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Jobs Report Delivers Big Employment Gains, But Overall Picture Mixed

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February 3, 2017

(Friday Market Open) The big number looks good, but overall, today’s jobs report could be seen as something of a mixed bag. Even so, the market seems to like it, leading to gains in pre-market trading.

One would have to go back to last July to see job growth this high. The economy added 227,000 new jobs in January, the government said early Friday, a huge jump from the 157,000 recorded in December and way above estimates.

However, hourly earnings rose just 0.1%, which isn’t necessarily what the Fed might have wanted to see as it tries to guide the economy toward its 2% inflation target. And employment in food services and drinking places continued to be one of the top growth categories. There’s nothing wrong with those jobs; many of us have poured drinks or waited tables. But those positions aren’t typically ones that really spark the economic engine.

Before the report, consensus among Wall Street analysts had been for job growth of around 170,000 and average hourly earnings growth of 0.3%.

There were plenty of things to like about the report, even if the overall picture wasn’t perfect. Some of the new jobs came in industries where we like to see it, including construction, health care, financial activities, and professional and technical services. The professional and technical services area has featured steady job growth. Manufacturing employment, however, showed little change, the government said.

It was particularly nice to see the growth in construction jobs, which is unusual for this time of year.

It’s also constructive (pardon the pun) to look back at the previous two reports. The government revised December job growth up by just 1,000 from its previous level, but revised November job growth down by a huge 40,000.

Moving over to Earnings Avenue: It’s said that good things often come in threes, but perhaps not this time. Tuesday brought pleasant tidings from Apple (AAPL), followed on Wednesday by a strong earnings report from Facebook (FB). Amazon stepped to the plate Thursday afternoon, but investors didn’t seem to like what they saw compared with the two previous big tech firms.

During the quarter, the e-commerce giant earned $1.54 per share, coming in well above the $1.36 consensus forecast from Wall Street analysts. Revenue rose 22% year-over-year to $43.7 billion, but that was below analysts' forecasts for $44.7 billion, and the stock declined 4% in pre-market trade. Guidance also seemed to disappoint investors, analysts said after the report.

Let’s spend a minute discussing volatility. After a January that saw only slight moves in the VIX, the market seems to be in flux right now. That doesn’t mean volatility is through the roof, because it isn’t, with VIX falling back below 12 early Friday. But what we’ve seen recently is more people selling calls, which means giving up a little on upside potential to protect downside risk. Volatility levels aren’t increasing much, but some investors are buying protection.

Why is this happening? Well, it may reflect the market being near all-time highs and some market participants wondering what it can do for an encore.

There’s also a sense that the Fed, which was story 1A last year, has now moved to page 1B, with fiscal policy replacing monetary policy on the front page now that the new administration is in office. (See below for more on the Fed, Trump, gold and the dollar).

And what do investors want to hear from the new administration? Probably more information about its tax and infrastructure plans; particularly tax reform. There seems to be some real upside potential if the policy makers in Washington come out with any business-friendly tax plans. But until that’s more clear, it appears some investors might be taking profit and retreating to the sidelines a bit.

And it sounds like investors may have to be patient. House Speaker Paul Ryan told Fox News yesterday that due to how the federal budget process works, tax reform and infrastructure plans would have to wait until spring. The focus now, he said, is on health care. However, on the policy front, there was some news from Washington late this week, as President Trump will reportedly sign an executive action to roll back Dodd-Frank financial regulations put in place to ensure big banks could weather a shock to the global economy, TheStreet.com reported. Such a move could potentially be interpreted as positive for stocks.

Crude oil rose back toward $54 a barrel early Friday amid U.S. tensions with Iran. The dollar fell, and 10-year Treasury yields dropped to around 2.46%. Chances of a March rate hike are down to 9%, from 17.7% yesterday, according to Fed funds futures.

Gold vs. dollar index

FIGURE 1: GOLD VS. DOLLAR INDEX (PURPLE LINE).

In November and December, Fed hawkishness and the Trump rally meant dollar strength and weakness in gold. Since the first of the year, each reversed course. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results. 

Gold and the Dollar--Signs of the Times? If we are in a time of uncertainty, then perhaps yes. Stimulus may be moving to the back burner, per Speaker Ryan's statements above, and some Fed watchers have begun to question the pace of hikes in the Fed Funds rate. This dynamic is reflected in the U.S. dollar index and gold markets. Each has unwound about half their post-election moves, as fiscal and monetary policy makers decide the fate of interest rates, stimulus and tax reform. The question is when and whether some of these things will come down the pike, including potential rate hikes and fiscal stimulus.

CEOs Expressing Optimism: There’s been quite a change this earnings season in what we’re hearing from CEOs on their calls. If you go back to the middle of last year, a lot of what we heard was along the lines of, “Things are OK, and we can manage with the way it’s going.” The tone wasn’t negative, but it seemed companies were just holding their own without a great deal of optimism. That’s really changed, and CEOs now say they’re expecting growth. This optimism seems to be reflected by investors, with many market participants getting excited about the future.

S&P 500 Companies Surpassing Earnings Expectations: We’re only about halfway through the Q4 earnings season, so things still could change. But so far, companies in the S&P 500 are posting better-than-expected earnings. Average S&P 500 earnings growth through the end of January stood at 5.6% year-over-year, well above beginning of the quarter estimates for 4.2% growth, according to research firm CFRA. Real estate, financials, materials, info tech, and industrials are the sectors that have surpassed expectations the most so far; but energy, telecom services, and consumer discretionary names have, on average, come in below estimates.

Good Trading,
JJ
@TDAJJKinahan

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JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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