Payroll Data Up Next, But M&A, ECB, Tariffs in Focus Before Friday's Report

Tomorrow's payrolls data loom large as the market awaits word on February wage growth. Meanwhile, tariffs, the ECB and some M&A news compete for attention.

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(Thursday Market Open) Today feels like a waiting game as investors tap their fingers and ponder what kind of reaction Friday’s non-farm payrolls report might bring. Last time out, the report helped cause a major shift in market sentiment, raising concerns about possible inflation and potentially hawkish Fed policy in response.

The January payrolls data rocked Wall Street as average hourly wages rose 2.9% year-over-year, up from 2.7% the previous month and the highest since May 2009. In the following few sessions, the Dow Jones Industrial Average ($DJI) fell more than 1,000 points two separate times, and the market as a whole slid more than 10% in a very short span. Hard to believe that was only a month ago considering all the water under the bridge since then, including a big recovery rally, most of earnings season, and then more hiccups amid tariff worries.

The rubber hits the road at 8:30 a.m. E.T. tomorrow when the government issues non-farm payrolls for February, and it’s possible that the wage number could draw more attention than normal, considering the chaos that followed January’s data. Wall Street analysts believe wages rose 0.2% in February from the previous month, down a touch from 0.3% in January, according to Briefing.com. But it’s the year-over-year number in the spotlight. Any signs of the tighter labor market starting to bump up wages in a major way could cause more turbulence in stocks and potentially push up yields in the interest rate complex. Still, investors might want to keep in mind that growth in wages is generally a good thing, implying strength in the economy and possibly increased consumer spending over time.

Before that, there’s still Thursday to deal with, and some merger and acquisition news popped up this morning — the first really big announcement in a while. Cigna Corp. (CI) reached a deal to buy pharmaceutical benefit manager Express Scripts Holding Co. (ESRX)  in a deal valued at $67 billion. Shares of ESRX climbed 17% in pre-market trading. The companies said the deal will help them manage costs and expand product offerings, according to media reports. In this industry, with Amazon (AMZN) supposedly sniffing around, businesses appear to be focusing on efficiency and on having as many different lines of revenue as possible. There’s also a sense that they want to get more vertical.

Overseas, the euro moved a bit higher vs. the dollar after the European Central Bank (ECB) removed some dovish language from its statement. The language that was cut had talked about expanding quantitative easing if the outlook worsens. This provides more of a sense that the easing is over and there’s only one direction the ECB might move in now.

Back home, the Nasdaq (COMP) has very quietly been up four days in a row and we’ll see if today can be day five. It’s been driven by the so-called “FAANG” stocks. Each day one of them seems to get hot. It’s interesting that as much as the talk has been about tariffs and their possible negative effect on chipmakers, tech continues to drive us.

Earnings season is pretty much over, aside from a few stragglers. That means in the coming weeks after Friday’s jobs report (see below for more discussion), there’s likely to be a slower flow of major market news each day. When earnings end, people often start looking for something to trade off of, and investors might want to be careful because little pieces of news can drive the market. Also, anything the Fed says might start attracting more attention, especially as the March 20-21 meeting approaches.

That meeting is coming right up, less than two weeks away. At this point, odds of a rate hike are pretty much baked in at 86%, according to the futures market, and it would probably take something really dramatic to change that. The bigger question is what Federal Reserve Chairman Jerome Powell and company have to say about inflation expectations moving forward, as well as any reaction they might deliver to coming economic news like payrolls. It could also be interesting to hear Powell’s thoughts, if any, on the administration’s tariff proposals. He’s going to have a press conference, so the question could come up.

Staying on the subject of tariffs for a moment, markets seemed to get a late boost Wednesday, clawing back from early triple-digit losses to close only slightly lower after word hit the wire that the White House might consider exempting Canada and Mexico from the proposed tariff regime. This news might have been read as potentially positive for the future of the North American Free Trade Agreement (NAFTA), which some economists and politicians are worried could be imperiled by the tariff plan. Farm state representatives and senators, in particular, have been on TV the last few days expressing worry about U.S. trade with Canada and Mexico, two huge markets for U.S. agricultural products. It looks like the exemption news might be continuing to give stocks some strength in pre-market trading Thursday.

