Stocks Manage Gains Following Jobs Report

U.S. stocks staged a solid advance on the heels of a mostly better-than-expected January labor report, though wage growth decelerated more than forecasted. Financials led the ascent as President Trump signed a couple of injunctions aimed at reforming parts of the Dodd-Frank Act and rescinding what's commonly referred to as the fiduciary rule, which deals with the relationship between certain retirement account owners and their advisors. Treasuries were mixed, crude oil prices and gold ticked higher and the U.S. dollar was nearly unchanged.

The Dow Jones Industrial Average (DJIA) increased 187 points (0.9%) to 20,071, the S&P 500 Index was 17 points (0.7%) higher at 2,297, and the Nasdaq Composite gained 31 points (0.5%) to 5,667. In moderate volume, 851 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.29 higher to $53.83 per barrel and wholesale gasoline lost $0.02 to $1.53 per gallon.

Elsewhere, the Bloomberg Gold Spot (NYSE:UBG) price added $3.17 to $1,219.13 per ounce, and the dollar Index—a comparison of the U.S. dollar to six major world currencies—nearly unchanged at 99.76. Markets were mixed for the week, as the DJIA decreased 0.1%, while the S&P 500 Index and Nasdaq Composite gained 0.1%.

Amazon.com Inc. (NASDAQ:AMZN $810) reported 4Q earnings-per-share (EPS) of $1.54, above the $1.37 FactSet estimate, as revenues rose 22.0% year-over-year (y/y) to $43.7 billion, compared to the forecasted $44.7 billion. AMZN issued 1Q revenue guidance that missed expectations. Shares traded solidly lower.

Dow member Visa Inc. (NYSE:V $86) posted fiscal 1Q EPS of $0.86, above the projected $0.78, with revenues rising 25.0% y/y to $4.5 billion, exceeding the forecasted $4.3 billion. The company reiterated its full-year revenue outlook. Shares rallied.

Amgen Inc. (NASDAQ:AMGN $168) announced 4Q profits ex-items of $2.89 per share, above the estimated $2.79, as revenues increased 8.0% y/y to $6.0 billion, topping the projected $5.8 billion. AMGN issued 2017 guidance that came in a bit shy of expectations. Shares were nicely higher despite the guidance as the company also announced positive results from a trial of its cholesterol drug Repatha.

Macy's Inc. (NYSE:M $33) jumped on a report from Dow Jones that Canada's Hudson's Bay Co. made a takeover approach of the department store, citing people familiar with the matter. The report also noted that talks are in the early stage and may not lead to a deal. The Wall Street Journal added that the two companies are also discussing other ways to cooperate, including the possibility of doing a real estate deal. Both companies declined to comment on the reports.

January labor report tops forecasts but wages slow, services sector growth continues

Nonfarm payrolls rose by 227,000 jobs month-over-month (m/m) in January, compared to the Bloomberg forecast of a 180,000 increase. December was upwardly revised to a gain of 157,000 jobs though the total revision to the prior two months' growth was to the downside by 39,000. Excluding government hiring and firing, private sector payrolls increased by 237,000, versus the forecasted gain of 175,000, after increasing by 165,000 in December, revised positively from the 144,000 rise that was initially reported. Job gains were led by retail trade, construction and financial activities.

The unemployment rate ticked higher to 4.8% from 4.7%, where it was expected to remain, while average hourly earnings rose 0.1% m/m, versus projections of a 0.3% increase, and December's downwardly revised 0.2% increase. Y/Y, wage growth decelerated to a 2.5% increase, the slowest pace since August, from December's downwardly revised 2.8% gain. Finally, average weekly hours remained at December's upwardly revised 34.4 rate, compared to expectations of a 34.3 hours level.

Despite the strong job growth, the slowdown in wage growth likely fostered concerns about the strength in the consumer, the largest contributor to GDP output, but also appeared to ease concerns about the pace of Fed rate hikes this year. The wage data follow's this week's Fed monetary policy decision, which appeared to foster a dovish takeaway by the markets. Schwab’s Chief Investment Strategist Liz Ann Sonders notes her expectations for future rate hikes eased in the immediate aftermath of the Fed's decision, and our view had been that a March rate hike could be on the table; however if the probability does not rise to at least 50% before the meeting, we would expect the Fed to hold off until May or June.

The January Institute for Supply Management (ISM) non-Manufacturing Index dipped to 56.5 from December's downwardly revised 56.6 level, and compared to forecasts of 57.0. However, a reading above 50 denotes expansion. New orders declined but remained comfortably in expansion territory, and prices rose to 59.0, while growth in employment accelerated. The ISM said comments from respondents were mixed, indicating both optimism and a degree of uncertainty in the business outlook as a result of the change in government administration.

