The labor market continues to tighten as the economy grows. The Labor Department stated initial jobless claims increased by 11,000 to 276,000 in the week ending March 26, 2016. The four-week moving average was 263,250. The private sector added 200,000 jobs in March. 214,000 jobs were added to the labor market in March, but revisions to the prior two months were blended, leading to a revision of -1,000 net jobs. The unemployment rate edged up from 4.9% to 5.0% as the number of people in the labor force rose more than the number of people employed, showing that people have started to re-enter the labor force as they gain more confidence in their ability to find employment.
Core consumption prices increased to 2.3% y/y growth in February, the strongest rise of the expansion. Headline consumer prices (which include energy components and volatile food) dropped -0.2% this month. Most of this decline was caused by the 6.0% drop in energy prices. The shelter, apparel and health care components displayed firm price appreciation in the month, causing the core measure to rise. Other inflation data continued to grow in February with import prices declining less than previously forecasted, providing more evidence the consumption deflator is inching towards the Fed’s inflation target of 2%.
The 10-year U.S. Treasury note yield decreased -0.12% to 1.79% for the week ending March 24, 2016. The Fed held short-term interest rates stable in the rage of 0.25%-0.50% in March. The Fed also lowered its projections for increasing the federal funds rate in 2016 from four to two, and Fed Chair Yellen has restated that they will proceed with caution. However, the combination of a low unemployment rate and the highest core CPI reading of the expansion, it suggests that the economic climate in the U.S. is tough enough to withstand a rate increase. J.P. Morgan Funds stated “We caution that this very easy monetary policy increases the odds that they may eventually need to tighten more sharply than the market expects.”
In its final estimate of 4Q 2015 GDP, the BEA displayed the U.S. economy growing at a seasonally adjusted annual rate (saar) of 1.4%, an increased modification from the earlier statement of 1.0% growth. Consumption was the main growth driver in 4Q 2015, but consumer spending thus far has been softer than expected this year, specifically after a big downward revision to the January numbers last week. This suggests that the risks to GDP in 1Q 2016 might be to the downside. The Commerce Department posted construction spending declined 0.5% and consumer spending increased 0.1% in February. S&P/Case-Shiller reported average home prices increased 5.4% in January. ISM noted manufacturing expanded in March.
According to the S&P Dow Jones Indices, as of March 23, 2016, of the 498 S&P 500 Index companies reporting 4Q earnings, 68.7% – beat analysts’ estimates. With 98% of the S&P 500 market cap having reported earnings, it is clear that companies continued to suffer due to a stronger U.S. dollar and lower energy prices in 4Q 2016. Overall earnings dropped 13.8% y/y, and the trend of companies beating on the bottom line missed on the top line continued. With the combination of persistent pain coming from a strong dollar and low energy prices, 1Q 2016 could also be a struggle for profits, but analysts expect a rebound in the latter half of the year.