For investors, the wage number will be the key point in this report, said Tom Essaye, a former Merrill Lynch trader who founded the “Sevens Report” newsletter. Assuming annual pay gains hold around 3.1% and hiring is strong, stocks should rally: “The market will love it because…” he said. Click here to read the full article.
What’s in Today’s Report:
Futures are modestly higher thanks to reports that the U.S. and China are extremely close to a new trade deal.
The WSJ reported the U.S. and China are aiming to sign a new trade deal on March 27th that will include the removal of all tariffs, although the article cautioned it’s not a done deal at this point.
Economically, data was weak again as British Construction PMI (50.6 vs. (E) 52.5) and EuroZone PPI (3.0% vs. (E) 3.2%) missed estimates.
There are no economic reports today so focus will remain on U.S./China trade and any official confirmation (from the U.S. or Chinese government) of the positive articles that hit overnight.
Futures are slightly higher following a generally quiet night of news.
There was no new trade news overnight so markets continue to wait for the administration decision on the 200 billion in new Chinese tariffs (it can come any day now).
Economically the only notable report was German Manufacturers’ Orders, which missed estimates (-0.9% vs. (E) 2.1%).
Today markets will be watching the news wires for any tariff related headlines. But, outside of that, we get thee notable economic reports, the most important of which is the ISM Non-Manufacturing Index (E: 56.8). On the employment front, we also get the ADP Employment Report (E: 182K) and Jobless Claims (E: 213K) and both reports should show continued strength in the job market.
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Before getting into this month’s jobs report preview, I want to point out that August jobs reports have a history of being the worst reports of the year, and often provide negative surprises. The reason why isn’t exactly clear. It likely has to do with the resumption of college and end of summer jobs, although that’s never been statistically verified. The reason I’m telling you this is because if there’s one month where a soft jobs report is at least partially overlooked, it’s August. Point being, a soft jobs report tomorrow won’t be as “dovish” as a soft jobs re- port any other month.
Bigger picture, the inflation component of this report remains key. A December rate hike isn’t certain, but if wages tick higher and the headline number is strong, that will push yields and the dollar higher, and stocks likely lower (at least in the short term). Longer term, though, we need a “reflation,” and that comes with better growth and inflation, so that’s the preferred outcome for anyone with a longer-term time horizon (which is all of us, I suspect).
“Too Hot” Scenario (A December Rate Hike Becomes More Certain)
• >250k Job Adds, < 4.1% Unemployment, > 2.8% YOY wage increase. A number this hot will refute the lower inflation numbers and reintroduce the potential for a “not dovish” Fed. Likely Market Reaction: We should see a powerful re-engagement…withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).
“Just Right” Scenario (Leaves a December Rate Hike As A 50/50 Proposition)
• 125k–250k Job Adds, > 4.2% Unemployment Rate, 2.5%-2.8% YOY wage increase. This is the best-case scenario for stocks, as it would reinforce the current expectation of balance sheet reduction in September, and (maybe) one more 25-bps rate hike in December. Likely Market Reaction: A knee-jerk, mild stock rally..withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).
“Too Cold” Scenario (Economic Growth Potentially Stalling)
• < 100k Job Adds, < 2.5% YOY Wage Gains. If we see a big disappointment in the jobs number and a further softening of wage inflation, that will send bond yields lower, but it would also likely weigh on stocks as it will raise concerns about economic growth. Likely Market Reaction: Bonds and gold should surge and the 10-year Treasury yield would…withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).
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Goldilocks Jobs Report Preview: What Will Make the Report too Hot, too Cold, or Just Right?
What a difference a month makes. For June’s jobs report, we were equally worried about a “Too Hot” report sending bond yields materially higher, and a “Too Cold” report implying a loss of momentum in the jobs market. Now, almost all the risks to this July report are skewed towards “Too Cold” given the drop in inflation we’ve seen since early July.
More specifically, even if the jobs report is a blow-outnumber, unless it’s accompanied by a big surge in wages it’s not going to elicit a “hawkish” reaction from the Fed or a spike in Treasury yields. Point being, the risk of the report being “Too Hot” is a lot lower than usual, given the drop in inflation.
Looking at the potential impact of this jobs report on the rally, it’s important realize that the dip in inflation since July has been a bullish catalyst, because economic data has stayed firm. So, low inflation makes the Fed more dovish, but economic growth stays constant, and that’s good for stocks.
However, that equation changes if US economic data starts to follow inflation lower (i.e. a big miss on the jobs number). As a result, the “Too Cold” scenario is the biggest risk for stocks heading into tomorrow’s report.
“Too Hot” Scenario (A December Rate Hike Becomes More Certain)
“Just Right” Scenario (Confirms Expectations of September Balance Sheet Reduction & Likely December Hike)
“Too Cold” Scenario (Economic Growth Potentially Stalling)
Bottom Line
From a short-term equity standpoint, the best outcome is for “Just Right” job adds (so between 100k-250k) and “Too Cold” wages (so less than 2.5% yoy). That will likely make the Fed incrementally more “dovish,” and take a December rate hike off the table, although it shouldn’t stay the Balance Sheet Reduction in September.