The final Markit U.S. Services PMI Index was revised to 55.6 in January from the preliminary 55.1 level, and compared to the 53.9 figure posted in December. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently. A reading above 50 denotes expansion.

Factory orders rose 1.3% m/m in December, versus expectations of a 0.5% increase, while November's figure was adjusted favorably to a 2.3% decline. December durable goods orders preliminarily reported a week ago, were adjusted lower to a 0.5% decrease, versus expectations of an unrevised 0.4% decline. Orders of non-defense capital goods excluding aircraft, a proxy for business spending, were revised slightly lower to a 0.7% increase.

Treasuries were mixed, as the yield on the 2-Year note declined 1 basis point (bp) to 1.20%, the yield on the 10-Year note was nearly unchanged at 2.48%, and the 30-Year bond rate increased 1 bp to 3.10%.

Treasury yields, the U.S. dollar and the stock markets have been choppy amid the heightened political uncertainty in the wake of the plethora of moves from President Donald Trump, recent record highs for stocks, and this week's unchanged monetary policy decision from the Fed.

Europe gains ground, Asia mixed

European equities moved higher, with the markets digesting a plethora of mixed earnings and economic data, including the January U.S. nonfarm payroll report, and shrugging off lingering U.S. political uneasiness. Markit's final Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—was revised higher to 54.4 for last month, matching December's level, with a reading above 50 denoting expansion.

Separately, eurozone retail sales for December unexpectedly declined. Shares of Banco Popular (MC:POP) ($4) fell after the Spanish bank posted a loss, while Skanska AB (ST:SKAb) ($26) rallied after the Swedish builder reported growth in quarterly earnings. The euro was higher and the British pound dipped versus the U.S. dollar, while bond yields in the region were mixed.

Stocks in Asia finished mixed ahead of today's January employment report in the U.S., while the markets continued to grapple with U.S. political uncertainty. Meanwhile, mainland Chinese markets declined, returning to action follow a week long Lunar New Year holiday, while the People's Bank of China increased its short-term interest rate unexpectedly and a report showed growth in manufacturing activity slowed for January. Stocks trading in Hong Kong were also lower.

Japanese equities finished flat as skepticism of the Bank of Japan's bond yield targeting actions was met with the yen pulling back from a recent jump. Australian securities declined and South Korean stocks ticked higher. Indian listings nudged to the upside, continuing a rally that stemmed from this week's annual budget release.

Stocks end little changed on the week

U.S. stocks finished mixed after oscillating around the unchanged mark, with another flurry of policy actions and comments from President Donald Trump exacerbating concerns regarding, geopolitics, trade relations and immigration. The focus on the political front continued to vector attention away from another string of upbeat economic data, highlighted by accelerated manufacturing output reported by ISM, as well as a mixed earnings front, as Dow member Apple Inc. (NASDAQ:AAPL $129) stood out on the upside, while shares of Under Armour Inc (NYSE:UAA). (UA $18) and United Parcel Service Inc. (NYSE:UPS $106) were hurt by their results. Per data compiled by Bloomberg, of the 274 companies that have reported out of the S&P 500, roughly 50% have topped revenue forecasts, while about 75% have bested earnings estimates.

The U.S. dollar continued its recent pullback to a more than two-month low and Treasury yields on the short-to-mid end of the curve retreated. The moves came amid a slightly weaker-than-expected January wage growth component of the labor report and the Fed's unchanged monetary policy decision, which appeared to ease expectations about an acceleration in rate hikes this year. Crude oil prices moved to the upside.

Although next week's domestic economic calendar will be relatively light, headlined by the trade balance, the JOLTS job openings report and the preliminary University of Michigan Consumer Sentiment Index, earnings season will continue to roll on and focus on U.S. politics shows no signs of easing.

The recent sideways movement of U.S. stocks was a healthy pause in the sharp post-election rally. Continued solid economic data and a decent earnings reporting season bolster our confidence in the continuation of the bull market in stocks. However, rising inflation, possibly forcing the Fed to be more aggressive, could lead to bouts of volatility and more pullbacks. Issuing executive orders to roll back previous executive orders is relatively easy in a lot of cases; but getting tax reform and new health care legislation written and passed will prove to be more difficult for President Trump. Investor and corporate confidence may have gotten a bit ahead of the pace at which many of the administration’s policy priorities can get enacted, and the balance between those which are growth-friendly and those which could retard growth and confidence.

International reports next week that deserve a mention include: Australia—retail sales and the Reserve Bank of Australia's monetary policy decision. China—Caixin China PMI Services Index and trade balance. India—the Reserve Bank of India's monetary policy decision, industrial production and trade balance. Japan—trade balance and machine orders. Eurozone—investor confidence, along with German factory orders, industrial production and trade balance. U.K.—trade balance and industrial production.