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Jobs

Despite payrolls missing previous expectations, the January employment report showed continued fundamental strength in the U.S. economy. While expectations were for an increase of 188,000 in payrolls, a drop in mining and transportation weighed on the headline number, suggesting there is not an overall slowdown in employment. The Labor Department stated initial jobless claims dropped by 7,000 to 262,000 in the week ending February 17, 2016. The four-week moving average was 273,250. The unemployment rate dipped to 4.9% in January from 5.0% in December, the lowest since February 2008, adding 151,000 jobs, and wage growth was raised to 2.5% y/y. The ADP National Employment Report noted the private sector increased by 205,000 jobs in January. January’s employment report and an almost record job openings number in the Job Openings and Labor Turnover Survey (JOLTS) report indicated the U.S. economy is still strong, giving the Fed good reason to continue tightening this year.

Inflation

Headline consumer prices were flat in January and y/y growth hiked to 1.4% from 0.7% in December. Energy prices dropped 6.5% over the year, the smallest 12-month decline since November 2014, supporting the increase in headline index growth. Core prices increased higher than expected at 0.3% in January and 2.2% over the last 12 months. In January producer prices increased, rising 0.1% directed by services prices. Inflation data was stronger overall in January, which illustrates that the consumption deflator is moving closer to the Fed’s 2% inflation target.

Rates

The 10-year U.S. Treasury note yield increased 0.02% to 1.74% for the week ending February 19, 2016. The Fed reported that labor conditions have further improved, and voted to maintain the current target range for the federal funds rate. The Fed held short-term interest rates constant at 0.25% in January. Many interpreted the Fed’s language on financial market and global economic concerns for an indication that a second rate hike in March was going to happen. Overall, the Fed carefully distinguished between dovish and hawkish in their attempt to restore confidence in the markets that rate hikes will be data dependent and gradual, without sending an overly dovish message that could be interpreted as alarming for markets.

Growth

The BLS noted the core CPI increased 0.3%, while the CPI remained unchanged in January. The Fed reported industrial production increased 0.9% in January. The Conference Board Leading Economic Index decreased in January. The BEA’s first estimate of 4Q 2015 GDP showed the U.S. economy growing at a 0.7% saar. The data continues to show headwinds from a strong dollar, low oil prices and an inventory overhang. Consumption growth lightened, but remained firm in 4Q, with consumer expenditures rising 2.2% saar following a 3.0% rise in 3Q 2015.

 Profits

According to the S&P Dow Jones Indices, as of February 16, 2016, of the 383 S&P 500 Index companies reporting 4Q earnings, 68.7% – beat analysts’ estimates. With 90% of the S&P 500 market cap having reported, the 4Q earnings season has softly moved into negative territory. Overall earnings dropped 5.7% y/y, but earnings ex-energy increased 7.8%. Companies beating on revenues were at an unsatisfactory 38%, but those beating on the bottom line maintained a healthy 68%, with blows from a lingering strong dollar and low energy prices, 1Q 2016 could also demonstrate a struggle for profits, but analysts expect profits to bounce back in the latter half of 2016.

 

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