Beyond the short term, it’s important to remember that an economic reflation is the key to sustainably higher stock prices. For anyone with a medium- or long-term time horizon (so almost all of us), I’d gladly take better growth and higher inflation over falling inflation and stagnant growth, even if it meant some short term stock weakness.
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For the first time in 2017, the risks to tomorrow’s jobs report are balanced, as a “Too Hot” number will increase the possibility of more than three rate hikes in 2017 while a “Too Cold” number will fan worries about the pace of economic growth, and the ability for better economic growth to push stocks materially higher.
Here’s The Sevens Report traditional “Goldilocks” breakdown:
“Too Hot” Scenario (Potential for More than Three Rate Hikes in 2017)
“Just Right” Scenario (A June Rate Hike Becomes More Expected, But the Total Number of Expected Hikes Stays at Three)
“Too Cold” Scenario (A June Rate Hike Becomes in Doubt)
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Economic data continued to underwhelm last week and the gap between soft sentiment surveys and actual, hard economic data remains wide, and that gap remains a medium term risk on the markets.
Last week in Economics – 4.24.17
Looking at the headliner from last week, Q1 GDP, it was underwhelming, as expected. Headline GDP was just 0.7% vs. (E) 1.1%, and consumer spending (known as Personal Consumption Expenditures or PCE) rose a mea-sly 0.3%. But, the 0.7% headline met the soft whisper number and that’s why stocks didn’t fall hard on Friday.
That GDP report came on the heels of another underwhelming Durable Goods number. The headline missed estimates but the more importantly, New Orders for Non-Defense Capital Goods ex-Aircraft rose just 0.2% vs. (E) 0.4%, although revisions to the February data were positive.
Meanwhile, inflation metrics firmed up last week. First, the PCE Price Index in Friday’s GDP report rose 2.2% vs. (E) 2.0%, while the Employment Cost Index, a quarterly gauge of compensation expenses, rose 0.8% in Q1 vs. (E) 0.4%. Those higher inflation readings were why you saw the dollar rally pre-open Friday despite the disappointing GDP report.
Bottom line, the economic data over the past several weeks hasn’t been “bad” and it’s not like anyone is worried about a recession. But, the pace of gains has clearly slowed, and until we see a resumption of the economic acceleration many analysts were expecting at the start of 2017, any material stock rally from here will not be economically or fundamentally supported (and remember, it was the turn in economic data back in August/September that ignited the late 2016 rally. Yes, the election helped, but the momentum was positive before that event, so economics do matter).
This Week in Economics – 5.1.17
Economic data this week could go a long way towards helping to resolve the large gap between soft sentiment surveys and hard economic data, given the large volume of economic reports looming this week.
First, it’s jobs week, so we get the ADP Employment Report on Wednesday and the official jobs report on Friday. We’ll do our typical “Goldilocks Jobs Report Preview” on Thursday, but after March’s disappointing jobs number, the risks to this report are more balanced (it could easily be too hot if the number is strong and there are positive revisions, or it could be too cold and further fuel worries about the pace of growth).
Second in importance this week is the Fed meeting on Wednesday. The reason this is second in importance is because it’s widely assumed the Fed won’t hike rates at this meeting (June is the next most likely date for a rate hike), although the Fed has turned slightly more hawkish so there’s always the possibility. We’ll send our FOMC Preview in Wednesday’s report but the wildcard for this meeting is whether the Fed gives us any more color into how it plans to reduce its balance sheet. If the Fed does reference or start to explain how its plans to reduce its balance sheet, that could be a hawkish surprise for markets.
Finally, we get the global manufacturing and composite PMIs this week. Most of Europe is closed today for May Day so just the US ISM Manufacturing PMI comes today, with the European and Japanese numbers out tomorrow. Then, on Wednesday, we get the US Service Sector PMI and global composite PMIs on Thursday. The global numbers should be fine but the focus will be on the US data. In March we saw a loss of positive momentum in these indices but the absolute levels of activity remained healthy. If we see more moderation and declines in the ISM Manufacturing and Non-Manufacturing PMIs in April, that will stoke worries about the overall pace of growth in the economy and that will be a headwind on stocks.
Bottom line, this a pretty pivotal week for the markets. On one hand, if economic data is strong and the Fed a non-event, the S&P 500 could push and potentially break-through 2400. Conversely, if economic data is underwhelming and the Fed mildly hawkish, we could easily see last week’s earnings/French election rally given back, and the S&P 500 could fall back into the middle of the 2300-2400 two months long trading range.
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Jobs Report Preview: For notable releases like tomorrow’s jobs report, the Sevens Report offers a “Goldilocks” outlook to give a few different scenarios: too hot, too cold, and just right.
This gives our subscribers clear talking points to explain the importance of the report to clients and prospects clearly and without a lot of jargon. As always, the Sevens Report is designed to help you cut through the noise and understand what’s truly driving markets—all in seven minutes or less and in your inbox by 7am each morning. Sign up for your free 2-week trial today and see the difference this report can make for you.