Stocks took a dive early Wednesday after President Trump’s National Economic Council head Gary Cohn resigned after disputing the tariff plan (more below). Remember, the markets tend to loathe uncertainty, and Cohn’s departure might lead to uncertainty about the administration’s economic policy moving forward. Cohn was thought of by many economists as more of a globalist than some other members of Trump’s administration. It could be interesting to watch over the coming days and weeks who the president zeroes in on to take Cohn’s place, and whether that person seems to share what many experts saw as Cohn’s market-friendly economic views.

Sector-wise, some of the defensive plays continued to be among the leading sectors Wednesday, including telecom and real estate. On the other hand, info tech also rose solidly and has easily outperformed the broader market over the last few sessions and the last month, a possible sign that investor optimism hasn’t flagged all that much despite the recent turmoil.

Still, other sectors were pretty weak, especially consumer staples. That sector fell nearly 1%, in part due to weak quarterly results from Dollar Tree (DLTR). That stock crumbled more than 14% after the company reported lower-than-expected sales and disappointed Wall Street with its forecasts. Remember that last week, earnings from Wal-Mart (WMT) failed to impress many analysts, and Target (TGT) missed on earnings per share with its results Tuesday. Costco (COST), which reported late Wednesday, saw shares fall in pre-market trading early Thursday as investors digested the results. Gross profit margin slipped a bit. That’s been the story with a lot of retail companies, as margins are getting compressed.

Russell 2000 vs SPX

FIGURE 1: SMALL CAPS FLEX MUSCLE.

The small-cap Russell 2000 (RUT) index (candlestick), was feeling unloved for a while. Lately, however, it’s on the comeback trail, outpacing the large-cap S&P 500 Index (SPX - purple line) over the last several weeks. This could reflect investors searching for new opportunities. Data source: FTSE Russell, Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Beyond Wages: In the old days (back in December, let’s say), the actual jobs number was usually the focus of the non-farm payrolls report. Now it’s pushed to the background a bit due to concerns over wages, but it’s still a key component. Analysts expect jobs growth of 210,000 in February, a little above January’s 200,000 and also slightly higher than the three-month average of 192,000. One thing to remember is that we’re less likely to see gonzo gains in job growth like we did a year or two ago, simply because unemployment is so low. When unemployment is 4.1%, as it was in January, there are fewer workers available to hire. Also, many companies might already be fully loaded with employees and don’t need to add as many.

At this point, any employment gain of roughly 100,000 a month or more is likely going to be enough to maintain low unemployment and keep up with population growth, analysts said. Also, initial unemployment claims are trending extremely low over the last few weeks, implying fewer unemployed people out there looking for new jobs. In other words, if Friday’s headline number isn’t sky high, it’s not necessarily a reason to worry about the economy.

Infrastructure Shaky? The departure of President Trump’s National Economic Council head Gary Cohn helped spark a sell-off early Wednesday as investors feared his resignation could increase the risk of trade wars. Another factor that might have Wall Street worried is the potential impact on the president’s infrastructure plans, something many investors had hoped to see move into the building phase this year. Cohn was the key White House leader on infrastructure, and pushed for the use of public-private partnerships to finance infrastructure spending.

"I think his exit can only be viewed as a setback for infrastructure," said Martin Klepper, former executive director of the Department of Transportation's Build America Bureau, quoted by the Chicago Tribune. "Cohn was a key person in pulling together the cabinet-level task force that developed the infrastructure plan.” 

Getting Out of A RUT: Looking at market performance Wednesday, it was an impressive session for small-caps, with the Russell 2000 (RUT) rising around 0.8% to its highest level since early February. The rise in the RUT might reflect some re-evaluation taking place as the end of the quarter approaches three weeks from now. With earnings season over, some people might be looking ahead and thinking about where they want their portfolio to be going into Q2. RUT was a little unloved over the last year compared to some other parts of the market, so one school of thought is that people are looking at small-caps for possible opportunity. In addition, some economists say small-caps might be hurt less than large-caps if tariffs do take effect in a big way, so that might be helping. It wouldn’t be too surprising to see RUT continue to perform well over the next few weeks.

Good Trading,
JJ
@TDAJJKinahan

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FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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