(Monday Market Open) In recent days, when the market moved it tended to move in a big way. The end of this holiday-shortened week was no exception to that volatility as stocks surged following a jobs report that was far stronger than expected and comments from the Federal Reserve that were considered dovish.
All three of the main U.S. equity indices finished markedly higher, with the tech heavy Nasdaq Composite (COMP) jumping more than 4% and information technology the best performing S&P 500 (SPX) sector.
Pre-market trading started off strongly as shares of Netflix (NASDAQ:NFLX) and Intel (NASDAQ:INTC) rose following bullish analyst notes and Apple (NASDAQ:AAPL) bounced from a sharp selloff the previous session. Investors also seemed optimistic about scheduled trade talks between China and the United States in Beijing on Jan. 7-8.
Jobs Report Stronger Than Consensus Forecast
Then, despite the potential for interpreting bumper jobs data as inflationary (see more below), stocks opened markedly higher after news that total nonfarm payrolls in December surged 312,000, well above the 180,000 jobs economists in a Briefing.com consensus had been expecting. November’s number was revised upward from 155,000 to 176,000. Even an uptick in the unemployment rate, to 3.9% from 3.7%, was good news. That rise came as nearly 420,000 people started looking for jobs but not all found one immediately (aka a rise in the so-called participation rate).
Notably, the report showed a marked number of people leaving their jobs voluntarily, which reflects positively on consumer confidence and adds a counterpoint to recent consumer confidence numbers that fell more than expected.
The stronger-than-forecast jobs data also seemed to help investors relax a little, after strong losses followed a surprise revenue downgrade from Apple and a ratcheting up in worries about a global economic slowdown. To be sure, this week has seen disappointing manufacturing data from China, Europe and the United States, so those economies might not be out of the woods. But today’s risk-on type of trading heading into the weekend seems to be a sign that at least some of those clouds have lifted.
Reassuring Comments From Powell
The icing on the cake seemed to come a bit later in the day in comments from Federal Reserve chairman Jerome Powell, speaking at an event in Atlanta. “Particularly with the muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves,” he said, according to media reports. He also said the central bank “wouldn’t hesitate” to change the pace of its balance sheet shrinkage if the bank determined it was materially adding to market turbulence.
Those are probably the comments investors wanted to hear back in December when the market had been expecting a rate hike but ended up tumbling after the move anyway.Stocks took a dive, in part on the less dovish tone that came out of the meeting and the press conference that followed it. Powell at the time suggested 2019 may see two more interest rate increases and no change in the Fed’s plan to keep winding down its balance sheet.
Fed Minutes, Inflation Data on Tap
It’s another relatively light week coming up in terms of economic data. But that doesn’t mean there’s nothing important to keep an eye on.
In the middle of the week, the Fed is scheduled to release minutes from its December meeting. It seems likely that market participants will be poring over the minutes to see if they can glean any more knowledge about what the Fed might have been thinking about potential future rate hikes.
One bit of data, the Labor Department’s consumer price index, scheduled for release on Friday, will likely be closely watched by investors as it likely will factor into the Fed’s monetary policy decision making.
The data, and Powell’s comments, come at a particularly sensitive time as the market has been worried about the Fed making a policy mistake by tightening too much even as inflation doesn’t seem to be problematic.
The last snapshot of the central bank’s preferred inflation gauge – the core personal consumption expenditures (PCE) price index, which strips out volatile food and energy prices – rose 0.1% from October to November, slightly below a Briefing.com consensus expectation of a 0.2% rise. That brought the annual core PCE price index reading to a 1.9% increase. So, overall, inflationary pressures seem to continue to be pretty tame.
Figure 1: Unemployment Rate, 1948 to Present. Though nonfarm payrolls expanded by a gonzo 312,000 in December, the unemployment rate upticked slightly to 3.9%, likely due in part to a rise in the participation rate. Despite the slight rise in the unemployment rate, it remains near multi-decade lows. The shaded areas in the above chart indicate recessionary periods. Data Source: Federal Reserve's FRED database. Chart source: The thinkorswim® platform from TD Ameritrade. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade. For illustrative purposes only.
Two Sides to the Jobs Story: Numbers like Friday’s blowout employment report can be a double-edged sword. On the one hand, they’re a good sign for the economy, which has shown some negative signs lately including a disappointing manufacturing report. On the other hand, the market has been known to falter after better-than-expected economic data on worries that the inflationary pressures the numbers create could prompt the Fed to tighten rates more than the market wants. Indeed, the jobs report showed that average hourly earnings on a monthly basis rose more than expected. That figure came in at 0.4% instead of the 0.3% gain that had been expected. Over the past year, average hourly earnings are up 3.2%. Treasury rates rose sharply after the announcement, apparently as fixed income investors thought the jobs report might give the Fed more wiggle room to stick with its plans for raising rates. But stock market participants seemed to focus on the economic strength reflected in the jobs report, as it showed broad-based jobs creation.
Status symbols and bellwethers: There was a saying back in the 1950s, during the heyday of the automobile, "As goes General Motors (NYSE:GM), so goes the nation," widely attributed to then-GM CEO Charles Wilson. And over the decades, it's probably been true to a degree. The automobile has been a key status symbol and mainstay of the consumer economy. Plus, its strong ties to raw materials, labor and transportation costs indicated that a good chunk of macroeconomic conditions rose and fell in lockstep with those of GM. These days, one could argue the smartphone has replaced the auto in that regard, and with its loyal following and high-end product line, Apple might be the new GM. Many people, if given the choice between giving up their car or giving up their phone—in urban areas anyway—might say they'd rather rely on public transportation and ride-hailing services than go phoneless. Plus, sales, as well as supply chains, have gone global, and many view Apple as "ground zero" in trade policy. Perhaps it's no wonder then, that when Apple sneezes, as it did this past week, the broader market seems to catch a cold.
Looking Toward Earnings: As earnings reports start to trickle in, the headlines and executive comments could give investors an added handle on market direction. In coming days, the market is scheduled to see reports from several companies that could provide insights into the health of the economy. When Lennar (NYSE:LEN) and KB Home (NYSE:KBH) report, it could be interesting to see what executives might say about the housing market, which has been a persistent economic headwind because of home affordability issues. Meanwhile, consider tuning in when Bed Bath & Beyond (NASDAQ:BBBY) reports, as it can be viewed as a proxy on the health of the consumer. Delta Air Lines (NYSE:DAL) is expected to report earnings on Thursday, after already telling the market that revenue growth was lower than expected during the holiday season.
All the best,
Shawn