Wednesday’s ADP Jobs Report clearly put upward pressure on expectations for tomorrow’s government report. And, there’s good reason for that. Over the past five months, the ADP report has been within 10k jobs of the official jobs report (the one outlier was November, when ADP was 50k over the actual jobs report). So, yesterday’s 298k jobs blowout implies a big number tomorrow.
Given that, the major issue for tomorrow’s jobs report is simple: Will it cause the Fed to consider more than three rate hikes in 2017? If the answer is “yes,” than that’s a headwind on stocks. If the answer is “no,” then it shouldn’t derail the rally.
Getting a bit more specific, the only reason the dollar is still generally stuck at resistance at 102 (and below the recent high at 103), and the 10-year yield is still below 2.60% is because the market assumes that the Fed will still only hike rates three times this year.
If that assumption gets called into doubt via a very strong jobs and wage number tomorrow, we will see the Dollar Index likely surge through 103 and the 10-year yield bust to new highs above 2.60%, and then they will begin to exert at least some headwind on stocks.
So, tomorrow’s jobs report is potentially the most important jobs number in years, as it has the ability to fundamentally alter the market’s perception of just how “gradual” the Fed will be in hiking rates.
“Too Hot” Scenario (Potential for More than Three Rate Hikes in 2017)
“Just Right” Scenario (A March Rate Hike Is A Guarantee, But Three Hikes for 2017 Remain the Expectation)
“Too Cold” Scenario (A March Hike Becomes in Doubt)
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An excerpt from today’s Sevens Report. Subscribe now to get the full report in your inbox before 7am each morning.
Both economic growth and inflation accelerated according to last week’s data, and while the former continues to help support stocks despite a darkening outlook from Washington, the latter also is increasing the likelihood of a more hawkish-than-expected Fed in 2017, and a resumption of the uptrend in interest rates. For now, though, the benefit of the former is outweighing the risk of the latter.
If, however, we do not see any dip in the data between now and early May, I do expect the Fed to hike rates at that May meeting, which would be a marginal hawkish surprise. To boot, if we get a strong Jobs report (out Friday, March 3), then a March rate hike two weeks later isn’t out of the question. Point being, upward pressure is building on interest rates again.
Last Week
Both economic growth and inflation accelerated according to last week’s data.
Looking at last week’s data, it was almost universally strong. Retail Sales, which was the key number last week, handily beat expectations as the headline rose 0.4% vs. (E) 0.1% while the more important “Control” retail sales (which is the best measure of discretionary consumer spending) rose 0.4% vs. (E) 0.3%. Additionally, there were positive revisions to the December data, and clearly the US consumer continues to spend (which is more directly positive for the credit card companies).
Additionally, the first look at February manufacturing data was very strong. Empire Manufacturing beat estimates, rising to 18.7 vs. (E) 7.5, a 2-1/2 year high. However, it was outdone by Philly Fed, which surged to 43.3 vs. (E) 19.3, the highest reading since 1983! Both regional manufacturing surveys are volatile, but clearly they show an uptick in activity, which everyone now expects to be reflected in the national flash PMI.
Even housing data was decent as Housing Starts beat estimates on the headline, while the more important single family starts (the better gauge of the residential real estate market) rose 1.9%. Single family permits, a leading indicator for single family starts, did dip by 2.7%, but even so the important takeaway from this data is that so far, higher interest rates don’t appear to be negatively impacting the residential housing market, and a stable housing market is a key, but underappreciated, ingredient to economic acceleration.
Finally, looking at the Fed, Yellen’s commentary was marginally hawkish, as she was upbeat on the economy, basically saying the nation had achieved full employment and was closing on 2% inflation, and reiterated that a rate hike should be considered at upcoming meetings. None of her comments were new, but the reiteration of them reminds us that the Fed is in a hiking cycle, and the risk is for more hikes… not less.
This Week
The big number this week is the February global flash manufacturing PMI, out Tuesday. With last week’s strong Empire and Philly Surveys, expectations will be pretty elevated for the flash manufacturing PMI, so there is some risk of mild disappointment. On the flip side, if this number is very strong (like Empire and Philly) you will likely see a hawkish reaction out of the markets (dollar/bond yields up) and the expectation for a rate hike before June increases. That, by itself, shouldn’t cause a pullback in stocks, but upward pressure will build on interest rates.
Outside of the flash manufacturing PMIs, the FOMC minutes from the January meeting will be released Wednesday, and investors will parse the comments for any clues as to the likelihood of a March increase. Yet given the amount of political/fiscal uncertainty, and considering the FOMC meeting was before the strong January jobs report and recent acceleration in data, I’d be surprised if the minutes are very hawkish (although given they are dated, I don’t think that not-dovish minutes reduces the chances of a May or even March hike).
Bottom line, the focus will be on the flash manufacturing PMIs, and a good number this week will be supportive for stocks.
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