Flying Close to the Sun

Flying close to the sun.  On Friday, stocks catapulted higher on a good jobs report, breaking a two-day losing streak.  There was little question in the minds of traders on Friday as they traded stocks up on the positive economic news, though not all may be as it appeared on the surface.

WHAT YOU NEED TO KNOW:

1)  Twitter, oh Twitter!  WHILE YOU SLEPT, President Trump was busy tweeting about everything. Amongst the subjects of his ire was the too-slow pace of US-Chinese negotiations.  He threatened to raise tariffs on $200 Billion in US imports from 10% to 25% this upcoming Friday and China threatened to call off talks scheduled for this week in Washington.  Though the most recent reporting has Vice Premier Liu still scheduled for his Wednesday trip, stock futures traded off on the news.

2)  Americans are working!  On Friday, the Bureau Labor Statistics announced that +263 K new non-farm jobs were created last month, topping analyst estimates of +190 K.  Additionally, the closely watched Unemployment Rate came in at 3.6% which represented a 50 year low.  Stock investors were pleased with the news after spending the two prior sessions moping about lower prospects for a rate cut.  Though the numbers appeared good on the surface, there were some statistics that should raise concern.  The Labor Force Participation Rate declined to 62.8% from 63%, which accounted for the fall in the Unemployment Rate.  The lower participation rate means less people in the workforce, which lowers the Unemployment Rate.  Additionally, the Average Weekly Hours worked declined to 34.4 from 34.5 which tarnishes the top line jobs creation number.  Finally, Average Hourly Earnings ticked up by +0.2%, lower than economist estimates which was viewed by many as an indicator that inflation is under control, as worker wages are the spark which drives consumption and increased consumption leads to inflation.  Like most of the recent economic data that has been released, Friday’s report sends mixed messages.  Stock traders decided to view the report as positive, while bond traders continue to take a more pragmatic viewpoint.

THE MARKETS:

Equity traders were relieved by Friday’s employment number and quickly put aside sorrow over Chairman Powell’s Wednesday press release choosing instead to celebrate what appeared on the surface to be good news for the economy.  Stocks rallied on what was quickly touted in the media as a 50-year low unemployment rate with low wage growth.  Low wage growth is most likely due to a younger work force replacing older, higher paid retirees which can also be viewed at as a glass half empty.  As the Fed most likely had early warning of Friday’s statistic, Powell’s assessment that the economy is doing well and inflation remains under control can be explained.  There can be little question that stock investors were pleased with the report as all indexes shot up with the S&P500 climbing by +0.96%, the Dow Jones Industrial Average trading up by +0.75%, the Russell 2000 jumping by an impressive +1.98%, and the NASDAQ 100 leaping up by +1.58%.  Bond traders took a more measured path choosing instead to remain focused on the potential for trouble ahead, trading bonds up.  The 10 year treasury yield to maturity ended the week at 2.52% down -2 basis points on Friday.  For perspective , a 3 month Treasury Bill, yields 2.37%!

WHAT TO LOOK FOR TODAY:

Markets will start the session still reeling from President Trumps weekend tweet about raising tariffs. Additionally, a US Carrier group has been deployed to the Middle East as part of growing tensions with Iran, which will also add a bit of strain to trading in the session ahead.  This morning KLA-Tencor, Tyson Foods, and Sysco will announce before the bell while AIG and Hertz will release earnings after the bell, amongst others.  The Fed’s Harker will speak today and the Treasury will auction 3 and 6 month bills.

WHAT TO LOOK FOR IN THE WEEK AHEAD:

On the economic front, we will start the week tomorrow with the Bureau of Labor statistics JOLTS report, which details job openings in the US.  Later in the week we will get monthly reads of inflation in the Producer Price Index and Consumer Price Index.  The CPI excluding volatile food and energy is expected to come in at 2.1% year over which is right above the Fed’s target.  Though the Fed prefers to use the Core PCE deflator as its inflation gauge, deviations in the CPI and PPI can be market movers, particularly at market inflection points.  With around 3/4 of S&P 500 companies in the books for first quarter earnings, we have another week of earnings to ponder with many notables on deck.  Controversial neophyte Lyft will announce earnings on Tuesday while their chief competitor is scheduled to conduct its IPO on Friday.  On Wednesday, Chinese Vice Chairman Liu is scheduled to be in Washington to resume trade talks.  Fed Chairman Jerome Powell will speak on Thursday, which is sure to stir some emotions.

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