Jobs Report Beats Expectations, Adding To Week Of Market-Boosting Economic News

As a new month got underway, investors had their second helping of big economic news this week in the form of the government’s jobs report for January, which came after the Fed meeting earlier this week helped boost the market. 

For the second month in a row, job creation in the United States blew past expectations with a surge of more than 300,000 new nonfarm payrolls positions. A Briefing.com consensus estimate had forecast a gain of 160,000 jobs in January, but the actual figure from the Labor Department ended up showing a rise of 304,000.

Still, there may be some factors that could temper enthusiasm about the bumper report. First, the 312,000 reading that had exceeded expectations in December was revised down to 222,000. That’s still above what Wall Street was expecting in last month’s initial report, but it takes some of the shine off. 

Also, the jobs data that show strength in the economy also point to potentially heightened inflationary pressure, which could, along with other data, prompt the Fed to revise its recently taken dovish stance. Indeed, the government said that annual average hourly earnings, a key component of inflation, increased by 3.2%.

Ahead of the jobs report, manufacturing data out of China seemed to temper the bullish tone – from the Fed’s stance and a strong earnings season – a bit after the January Caixin/Markit Manufacturing Purchasing Managers Index came in below expectations and posted its worst reading since February 2016. 

Asian markets were mixed after the news, as hopefulness about a U.S.-China trade deal helped buoy sentiment. President Trump told reporters Thursday that he hoped to get a deal done before the March deadline, and Chinese state media said negotiators from both sides have made “important progress” in solving an issue that has been a headwind for markets for months. 

Market Digests Fed News; Earnings Continue

Thursday was the first full trading day after the Fed stood pat on interest rates, removed the words “further gradual increases” from its statement and reiterated the central bank’s more dovish stance amid its willingness to be patient about potential further rate hikes.

After cheering the move following the announcement Wednesday, the U.S. stock market finished mostly higher Thursday. While the Fed’s monetary policy stance is important, as we’ve said before, earnings drive markets, and generally earnings have been showing positive signs.

Facebook FB shares surged after the social media giant easily beat third-party consensus earnings and revenue expectations. FB said daily active user growth climbed 9% in the quarter to 1.52 billion, while monthly active user growth also rose 9%. The company did say it expects revenue growth to slow, but revenue rose at about a 30% clip in Q4, beating the company’s own guidance range.

While FB was helping the S&P 500 (SPX) communication services sector post the day’s best sector gains, General Electric Company GE was leading the industrials sector higher. GE added to the generally positive tone to the market after it reported stronger-than-expected revenue, although its earnings per share came in under expectations. 

The rally in those two companies’ shares comes after Apple Inc. AAPL and Boeing Co BA surprised to the upside, seeming to help alleviate some worry about slowing growth in China. 

In corporate earnings news Friday morning, Exxon Mobil Corporation XOM shares gained ground after the company reported earnings that beat Wall Street estimates even as revenue fell short of expectations. 

Capex Concerns

Although the U.S.-China trade war has been a market overhang for months now, the extent to which the tariff tussle is holding back company executives in terms of making plans may be underrated.

One notable issue during this earning season has been a relative absence of talk about capital expenditure plans. It seems likely that is because of the tariff uncertainty. So, if the China-U.S. trade dispute gets solved, it’s a possibility that capex may ramp up. While one-quarter with a dearth of capex is not too alarming, an extended absence of company spending would be.

Some Earnings-Season Clouds

Not all of this earnings season has been positive. The Dow Jones Industrial Average ($DJI) ended just shy of the break-even mark on Thursday, weighed down by a hefty drop in DowDuPont Inc's DWDP shares after earnings came in slightly ahead of expectations, but revenue missed analysts’ forecast.

And after the closing bell, Amazon.com, Inc.'s AMZN shared dipped substantially in extended trading hours Thursday after the online retailing giant provided an outlook that disappointed investors, even though it beat top- and bottom-line expectations after a bumper holiday season. Revenue at Amazon Web Services, the company’s cloud-computing platform, also beat expectations.

While much of the market’s strength at the moment appears to be coming from optimism about the Fed and strong corporate earnings, it’s also possible that some companies may have gotten oversold, creating what some see as a buying opportunity.

But last month’s strength also brings to mind January 2018, when the market was on fire but then the bulls got doused in cold water amid a sharp pullback that carried into last February. One thing to potentially watch for is earnings reports from retailers. They could prove to be a headwind and a test for the resiliency of the current bullish momentum.

Figure 1: Brexit and the Buck: The dollar gained ground against a basket of other currencies last year amid stock market volatility prompting flight-to-safety buying in the greenback, signs of strength in the U.S. economy, and multiple interest rate hikes by the Fed. What remains to be seen is whether the Brexit outcome might weigh on the pound and the euro enough to give the dollar another meaningful boost of support. Data Source: ICE Futures U.S.Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

More Strength for the Dollar?: With the deadline for Brexit approaching in March, one of the questions that has been hanging over the market is how that might affect Britain’s economy, and that of the European Union. Britain hasn’t yet passed a plan for the split. While no one knows exactly how a no-deal Brexit would play out, it’s arguable that the results wouldn’t be good for either economy, or at least not as good as they would be in a negotiated divorce. If the economies of Britain and the EU deteriorate meaningfully as a result of Brexit, that could weaken their currencies compared with the U.S. dollar. After strengthening though much of last year (see chart above), an even more muscular greenback could create a stronger headwind for U.S. multinationals by making the goods they sell more expensive for buyers using other currencies.

From Supply to Demand: Oil prices took a beating last year, in part on concerns about oversupply amid a glut of production. But a deal from OPEC and Russia on curtailing production has helped prices rally, boosting the SPX energy sector more than 10% this year through Wednesday, according to investment research firm CFRA. That’s a sharp contrast to last year, when, according to the research firm, the sector fell more than 20%. But the sector isn’t out of the woods yet, as the International Monetary Fund has reduced its global economic growth expectations. “The uncertainty in the oil market has shifted from a supply side concern to a demand side question,” CFRA said.

Consumers Less Confident: Earlier this week, a reading on the confidence of the U.S. consumer dropped more than expected. The Conference Board’s Consumer Confidence Index fell to 120.2 in January from a downwardly revised 126.6 in December. A Briefing.com consensus had expected the reading for last month to come in at 126.1. The mindset of consumers is a big deal because consumer spending represents the single largest contributor to the U.S. economy. “The outlook among consumers was dampened by the volatility in financial markets and the government shutdown, which threatens to register in consumer spending data that would be a drag on first quarter GDP,” Briefing.com said. 

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