Wall Street Looking To End The Week On A High Note On US Jobs Data

The latest government report on the domestic employment situation came in way better than expected, offering the market another encouraging data point after a gauge of manufacturing in China pointed to expansion there. 

According to Labor Department figures, total nonfarm payroll employment rose by 128,000 in October, and the prior month’s figure was revised up to 180,000 from 136,000. A Briefing.com consensus had expected the new figure to come in at just 80,000 as the General Motors Company GM strike was forecast to weigh on the number.   

Average hourly earnings growth came in as expected at 0.2%. Meanwhile, the unemployment rate of 3.6% also came in as forecast and remains close to its lowest point in half a century. 

The U.S. jobs market has been a bright spot amid worries about the domestic manufacturing sector and concerns about global economic growth as the U.S. and China have been engaged in a tit-for-tat trade war.

Encouraging Manufacturing Data From China

Before the jobs data came out, U.S. equity index futures were already reflecting a positive tone among investors after the Caixin/IHS Markit China manufacturing purchasing managers index showed another month of expansion in the Asian nation’s manufacturing sector in October. That report painted a brighter picture than the official Chinese manufacturing PMI, which showed contraction in the sector during the month.

If the private sector data proves to be the more accurate, that would be an encouraging sign that maybe the manufacturing sector in the world’s second largest economy is continuing to rebound amid a thawing in the trade war with the U.S.

The press release accompanying the new data noted that the measure of new export orders returned to expansionary territory, likely because of the U.S. exempting more than 400 types of Chinese goods from additional tariffs.

Doubts Reported On Long-Term Trade Deal

A string of records came to an end for the S&P 500 Index (SPX) Thursday as stocks closed out the month with a bit of a fizzle after a Bloomberg report said Chinese officials have cast doubts on a more comprehensive long-term trade agreement beyond the “phase one” deal that could be signed soon.

For his part, President Trump said China and the U.S. are working to find a new site to sign the first phase of the trade deal—which he said will comprise about 60% of the total agreement—after a summit in Chile was canceled due to domestic unrest in the South American nation. 

But if and when a first phase is signed, that would still leave 40% left undone, and the market on Thursday seemed to take a dim view on that based on the Bloomberg report.

Still, the selling wasn’t anywhere near to being a rout or panicky. Rather, it looked like perhaps some investors saw the news as a good time to book some profits following the SPX’s record highs this week. Also, because it was the end of the month, there could have been some portfolio rebalancing going on that may have resulted in some selling. 

Solid Earnings From AAPL, FB Soften The Blow

The selling could arguably have been worse, but the market seemed to take some comfort in another round of better-than-expected earnings from big-name companies.

Both Apple Inc. AAPL and Facebook, Inc. FB beat Wall Street’s projections, matching or exceeding third-party consensus estimates for all their major businesses, including revenue and earnings per share. 

FB’s revenue per user came in a little above estimates, particularly important because it provides more proof that FB is able to make users into revenue generators. Wall Street had expected revenue per user to fall about a penny.

For AAPL the news also looked good. Earnings and revenue easily surpassed Wall Street’s expectations. As many analysts expected going in, iPhone revenue looked pretty solid but was down from a year ago. What’s interesting with the iPhone is how the September launch of iPhone 11, which many analysts had predicted wouldn’t make many waves, seems to have triggered some excitement.

Like we’ve said before, earnings drive the market in the long run. So even though stocks retreated a bit in the face of some adverse trade news, it seems like earnings like AAPL’s and FB’s could offer more solid fare for the market going forward.

Overall, most of the SPX companies that have reported this earnings season have surpassed Wall Street estimates, and while earnings overall are still expected to show a decline for the most recent quarter, that forecasted decline is now much smaller than previous expectations.

CHART OF THE DAY: YIELDS FALTER. After climbing steadily over the past few weeks, the yield on the 10-year Treasury (TNX) has fallen 19 basis points from the high earlier this week—first on the rate cut by the Fed, and again on Halloween as a news report on the trade situation spooked investors. But this morning's solid jobs report pushed TNX higher in early trade. Data source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Silver Linings: Although stocks declined Thursday, there were some silver linings, including the AAPL and FB results as well as data that showed inflation isn’t problematic. The Fed’s preferred inflation gauge, the core PCE price index, which excludes volatile food and energy prices, was unchanged in September. A Briefing.com consensus had expected a 0.1% rise. The core PCE index coming in flat offers more evidence that inflation remains muted. That’s at least one data point arguing against the Fed raising rates anytime soon. Fed Chairman Jerome Powell said late in his post-meeting press conference this week that the central bank wouldn’t raise rates without a “significant inflation rise.”

Rising Wages: But that’s not to say that there aren’t inflationary pressures out there. On Thursday, the latest government employment cost index, for Q3, rose an as-expected 0.7%. For the full year, the index showed a total rise of 2.8% as wages and salaries rose 2.9% and benefits jumped 2.3%. The labor market, which has been a strong underpinning to the U.S. economy, has been tight, and there has been pressure on employers to offer increased compensation to attract workers. While this is leading to inflationary pressures in the labor market, that’s just one inflation metric, and it doesn’t seem too far out of hand, especially given that overall inflation doesn’t seem to be problematic. “The key takeaway from the report is that it shows a continuation of moderate growth in compensation costs,” according to Briefing.com.

Manufacturing Slump: On the other hand, the domestic manufacturing sector hasn’t been doing that great. The latest evidence of this came yesterday as a measure of factory activity in the Midwest fell to 43.2 in October from the prior reading of 47.1. A Briefing.com consensus had expected the figure would rise to 48.2. Even if that had come about, it still wouldn’t have been stellar as numbers below 50 indicate contraction. As it is, the actual reading was the worst since December 2015. 

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