Thud! China Trade Worries Still the Main Event But Jobs Data Paint Weak Picture

Bad economic news out of China and worries about trade talk progress could be the main factors affecting U.S. stocks today, overshadowing a very disappointing February jobs report.

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6 min read

Key Takeaways

  • China trade concerns could outweigh payrolls data

  • Weak export and trade talk news out of China overnight

  • U.S. payrolls data a major disappointment

(Friday Market Open) Normally, the monthly payrolls report overshadows everything the day it comes out. Today might be the exception as concerns about trade with China continue to dominate. 

Stocks fell 4% in Shanghai overnight on weak export news and fears of slowing progress in U.S./China trade talks. The weakness extended into U.S. pre-market trading, and it simply goes to show what we’ve been saying: Tariffs are the story. Everything else is secondary. That’s not to say the jobs report—which came in well below expectations—won’t necessarily move the U.S. market, but China is what people are paying most attention to.

Before checking the jobs numbers, let’s quickly review what happened overnight across the Pacific. The Shanghai Composite looked like a bloody battleground after falling more than 4% Friday on another set of disappointing trade data. The country’s February exports fell more than 20% year-over-year. Analysts had expected about a 5% drop, and this followed a better than 9% rise in January. Imports also weakened during the month. One caveat is that this happened during a month where China’s economy typically slows for the New Year’s holiday, but there’s really no way to paint a smiley face on a 20% decline in exports. 

The weakness might also reflect the ongoing U.S./China trade dispute, and there hasn’t been any positive tidings on that front this week. The U.S. ambassador to China said early Friday that the two countries haven’t set a date yet to have a presidential summit, and that “significant progress” needs to be made in trade negotiations before that happens. This news might also have contributed to the Asian market overnight weakness and could play into U.S. equities trading as well. 

Job Growth Hits a Wall

Anyone hoping for the monthly U.S. payrolls report to come to the rescue probably isn’t feeling too happy right now, as February jobs growth was a major disappointment at 20,000. While some analysts had expected a relatively weak number, in part due to the lingering effects of the government shutdown, it’s fair to say few if anyone expected a number this low. 

On the plus side, unemployment dropped to 3.8%, from 4% in January. Also, the December and January payrolls numbers got revised slightly upward and year-over-year wage growth rose 3.4% in February.  But it might be hard for some investors to get past that 20,000 number, the lowest in many months and well under expectations for growth of around 180,000. In January, jobs grew 311,000.

One thing to keep in mind is the possibility of February’s payrolls data getting revised next month, as the shutdown might have had Washington scrambling to get these numbers together. That’s something we won’t know until April. In fact, the Labor Department’s shifting of people into and out of the labor market might have had a big impact on the headline number in February, so investors could end up taking it with a grain of salt. 

Delving into the data a little more closely, a 31,000 decline in construction positions during February was another negative, while business and professional services added the most jobs during the month.

Major Indices Batting Zero So Far This Week

In baseball, a batter never wants to go 0 for 5 in a game. It means five at-bats without success. The market faces the same possibility today if the major indices can’t pick themselves up from their slumps. The S&P 500 Index (SPX) has been down all four days this week, and it’s been a long time since it went a whole week without even one positive session.

As might be expected from all that, it’s so far the worst week of the year for U.S. markets. Thursday, like other recent days, was marked by a notable lack of news on the China tariff front. With no positive tidings there, focus might have shifted to weak growth in Europe as the European Central Bank (ECB) lowered its 2019 eurozone economic forecast (see more below). 

With strength hard to find in Europe, the dollar index jumped significantly to new highs for the year above 97.60. The dollar’s strength, if it continues, has a chance to weigh on U.S. company earnings, which is probably one reason why many U.S. multinational stocks—whose overseas sales might suffer  from a surging dollar—got slapped down Thursday. Some of the weakness in multinationals was evident in the performance of stocks like Apple (AAPL), Caterpillar (CAT), Boeing (BA), and Microsoft (MSFT).

As the market floundered, the VIX perked up. Volatility surged to five-week highs Thursday as VIX rose to nearly 18 at its intraday peak. The last time it neared that mark was back on Jan 29. Perhaps it’s worth noting, though, that after pushing above 17 intraday, it fell back below that level toward the end of the session. The 17 handle is one that the VIX has had trouble getting through recently.

Other risk lights, however, weren’t really flashing, as gold stayed sluggish and 10-year Treasury yields only fell slightly. It’s worth noting, though, that 10-year yields are down double-digit basis points from a week ago, perhaps a sign of more money seeking so-called “defensive” investments.

Transports, Small-Caps Still Under the Weather

For another possible sign of that, consider checking out the Dow Jones Transportation Average ($DJT), which fell for the 10th-straight day Thursday to post its longest losing streak in a decade. The $DJT is now at one-month lows, and includes a number of airline, railroad, and other shipping-related stocks that tend to do well when the economy is humming along. Meanwhile, crude oil prices, down more than 2% this morning, are also under pressure, in part on rising U.S. supply.

Small-cap stocks, another sector sometimes seen as a leading economic indicator, have also been on the way down. The Russell 2000 (RUT) Index is off 4% since the beginning of March.

