George Hosfield, CFA, discusses Ferguson Wellman's quarterly strategy titled, "Inflation's Flame Flickers," which addresses the narrow market leadership, the impact of higher interest rates on inflation and how assets are priced at this stage of the economic cycle.
George Hosfield, CFA, discusses the firm's quarterly strategy titled "Stalemate," which highlights the Fed's ongoing battle to tame inflation along with our views on the health of the banking industry and capital market expectations for the balance of the year.
Director and Chief Investment Officer George Hosfield, CFA, discusses the Fed raising interest rates, peaking inflation and our view on equities and volatility across all asset classes in our Investment Strategy titled, “Balancing Act.”
This week we experienced something we haven’t in some time: a down week. Stocks struggled to a close, down 3.8 percent with no help from blue-chip names. Alphabet (GOOGL) and Apple reports weren’t favored by Wall Street, driving the stocks down 5.2 and 4.3 percent, respectively.
Stock markets were higher this week, despite Hurricane Harvey and a weaker-than-expected jobs report. The S&P 500 was up 1.5 percent, ending the week close to the all-time high of 2,480 from early August. Bond yields slid slightly lower, with the benchmark 10-year Treasury yield dipping to 2.14 percent. August’s nonfarm payrolls report showed a gain of 156,000, which was below the expected 180,000 jobs.
by Brad Houle, CFA
Executive Vice President
Today the Federal Reserve released the September change in nonfarm payrolls which came in at 142,000 jobs versus the estimate of 201,000 jobs. Also, August data was revised down from the originally reported 173,000 jobs to 136,000 jobs. This data was seen a disappointment and the bond market reacted negatively. According to Bloomberg data, the Federal Funds Futures Market, which is a market in which traders can speculate on the direction of the Federal Reserve raising interest rates, shows only a 2 percent probability of the Fed raising interest rates this month. The probability of the Fed to raise interest rates in December has dropped from a 40 percent probability early this month to a 29 percent probability as of today.
It is important to remember that the U.S. has created an average of 200,000 jobs for the last six months. Since the depth of the financial crisis, the unemployment rate has gone from over 10 percent to around 5 percent where it is today. We prefer to take the long view as opposed to changing opinion on every incremental piece of economic data. Payroll data is notoriously volatile and is a backward-looking indicator. U.S. consumer spending accounts for nearly 70 percent of our GDP or national income and continues to be robust despite a couple of months of job creation that does not meet expectations.
One of our research partners, Cornerstone Macro, published a note this morning with some facts about the U.S. consumer that are worth sharing:
We still believe that the domestic economy and the U.S labor market are continuing to heal from the Great Recession. The headwinds from emerging market turbulence and a strong dollar are not large enough to derail this economic expansion.
Our Takeaways from the Week
by Shawn Narancich, CFAExecutive Vice President of Research
Working for a Living
Investors unnerved by disappointing economic data of late breathed a sigh of relief with the April jobs report, which showed that nonfarm payrolls rebounded to a monthly rate of 223,000 last month. Unemployment dropped again and now stands at 5.4 percent, a rate not too far from the Fed’s definition of the full employment rate of unemployment (somewhere just north of 5 percent.) A “goldilocks” report of sorts that’s neither too hot nor too cold, the April payroll release supports the notion that the Yellen & Co. will likely begin the rate tightening process this fall. As policymakers and investors debate how tight labor markets actually are against a backdrop where the labor force participation rate hovers near its lowest level since the late 1970s, we are increasingly attuned to reported wage rates and the broader employment cost index (ECI). While wage gains remain muted at 2.2 percent in April, the ECI of 2.6 percent released last week demonstrated a notable uptick. When juxtaposed against anecdotal evidence of wage gains at fast food restaurants and retailers, our best guess is that the worm has turned with regard to employment costs this cycle. Because labor accounts for the predominant cost of doing business, the near-zero inflation rates we’ve seen of late appear likely to begin rising. When combined with the recent rebound in oil prices, headline inflation probably rises closer to the Fed’s 2 percent target by year-end.
Spring Forward
In contrast to the encouraging labor report, investors were greeted by a report showing that productivity of the U.S. labor force declined for the second consecutive quarter. While somewhat obscure, the statistic shines a light on the U.S. economy’s weak start to the year. By marrying employment and output statistics, the report tells us that the U.S. economy produced less per each hour worked in the first quarter. The reason productivity is such an important statistic is because when it’s combined with employment costs, it generates what we call unit labor costs. As alluded to above, sustained increases in the cost of labor are a key signpost for inflation, particularly when they translate into rising costs of production on a per unit basis. Just as importantly, unit labor costs determine how profitable companies are and the overall standard of living enjoyed by workers. Another tough winter combined with disruptions from the west coast ports strike put a damper on the U.S. economy in the first quarter, but we believe that an improving labor market, rising disposable incomes, and higher capital spending will engender a rebound of sorts in the second quarter. Commensurately, we would expect productivity to return to positive territory.
Exceeding Expectations
First quarter earnings season is just about finished and, once again, U.S. companies have done a remarkable job of under promising and over delivering. Compared with expectations of a low single-digit decline in first quarter profits, corporate America is instead delivering earnings that should end up being marginally above levels of a year ago. In particular, while dramatically lower oil prices caused red ink to flow on the income statements of many energy companies, the damage was ameliorated by better downstream refining and marketing results and the quick pace with which oil and gas producers have right-sized their cost structure.
Our Takeaways from the Week
by Brad Houle, CFA
Executive Vice President
More than anything, the financial markets dislike uncertainty and the most recent source of angst was the election. With the mid-term elections behind us, the market participants are free to focus on economic data and not political minutia. One of our research partners, Cornerstone Macro, published a great summary of likely legislative change and probable market impact from the change in control of the U.S. Senate.
The European Central Bank (ECB) met this week and the takeaway from their meeting is the ECB is still poised to take extraordinary measures to keep the Eurozone economy from lapsing into a recession and possible deflation. Mario Draghi, the ECB president, reiterated the ECB's commitment to do whatever it takes to keep Europe's economy staggering forward. He did not go so far as to announce quantitative easing which just ended in the United States. The ECB has been doing some bond buying on a smaller scale and keeping the possibility of a large scale quantitative easing program on the back burner in the event the European economy goes from bad to worse.
The employment data for the month of October was released today. The unemployment rate declined to 5.8 percent and nonfarm payrolls increased 214,000 jobs. In addition, there was a 31,000 revision to the September employment report. While the absolute number of jobs was a bit behind the consensus number, this is a very solid report and continues to demonstrate that the labor market is healing.
Takeaway for the Week
