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Jobs

The December Employment Report demonstrated strength across the labor market, including job gains of 292,000, 5.0% employment rate, and a 2.4% wage growth. Despite a small increase, new job openings continue to show a tightening labor market and initial unemployment claims continue to run below trend.

Inflation

November headline consumer prices rose 0.5% over the year prior, although decreasing food and oil prices burdened growth; the energy index dropped 14.7% over the same period. Core CPI inflation rose by 2.0% y/y. With the drag from energy prices set to dwindle in early 2016, headline inflation should move closer to the Fed’s 2.0% mandate in the medium term. Producer prices continue to drop. The producer price index dropped 1.0% y/y in December, after slipping 1.1% the month prior.

Rates

The 10-year U.S. Treasury note yield dropped -0.10% to 2.03% for the week ending January 15, 2016. The Federal Reserve showed its confidence in the health of the U.S. economic recovery by raising short-term interest rates 0.25% last week. This move was a unanimous decision by the voting members of the Committee, and this decision ends seven years of a near-zero interest rate policy. The rate hike was well communicated to the investing community, so the market reacted to the announcement positively, with stocks rallying and Treasury yields remaining comparably stable. However, now that the obstacle of the first rate increase has passed, markets need to prepare for the Fed’s expectations for future interest rate increases.

Growth

In its closing estimate of 3Q 2015 GDP, the BEA showed the U.S. economy growing at a 2.0% saar. The analysis continues to show significant inventory accumulation in the 3Q, although lower from 2Q, and returning inventory growth to a normal pace will be a moderate headwind to future growth in 2016. Consumption remained firm in 3Q, with consumer expenditures increasing 3.0% y/y following a 3.6% rise in 2Q.

Profits

As the 4Q earnings season begins, two of the major themes this year, a strong U.S. dollar and falling energy prices, will likely continue to eat up earnings. J.P Morgan Funds estimates that y/y S&P 500 EPS in 3Q dropped 14.1% and ex-energy increased by 3.1% and estimates this pattern is likely to repeat. The strong dollar hurt foreign sales, and has not decreased. Looking ahead into 2016, these themes should continue to take effect, but the blow from low prices should begin to dwindle and lead to stronger earnings growth.

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