Getting back to the SPX, it’s looking technically weak after failing to hold onto last Friday’s close above 2800 and then plunging down to below the 200-day moving average on Thursday. The 200-day sits at roughly 2750, and the feeling going into Thursday was that we might see it flirt with that level. It didn’t just flirt, it went on a date, and it wasn’t a good date. 

The only good thing one could maybe say is that the SPX did arrest its slide after hitting its low-point Thursday, and came back to close just below the 2750 mark. There doesn’t appear to be much technical support below that level. The 100-day moving average of 2670 might be seen by some analysts as the next major support point.

No More Time For Complacency

The climbing VIX and strong dollar, combined with weakness in the major U.S. indices, all seem to mark the end of a period of complacency that began early this year and continued into late February. A lot of that might have been driven by a dovish Fed and strong Q4 earnings. The rude awakening might have started back on Feb. 14 when December U.S. retail sales came in well under Wall Street’s expectations.

Now, investors face a slowing European economy where Brexit is breathing down peoples’ necks, a U.S. economy that some analysts think will barely grow in Q1, and a coming Q1 earnings season that’s seen analyst estimates for earnings growth drop pretty steadily over the last two months. FactSet now expects a 3.2% year-over-year decline in S&P 500 company earnings for Q1, with Energy, Materials, and Info Tech registering the biggest drops.

On the plus side, the U.S. corporate news front got a positive injection from COST late Thursday. Shares rose more than 4% in pre-market trading as the retailer’s earnings smashed analysts’ estimates and same-store sales rose 6.7%. Revenue, however, just missed Wall Street’s estimates. Retail has been all over the map lately, with Kroger (KR) earnings disappointing many investors and Target (TGT) exceeding expectations.

Leading Indicator? As this one-year chart shows, the Russell 2000 Index (candlestick) has at times been ahead of the S&P 500 Index (purple line) in starting a longer-term up or down move. The most obvious is last summer, when RUT began sinking before the SPX. Now the RUT is fallling again, but the two appear to be in sync. Data Source: FTSE Russell, S&P Dow Jones Indices.  Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results. 

This One Goes to Zero: Chances of a rate hike at the Fed’s meeting later this month fell to zero this week, according to the CME futures market, with less than 2% odds of a hike any time this year. In fact, the futures market now puts higher odds (around 11%) that the Fed might lower rates by 25 basis points this year than raise them. The latest blow to any investors hoping for tighter Fed policy (and conceivably to Financial sector stocks that tend to benefit from higher rates) was the European Central Bank’s (ECB) decision Thursday to keep rates steady. That outcome wasn’t unexpected, but what might have been a surprise was the ECB adding that it’s unlikely to change rates until the end of 2019. That conceivably could put more pressure on the Fed to keep its foot off the rate pedal, for fear of raising the gap between U.S. and European borrowing costs too much.

Though an easy monetary policy on both sides of the Atlantic might sound bullish in some respects, consider keeping in mind what’s behind those low borrowing costs. The ECB now expects the eurozone economy to grow 1.1% this year, down from its previous forecast of just above 1.5%. Annual economic growth there hasn’t reached 2.5% in the last nine years, and arguably the ECB’s loose policy hasn’t done much to inject more propulsion into the economy. Brexit also looms, with the prospect of a “no-deal” Brexit looking more likely by the day as the March 29 deadline approaches. A weak Europe isn’t good news for U.S. exporters, and might be one reason the U.S. stock market struggled Thursday.

No Help From Staples: In weeks like this, sectors like Staples often perform a little better than the overall market as some investors look for less volatile areas. While Staples did outdo the SPX on Thursday, it wasn’t really something to brag about with a nearly 0.6% loss. Much of the softness stemmed from the food sector. Kroger (KR) got beat up after it reported weaker than expected earnings. Gross margin and same-store guidance also appeared to disappoint many investors. Conagra (CAG) and Dean Foods (DF) also suffered tough sessions Thursday, while other food distributors like Walmart (WMT) and Amazon (AMZN) got slapped around.

AMZN was an interesting case, as it announced the closure of 89 “pop-up” stores that it had selling food. The grocery business is closely interrelated, and it’s not just food makers but also food distributors like KR and AMZN having a tough time. It isn’t like restaurants are doing a lot better. McDonald’s (MCD) also has had a rough week. 

Retail Sales, Inflation Data Loom Next Week: Monday’s January retail sales report could get more attention than usual after the surprisingly soft December figure, but keep in mind that the government shutdown lasting well into January might have caused more weakness in this data.

Other data investors might want to prepare for next week include consumer and producer price index reports for February, as well as durable orders and constructions spending for January. If it feels like the reports are coming hot and heavy, it probably reflects the government trying to catch up after the shutdown delayed some data.

Good Trading, 

JJ
@TDAJJKinahan 

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Economic calendar for week of March 4. Source: Briefing.com
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Key Takeaways

  • China trade concerns could outweigh payrolls data

  • Weak export and trade talk news out of China overnight

  • U.S. payrolls data a major disappointment

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