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Sizzling Jobs Growth, But Will It Raise Inflation Or Spending? Week Ahead Could Give Hints

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August 7, 2017

(Monday Pre-Market) The question heading into the new week is whether sizzling jobs growth and improving wages might start having an impact on the wider economy. The coming days, which bring inflation data and key retailer earnings, could help provide some answers.

Though inflation and the so-called “brick-and-mortar” earnings reports dominate the picture over the next few sessions, there’s still some buzz about Friday’s July jobs report. It was the second in a row to show more than 200,000 jobs added, and hourly wage growth looked healthy at 0.3%. In a way, the report came as a relief after several other data points last week like construction spending, Chicago PMI, and personal consumption expenditure (PCE) prices seemed a little sluggish.

Some might look at the jobs report and ask if it’s a good thing to see food services and drinking places leading in growth. While there’s absolutely nothing wrong with such jobs, they often don’t pay a lot or offer long-term prospects. The other side of the coin is that when people are employed and feel like there’s a little extra cash in their wallets, they often spend it on fun stuff like eating out, and that’s what might be bumping up jobs growth at restaurants and bars. Additionally, the report showed growth in other sectors like health care, business and professional services, construction, and manufacturing, so it’s not one-dimensional.

Earnings season is starting to wind down, with reports out from nearly 85% of S&P 500 companies. Attention now turns toward retailers, with Kohl’s (KSS), Macy’s (M), Nordstrom (JWM), and JC Penney (JCP) all on the earnings calendar late in the week. 

Keep an eye on two things. First, how are these retailers working to compete with online vendors? It’s a continuing story for the sector and isn’t going away anytime soon Also check if any of these companies can beat analysts’ estimates on revenue. That’s really one of the most important things to watch. If they do, it would likely be a sign not only that the companies are doing a better job competing in an increasingly electronic world, but also that those new jobs we’re seeing are starting to translate into better consumer spending. Remember, retail sales have fallen for two months in a row.

We’re not going to get a look at July retail sales this coming week, but we will be treated to two major reports from the government that could also tell a story about consumers. The July Producer Price Index (PPI) comes out early Thursday and the July Consumer Price Index (CPI) takes the stage early Friday. In June, both PPI and CPI showed barely any signs of life, with PPI up 0.1% and CPI coming in flat. The critical core CPI reading was up just 1.7% year-over-year in June, still below the Fed’s “neighborhood of 2%” inflation target. And PCE prices last week were even weaker, up just 1.4% over the last year. There’s a lot of scuttlebutt on the airwaves about why jobs growth may not be translating into inflation growth, and doubtless we’ll hear more about that if PPI and CPI fail to budge in July.

Which brings us to the Fed. Two or three Fed speakers are scheduled to give talks during the week, and we’ll see if any of them start to set the table on the Fed’s plans for balance sheet unwinding. A lot of people are thinking that could begin in September, but the Fed hasn’t been too open on timing. Odds of a rate hike by December perked up a little after the jobs report, rising to 50% by midday Friday according to CME futures. The inflation data on the way could help the Fed get a better sense of by when and how much it wants to tighten the screws in coming months.

Dollar Index

FIGURE 1: JOBS POP FOR DOLLAR, YIELD

Just a few days ago, the dollar index and bond yields were both on the run. But check the very right edge of this one-month chart, which shows how both markets jumped in the aftermath of Friday’s jobs report. The question is whether this action, which shows more investor optimism about the U.S. economy, can continue in the new week. Data sources: CME Group; NYSE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Earnings Impress: With 83% of S&P 500 companies reporting Q2 earnings as of Friday morning, 70% have beaten Wall Street’s estimates for earnings and 68% have beaten analysts’ projections on sales, according to data from research firm CFRA. From a sector perspective, CFRA expects energy, info tech, and financials to be the leaders in earnings growth, and sees only one sector (consumer discretionary) recording a negative EPS figure. CFRA now estimates average EPS growth at 10.6%, compared with the firm’s original estimate for 6.2% growth. With less than 20% of companies to go, it seems fair to say it’s been another banner earnings season.

Looking For Growth: Friday’s jobs report pointed toward improving economic growth, and naturally leads to thoughts about what this quarter’s gross domestic product (GDP) might look like. We’re close to halfway through Q3, and estimates now are all over the place. Some analysts look for growth as low as 2.5%, which would be below the 2.6% growth in Q2. Others, like the Atlanta Fed’s GDP Now indicator, are much higher, at 3.7%. That’s actually down slightly from the indicator’s previous prediction of 4% growth. One reason the GDP Now number ticked down this week was due to lower forecasts for real consumer spending growth and real fixed investment growth. We’re still months away from having any government estimates in hand, but it’s something to keep monitoring.

Defensive Line Crumbles: Before Friday’s jobs data, some investors were seeking safety. Bonds and gold both posted gains while health care and utilities stocks found buyers. A lot of that reversed course after the government delivered another robust jobs number. By midday Friday, the 10-year yield had charged back up to 2.28%, from 2.22% late Thursday and gold fell nearly 1%. Over in the stock market, financial stocks got some traction, as did other growth-oriented sectors like materials and info tech. Telecom and utilities were the two worst performers. Stay tuned to see if this pattern follows through into the new week.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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