Positive Energy From Jobs Report Seems To Roll Into New Week With Data Ahead

Positive sentiment generated by last Friday’s jobs report appeared to roll over into the new week, as stocks turned higher in pre-market trading Monday. If you’d asked Hollywood to put together a script for a perfect rally, Friday might have been the result.

The jobs report is in the rear view, and earnings are basically over. Unfortunately, this isn’t a time to relax. Investors might want to consider being careful this week, because there could be a lot of intra-day volatility. Worries about rates could flare up, especially when there isn’t much other news, and action could move back and forth quickly. The 10-year Treasury yield climbed back above 2.9% early Monday, VIX is back above 15, and the market might be a little fragile.

The February payrolls report was great across the board, delivering a massive 313,000 gain in jobs but with only mild wage growth. That could be called a “Goldilocks” scenario, because the economy churned out tons of high-quality jobs without a corresponding upward jolt to wages that might have renewed inflation fears. The core jobs growth was in areas investors typically like to see, including construction, manufacturing, and business and professional services. Those are sectors where workers can often build solid careers.

In another positive development, the employment report included an uptick in the labor participation rate, to 63% up from 62.7% last month, continuing an uptrend after a generational low of 62.3% set back in September 2015.

All these ingredients blended into a winning recipe that helped the Nasdaq (COMP) set a new record high for the first time since Jan. 26, back before that 10% market correction a month ago. Though COMP was alone in hitting a new record, all the major indices rose sharply, with the S&P 500 (SPX) cutting through technical resistance near 2,765 like a knife through butter and the $DJI easily closing above the psychological 25,000 mark.

This week brings a slew of data, but arguably none as important as the consumer price index (CPI) and producer price index (PPI) for February. These two numbers are due Tuesday and Wednesday morning before the bell, respectively. Housing starts this Friday (see below) could also be worth watching to see if there’s any sign of job growth translating into people buying new homes. There’s arguably nothing that says optimism more than the decision to go out and spend money on a home, so a positive number on housing starts might be a sign that the ball continues to roll in the right direction.

The payrolls report might have eased some inflation concerns, showing tepid 0.1% February wage growth and year-over-year wages rising 2.6%, down from 2.9% the prior month. However, that doesn’t mean we’re out of the woods, necessarily. No single data point tells the entire story, and that’s why CPI and PPI are important to watch. In January, CPI rose a moderate 0.5%, but much of that was driven by surging energy costs. With energy and food stripped out, core CPI was up 0.3%, arguably a more manageable number.

From a year-over-year perspective, CPI rose 2.1% in January, down from 2.2% the prior month and near the Fed’s 2% target, though the Fed’s preferred inflation market is personal consumption expenditure (PCE) prices, which have been consistently trending below 2%. Looking more in depth at January CPI, apparel, transportation, and medical care costs were some of the bigger gainers, so it could be interesting to see if those higher costs persisted into February. Additionally, watch to see if core CPI can break out of a pattern in which it’s grown either 1.7% or 1.8% year-over-year for the last eight months.

This week  marks the start of a countdown to the next Fed meeting, scheduled for March 20-21. Nothing is ever a slam dunk with the markets or the economy, but when futures project a better than 88% chance of a rate hike and the Fed meeting is this close, that’s often something you can pretty much count on. The Fed goes into its quiet period ahead of the meeting, but on Friday morning, Chicago Fed President Charles Evans told CNBC, “I think we really have the ability to be cautious” on plans for coming rate increases.

Chances of a fourth rate hike this year — a possibility that helped spook the market into a brief correction a month ago — have been creeping a little higher. They’re now around 34%, according to Fed funds futures, compared with 25% not so long ago. One thing to consider, however, is that generally wage growth has been pretty moderate despite the huge job gains over the last three months. Some analysts say this might imply additional “slack” that could allow the Fed to refrain from tightening the vise too much, and that might be what Evans was hinting at on CNBC. The Fed is under pressure not to hike rates to a level where they might choke off economic growth, even as it also keeps an eagle eye on inflation.

It’s kind of unfortunate that we’re not getting much wage growth, even though it would potentially raise inflation concerns. Higher wages not only help employees, but also can translate into broader consumer spending. Keep in mind that retail sales data have flagged a bit over the last few months. February retail sales data are due Wednesday morning.

Another thing people might keep want to consider keeping an eye on is the political scene. President Trump was in the headlines Friday after announcing he would meet at some point with North Korea’s leader. Last year, verbal skirmishes between the U.S. and North Korea helped contribute to anxiety in world markets, but hopes for some sort of detente might be playing a small role in the market’s current rally. Any more news on that front — positive or negative — could affect the general mood. Also, Tuesday brings a special congressional election in Pennsylvania that political pundits say could point toward how things might go in November’s mid-terms.

FIGURE 1: NASDAQ TAKES THE LEAD. This year-to-date chart shows the Nasdaq (candlestick) out-pacing the S&P 500 (purple line). Strength in info tech has helped Nasdaq pull ahead. Data source: Nasdaq, Standard & Poor’s, Dow Jones & Co. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Re-attachment?

Labor force detachment is a term given by economists to describe people who have given up on finding a job, and have been out of work for so long their skills have begun to deteriorate. Friday's gonzo employment report included an uptick in the labor participation rate, to 63.0, up from 62.7 last month, continuing an uptrend after a generational low of 62.3 set back in September 2015. A return of previously-detached workers to the job force would be welcome news, but could also be a factor as to why wage growth eased a bit last month. February wage growth and year-over-year wages rose 2.6%, down from 2.9% the prior month. Though a single month's data doesn't constitute a trend, it's certainly something to watch in the coming months.

Earnings Growth Seen Near 15%

Earnings season is just about over, and except for some recent stumbles in the retail sector, it’s been exceeding Wall Street analysts’ expectations in a big way. S&P Capital now sees a 14.7% increase in year-over-year earnings for last year’s Q4, up from the 10.6% advance the firm had forecast back on Dec. 29, it said in a report. In addition, the firm sees 10 of the 11 S&P 500 (SPX) sectors posting positive comparisons in Q4, led by energy, materials, and tech. Only real estate is left out. And it’s not too soon to start looking ahead to Q1 earnings, which start rolling in just over a month from now. S&P Capital sees 16.9% growth in S&P 500 earnings this quarter, and 18.7% for the full year. Some of the firm’s  highest revisions have been for the consumer discretionary, industrials and telecom groups.

Home Run

It’s been a while since we talked housing, but it’s worth noting that climbing interest rates seem to be raising borrowing costs for home buyers. Mortgage buyer Freddie Mac said that the average rate on 30-year fixed-rate mortgages climbed to 4.46% last week from 4.43% the week before, The Associated Press reported. This marks the highest average since January 2014. The 30-year rate averaged 4.21% a year ago.

Some housing data come down the pike this week, with housing starts and building permits for February due Friday morning. Building permits leaped by more than 7% in January, but the caveat is that most of the increase was due to growth in multi-family homes. Housing starts were up more than 9% in January, driven by single-family homes. Tight supplies remain, and it could be interesting to see if rising mortgage rates start to temper the building activity that’s been rising to meet the growing need for new homes.

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