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Strong Job Growth? Check it Off. Market Now Eyes Yellen, Bank Earnings, Inflation Data

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July 10, 2017

(Monday Pre-Market) The rubber truly hits the road this coming week with the start of earnings season and key inflation data from the government. Markets enter this important stretch on a positive note following Friday’s rock solid June jobs report.

Along with everything else, Fed Chair Janet Yellen is scheduled to pay a visit to Capitol Hill for testimony Wednesday and Thursday, so all eyes could be on her remarks both of those days. 

Before looking ahead, it’s worth revisiting the jobs report for a moment. Headline growth of 222,000 positions was a hot number, but market reaction wasn’t initially as exuberant as one might have thought, perhaps tempered by wage growth that totaled just 0.2%. However, the market slowly gained as trading continued Friday, perhaps in a delayed reaction to the data.

Slice it any way you want, but it’s hard to find a lot to dislike in the report aside from the tepid wage growth. There tends to be a lot of noise out there when various data points pop up every week, but the jobs report is really the king of the hill as far as numbers are concerned, and it’s hard to argue that this one — combined with upward revisions to the last two — signals anything other than a relatively healthy economy.

Odds of a Fed rate hike by the end of the year clawed back above 60% by midday Friday, according to CME futures, possibly reflecting sentiment about jobs growth, which now has averaged 180,000 a month in 2017. The bond market, which has been getting slapped around early this month, continued its descent early Friday after the jobs data, with 10-year yields climbing to near 2.4%.

The climb in yields Friday as stocks also rose looked like a good sign following Thursday’s odd dynamic in which stocks and bonds fell at the same time. Yields are getting higher, and we’re finally starting to see a little separation between bonds and stocks. That’s more of a natural relationship, which had been distorted over the years by central banks keeping rates at historically low levels.

After weeks of watching the financial sector gain amid steadily rising U.S. Treasury yields and in the wake of the Fed’s second rate hike of the year, three of the biggest U.S. banks step up to the plate this coming Friday to show what kind of Q2 they had. Citigroup (C), JP MorganChase (JPM), and Wells Fargo (WFC) are all scheduled to report before the market opens that day. The financial sector is forecasted to report year-over-year earnings growth of 6.8%, the third highest out of the 11 sectors in the S&P 500, according to FactSet.

Trading in some of the bigger financial companies such as JPM, WFC, Bank of America (BAC), and Citigroup (C), has been choppy so far in 2017, likely pressured by yields and regulatory uncertainty out of Washington. Even though the post-election rally in financials has cooled, many stocks in the financial sector are still up significantly over the past year; and bank stocks started rallying again following positive results from the Fed’s annual stress test, which was seen as a vote of confidence that balance sheets at the big banks are in healthy shape.

Banks aren’t the only companies scheduled to share earnings this coming week. The parade of major company reports starts Tuesday with PepsiCo (PEP), and continues Thursday with Delta Airlines (DAL). More banks open their books the following week. Strap on those seatbelts.

Aside from earnings and more analysis of the jobs report, another key factor could be inflation data from the government, with producer prices for June due Thursday and consumer prices on Friday. Inflation keeps running light, as the Fed’s favored personal consumption expenditures (PCE) price number for May was up just 1.4% year over year, well below the 2% inflation growth the Fed said it strives to achieve. Both PPI and CPI barely budged in May, though core numbers rose a bit more than the headline figures. Core PPI actually went up 0.3% that month, which some analysts saw as supportive of the Fed’s rate hike policy.

As for the Fed, officials there continue to believe weak inflation is transient, according to minutes of the June Fed meeting released last week. The Fed comes back into the spotlight again Wednesday and Thursday when Yellen testifies to Congress. It’s important to hear what she has to say, but Yellen hasn’t tended to spring any surprises in past testimony, and it’s unlikely she’d stray far from the comments she made in the press conference she gave after last months’ Fed meeting. It’s possible, however, that Yellen could be pressed to give more detail on the Fed’s plans to whittle down its $4.5 trillion balance sheet, as the minutes showed debate about when that should begin.

Oil

FIGURE 1: OIL RIDES SEE-SAW.

Almost lost in the excitement of strong jobs data Friday was another slide in oil, tracked here through midday Friday on the thinkorswim® platform from TD Ameritrade. Oil has been riding the proverbial see-saw lately, bouncing up and down based on stronger U.S. demand but rising supplies from both the U.S. and OPEC. Source: CME Group. For illustrative purposes only. Past performance does not guarantee future results.

Will Consumers Step In? Retail sales data next Friday is another weekly highlight, and like inflation, it’s coming off a disappointing number. May retail sales fell 0.3%, and since then we’ve seen other signs of relatively light consumer demand, including slower auto sales and a decline in durable goods orders. One thing this might reflect is the relatively light wage growth. People might have jobs, but if wages aren’t growing much, perhaps they’re holding back on spending. The PCE data last month showed the savings rate as a percentage of disposable income rising to 5.5% from 5.1% a month earlier, and at the highest level since last fall.

Riding the Info Tech Coaster: If you’re feeling slightly nauseated, maybe it’s because you — like a lot of people — are taking a ride on the roller coaster that the info tech market seems to have turned into lately. The ride on Friday morning was straight up, with gains of 1.3% by late morning after a 0.9% decline on Thursday. Info tech has had its pits and valleys over the last month, but the overall direction has been lower, with about a 4% slide since early June.

VIX Keeps Shying From Rallies: It’s happening again. After a sharp jump at mid-week, the VIX — the market’s key “fear index” — quickly surrendered a good portion of its gains by early Friday. The market seems to keep shaking off just about everything thrown at it over the last six months, and the latest crisis to rattle VIX for a day before easing off appears to be tensions over North Korea. When events happen, the market has been suffering 1% to 2% corrections before buyers stepped in. It’s been a volatile news flow, but the level of volatility remains low and the market continues to hang in there. When one sector weakens, another takes its place, as we’ve seen recently in the info tech and financial sectors.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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