Winter Winds Cool Off Jobs Growth, But Positive Trends Lurk Below Surface

Jobs growth cooled off a bit in December, reaching just 148,000 and falling short of analysts' expectations. Still, the quality of jobs created was positive.

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(Friday Market Open) Jobs growth looked a little ho-hum in December, rising just 148,000. While that was well below Wall Street’s expectations for around 180,000 and also under the recent average pace, investors digging a little deeper into the data might find some positive signs.

For instance, wages grew 0.3%, meeting analysts’ expectations. This looks like it might be just strong enough to give people a little more money, but not so strong that it risks overheating the economy. In addition, the biggest job gains occurred in areas like construction, health care and manufacturing, continuing the pattern seen in November. These tend to be areas where people can build careers.

Also, the overall unemployment rate remained low at 4.1%, and November jobs growth got revised up to 252,000 from the previous 228,000. October jobs growth, however, was revised lower. In total, 9,000 fewer jobs were created in October and November than the government had reported previously.

The report didn’t show much in the way of changes in labor force participation or the number of people working part-time who’d prefer to work full-time.

One surprise in the data was a large drop in retail jobs. Usually December sees job gains in the retail sector, due partly to the holiday shopping season. Retail employment fell by 20,000 in December and overall in 2017 by 67,000.

In sum, however, this doesn’t look like a report that’s going to change the world, and it seems unlikely to make the Fed get too worried about an over-heating economy. Going into Friday, there was some concern on the Street that a really positive report with huge job and wage gains might put the Fed under more pressure to raise rates further and sooner. There’s nothing here that appears to indicate any new worries about inflation. Wage growth is up 2.5% year over year, hardly changed from November.

In the minutes after the data, odds of a March rate hike edged slightly lower to 67.5%, according to CME Group futures. Pre-market stock futures trading continued to hold onto gains.

Another day brought another series of records for the major indices Thursday, with the Dow Jones Industrial Average ($DJI) climbing above 25,000 for the first time and new highs for the S&P 500 (SPX) and Nasdaq (COMP). The Russell 2000 (RUT) index of smaller stocks didn’t get left out either, also scoring a new all-time record.

If the markets this week were a basketball game, there’d probably be at least one team scoring 120 points because just about no one seems to be playing defense. That is, there doesn’t appear to be much interest right now in the so-called “defensive” sectors of the market like utilities and consumer staples. Instead, the action continues to be in places like financials, consumer discretionary, info tech, materials, and energy. Typically when you see a market acting this way, it signifies economic optimism. Financials were especially powerful on Thursday, with JP Morgan (JPM) setting a new all-time high and several other big banks coming close.

At the same time, many investors are snapping up some of the old-school stocks. While the so-called “FAANG” tech stocks continue to gain ground, other names with much longer histories also performed well lately. Look at shares of companies like Merck (MRK), IBM (IBM), General Electric (GE), Goldman Sachs (GS), and American Express (AXP). All of these have done well in recent days, perhaps in part because markets are trading at high levels. Many investors still want to be involved, but some might feel more comfortable hitching a ride with companies that have deeper pedigrees as they seek long-term value in a market where prices are starting to look a little expensive for some names.

The strength continued overseas early Friday, with European and Asian stocks climbing. European stocks are near two-month highs. However, surging commodity markets mostly pulled back early in the day. Oil fell nearly 1% but remains above $61 a barrel in the U.S.

On another interesting note, the price of gold has been climbing steadily since hitting a five-month low in mid-December, and moved up another 0.5% on Thursday to near $1,324 an ounce. That’s still not quite shouting distance to last year’s highs above $1,355, but it’s been quite a rally as the market posted gains in nine of the last 10 trading days. The Fed recently voiced some concerns about possible inflation pressure, so part of this gold surge could reflect inflation hedging.

Crude oil, meanwhile, seems to move in only one direction lately: Up. Some of the explanations for this could include stronger demand for heating oil due to the cold spell that’s plaguing much of the U.S., protests in Iran, and the OPEC supply cut. In general, demand just seems strong right now and that might partly reflect growing economies around the world, which wouldn’t necessarily be a bad thing. U.S. supply data out on Thursday showed another big draw from stockpiles, but also huge production and growing gasoline supplies.

Gold

FIGURE 1: GOLD OUTPACING GREENBACK.

Gold (candlestick chart) has climbed in nine of the last 10 trading days whilethe Dollar Index (purple line) continues to languish. Concerns about possible inflation might be behind some of gold’s recent strength, but recent Fed rate hikes and positive data haven’t been able to help underpin the dollar. Chart source: CME Group.The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

GDP Watch Is On: After two straight quarters of 3% growth, a big question is whether the economy did it again in Q4. Some economists think the answer might be yes. The Atlanta Fed’s GDP Now model has increased its estimate for Q4 gross domestic product (GDP) growth to 3.2%. The previous estimate had been 2.8%. However, the average estimate from Wall Street analysts remains below 3%. The government puts out its first Q4 GDP estimate on Jan. 26.

For anyone keeping score, it’s been well over a decade since the U.S. economy put together three consecutive quarters of 3% or better growth. That was back in 2004 and 2005, when growth reached 3% or more in four straight quarters from Q2 of 2004 through Q1 of 2005 as the economy recovered from the recession of the early 2000s, according to the Bureau of Economic Analysis. The economy hasn’t had a full calendar year of 3% growth since 2005.

Of Bunds and Bonds: You may have noticed benchmark 10-year U.S. Treasury bonds creeping up within range of the 2.5% level, partly due to the slew of positive economic data hitting the newswires lately. Remember to also keep an eye on the German bund, a benchmark European bond market where yields are also climbing on solid economic news across the Atlantic. Yields on the bund have been far lower than on U.S. 10-year Treasury notes, and that’s arguably one factor that’s kept the cost of borrowing here in the U.S. The bund yield is now near 0.45%. That might sound low, but it’s up from below 0.3% in mid-December. Any signs of renewed selling that sends bund yields higher could have ramifications for yields here in the U.S.

All Aboard For Earnings: The holidays just ended, but earnings are right around the corner. The big banks kick things off late next week to start the quarterly barrage. At this point, there’s optimism for strong Q4 results across most of the sectors and overall double-digit gains. For instance, research firm CFRA looks for 10.6% EPS growth in S&P 500 companies, led by the energy sector with 121% year-over-year growth, followed by estimates for double-digit gains in materials, technology, and financials. The laggards, according to CFRA, look to be real estate — where earnings might fall double digits — along with telecom and industrials where the firm sees earnings growth below 2%. Revenue growth for S&P 500 sectors overall should be around 7%, CFRA said.

One outstanding question as we go into earnings season is whether the results might be better than expected. That’s been the trend in recent quarters. If it happens again, it could help keep price-to-earnings ratios — now at a historically high level of 18.5 vs. 2018 earnings expectations — a bit more in check.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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