Friday, January 4 , 2019, 12:14 PM, EST
- NASDAQ Composite +3.44% Dow +2.49% S&P 500 +2.60% Russell 2000 +2.96%
- NASDAQ Advancers: 2086 Decliners: 257
- CENX +11.4% NFLX +7.8% MAT +8% ROKU +9.9%
- December Nonfarm Payrolls +312k with November revised higher to 176k
- National Unemployment Rate 3.9%
- Average Hourly Earnings YoY +3.2%
- Market December Services PMI 54.4
The market is nearly reversing yesterday's losses this morning following strong employment data. Each of the major indices is up over 2.5% and once again the Russell 2000 leads the way higher with 95% of its member stocks in the green. In recent weeks there has been plenty of conjecture over why the markets are so choppy, but this week highlights the crosscurrents facing investors.
Yesterday the market moved sharply lower on growth concerns with Apple and Delta Airlines issuing profit warnings and ISM Manufacturing signaling a slowdown. Yet at the same time investors are presented with strong employment numbers with no sign that employers are cutting back on staffing. Not only are the bread & butter weekly unemployment claims holding near decade lows, ADP presented good employment stats yesterday and today we get even better data.
December Nonfarm payrolls exceeded expectations with a 312k print, the best since February, and November was revised higher. Private and manufacturing payrolls also exceeded expectations, and average hourly earnings ticked 0.4% higher in December and YoY also exceeded expectations at 3.2%. Labor force participation increased from 62.9% to 63.1%, so with more people rejoining the workforce the National Unemployment Rate bumped up to 3.9%.
Speaking this morning at the American Economic Association conference in Atlanta, Fed Chair Powel says investors can expect policy flexibility. He went on to say that the market is focused on risks and is perhaps looking 'ahead' of the data, but reiterated that the Fed is listening and is ready to adjust policy as needed. His comments were well received and the markets moved to session highs during his talk. More on this below in the Technical Take.
Investors also received a dose of positive news from China. The PBoC announced that it is lowering bank reserve ratios by 50 basis points on January 15th, a move that will free up around $116 billion in liquidity. Additionally December Caixin services PMI came in at 53.9, slightly higher than November and well ahead of the 53.0 expected. New export business also increased by the most in six months. This provided a sigh of relief following recent data showing Chinese manufacturing is in contraction.
All sectors are in the green with Technology seeing a 3.4% rebound followed by 2% or better advances in seven other sectors. Utilities are up the least with a 1% move, and even that is also a sign of today's market strength. There are also signs of life in the oil patch with WTI crude higher for its seventh gain in eight sessions. API inventory data last night reflected a substantial 4.5M barrel drawdown last week but DOE data shows stockpiles held steady with gasoline and distillates seeing builds. No matter, WTI crude is holding a near 4% gain.
Lastly Citi is out this morning suggesting that investors buy the dip since they expect global equities to return about 14% this year. This comes on the heels of a similar prediction from Blackstone's Byron Wien, who sees the S&P advancing about 15% for the year.
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Brian's Technical Take
The focus of investors has been on the pace of interest rate increases as the Fed seeks to "normalize" from an extended period of low rates. The Fed ran on "autopilot" in 2018, with 25 basis point increases each quarter. Until fairly recently, the Fed was expected to continue this tempo entering 2019. Stock market weakness in the fourth quarter raised the question about whether the Fed should increase rates in December (it did, disappointing some including Fed-Watcher-In-Chief Trump) and beyond.
Last month it was also expected that there would be at least one rate increase in 2019. Over the past two weeks the odds for this began to drop sharply with yesterday's probability at 6%, down from 75% a month ago) and today's Fed Fund futures implying almost no chance of a hike. What few have discussed until recently is the probability of a rate cut.
The chart below (orange line) depicts the current implied probability of the possibility of the Fed decreasing rates by the December 2019 Fed meeting. The current probability is 45% - basically a 50/50 shot, up from levels below 5% for much of 2018. Notably, the possibility of a rate hike (in white) is now shown at zero (CME FOMC watch shows 1.7%) vs. the 1-in-3 odds from a few weeks ago.
The gap between these market-based measures and the Fed's current posture is growing. The market is discounting weakening manufacturing numbers, regional Fed releases, bond market signals and corporate profit warnings. The Fed can point to consumer spending and today's "exceptional" jobs report.
Fed Chairman Jerome Powell disappointed markets last month with the rate hike and commentary about continuing quantitative tightening, which inflamed worries of a "policy mistake." The Fed seemed content to focus on the economy and not the stock market. Linking the two, equities sold off yesterday on fears of slowing corporate profit growth. Today, shares have rebounded on the very strong jobs numbers - highlighting two sides to the story.
Today in comments at the American Economic Association's Annual Meeting, Jerome Powell (speaking with former Fed Chair's Janet Yellen and Ben Bernanke) noted the tension between some of the positive factors - strong 2018 economy, 2019 momentum, jobs, wages, labor force participation, consumer spending - and more recent negative factors - ISM numbers, China weakness, emerging markets, market signals.
Equities reacted favorably to his statement that the Fed would be "patient" and "prepared to adjust policy quickly." Powell stated that the market is expressing concerns about forward looking measures that have not shown up in the data yet but that the Fed is listening carefully to the message that the markets are sending. Data dependent indeed.
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Looks like the market is starting the year in the Green!
Nasdaq's Market Intelligence Desk (MID) Team includes:
Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.
Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.
Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.
Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq's Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).
Michael Sokoll, CFA is Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.