Last year, when our economy began to emerge from the recession and to reopen, so too did concerns of inflation, even though it was below the Federal Reserve’s target interest rate of 2 percent.
It Finally Happened...
Stubbed Toe
In recent months, stocks have experienced an impressive rally, resulting in many commentators and analysts creating new and unusual analogies. This week, our favorite is “the market’s new coffee table.”
Move Over Wonder Woman; Yellen Speaks
The broad markets performed as expected this week as the Federal Reserve announced its much expected rate hike Wednesday. The Dow Jones Industrial Average did set a new high after the announcement but finishes the week up only 0.4 percent.
Debt Ceiling, Tax Policy and Trickle-Down Economics
Global elections continue to stir up markets this week. U.S. stocks and the dollar rose as the British pound declined after the U.K.’s Conservative Party lost its parliamentary majority just as the Brexit negotiations begin
Show Me the Numbers
by Deidra Krys-Rusoff Senior Vice President
The S&P 500, Dow Jones Industrial Average and NASDAQ ended the week nearly flat from last Friday, despite a volatile trading day today. The financial sector retreated 1.4 percent, as investors’ hopes of a Federal Reserve interest rate hike dwindled on the release of today’s nonfarm payrolls report. Utilities and phone stocks rose this week, benefitting from the prospects of lower rates. The Bloomberg Commodity Index rose to a seven-month high and is nearing a level marking of a 20 percent advance from the gauge’s January bottom, close to meeting the common definition of a bull market. The dollar dropped and ended the day trading at $1.14 per euro. International markets were mixed, with European stocks slightly down and the MSCI Emerging Markets Index advancing 1.5 percent to a one-month high. The benchmark 10-year Treasury rallied, with rates falling 15 basis points over the week to yield of 1.70 percent.
What’s in a number? A lot, when the number is the nonfarm payrolls reporting significantly weaker than even the most pessimistic economist expected. May’s payroll numbers rose by a mere 38,000 versus the consensus estimate of 160,000. The report further muddied the economic waters by revising the April increase downwards to 123,000 from 160,000 and March’s numbers to 186,000 from the robustly reported 208,000 increase. The Verizon strike temporarily played into these numbers, subtracting roughly 40,000 from the overall job growth that should reverse after the strike ends. This boost, up to what would have been a gain of 78,000, is still shockingly low. The report shows that the labor market deceleration was widespread. Private-sector hiring was at 25,000 versus 130,000 in April and government hiring added a scant 13,000 jobs to the May numbers. Job losses were seen in construction, manufacturing and wholesale trade. Hiring in the paid professional and business sectors also showed slowing.
Markets initially took the news hard: The S&P 500 Index initially dropped as much as 1 percent from a recent seven month high, the dollar sold off against the euro, and bond prices increased dramatically – dropping the yield of the benchmark 10-year Treasury to 1.70 percent from 1.80. However, U.S. equities pared the early losses to around 0.2 percent as commodity producers extended gains.
The unemployment rate fell to 4.7 percent, but this is unfortunately attributed to declining labor force participation or labor force dropouts. This year’s earlier rebound in jobs participation may be stalling out. One good piece of information from the government report was that the broader U-6 unemployment rate (which reflects underemployment) remained steady at 9.7 percent. Another positive note is that average hourly earnings advanced last month by 0.2 percent, which resulted in earnings 2.5 percent higher than last year’s levels.
The weak jobs number almost certainly takes a Federal Reserve rate hike off of the table for June. The Fed governors have repeatedly stated that their policy decisions will be data-dependent and we didn’t have to wait long to hear how the Fed governors feel about the number. Federal Reserve Governor Lael Brainard spoke to the Council on Foreign Relations this morning and stated, “In this environment, prudent risk management implies there is a benefit to waiting for additional data to provide confidence that domestic activity has rebounded strongly and reassurance that near-term international events will not derail progress toward our goals.” Prior to the jobs report release, the market was pricing in one to two hikes for the remainder of the year. Now the market is placing odds of a hike below 50 percent for July, September and November.
One stand-alone jobs number does not make a trend and this could easily be a one-time blip on the radar. As noted earlier, unemployment numbers are often revised in months following releases and this extremely low number may be revised upwards in coming months. While predicting unemployment numbers is a fool’s game, we can confidently predict that everyone will be watching and waiting for the June unemployment numbers release on July 8.
Our Takeaways for the Week:
- Despite a volatile trading day, markets ended the week nearly flat from last week
- May jobs number shocks economists; however, employment numbers are often revised
- Low payrolls growth likely takes June Fed hike off the table
Spring Break Movies
by Tim Carkin, CAIA, CMT
Senior Vice President
Divergent
This week the market is showing some interesting divergence. The S&P 500 performance is paltry, nearly flat on the year. Technology, biotech and consumer discretionary sectors, which are more heavily weighted in the NASDAQ, started selling off heavily last week leaving the NASDAQ down more than seven percent year to date. This week small cap stocks, which had been performing admirably, sold off more than four percent and are now negative on the year. Citigroup, Morgan Stanley and other large financials also sold off heavily after the Fed’s latest stress test results. On the plus side, emerging market stocks rallied significantly this week in hopes of new Chinese stimulus.
Need for Speed
A few good economic readings came out this week. Last month’s Q4 GDP number was revised up to an annualized 2.6 percent from 2.4 percent. This came as consumer spending in February rose by the most in three years and jobless claims declined last week to the lowest level in four months. Personal consumption expenditures (PCE), a favorite economic indicator of past Fed Chairman Bernanke ticked up 0.1 percent in February. Lower jobless claims and a low inflation rate give the Fed a little cushion to work with when considering stimulus and rate increases.
Rise of an Empire?
The constant media attention of developments in the standoff between Ukraine and Russian is weighing on the market. We did get good news on that front in an announcement from the IMF of $14-18 billion in aid. In addition, our Senate approved $1 billion in loan guarantees and the EU promised more than 10 billion euros in the next few years. On the other hand, Yulia Tymoshenko, former Prime Minister of Ukraine, announced her candidacy for president. This ensures the standoff will remain in the news through the Ukrainian elections on May 25th.
Takeaways for the Week
- Geopolitics is a major overhang to the momentum in the U.S. economy