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Jobs

According to the Labor Department initial jobless claims increased by 10,000 to 293,000 for the week ending January 16, 2016. The four-week moving average was 285,000. 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. The report highlights the fact that recent volatility in the equity market is more likely an emotional reaction to China’s poor management of their own stock market than a reflection of fundamental growth prospects in the U.S. Also, the stronger labor force numbers keep the Fed on track to increase rates for a second time in March.

Inflation

In December, headline consumer prices dropped 0.1% as energy prices continued to burden the index. Headline inflation rose 0.7% y/y, while the core index rose 2.1% over the same time period, this was the highest number since June of 2012. In spite of the drop in headline inflation, the core index moved higher showing that inflationary pressures are moving gently, but deliberately, toward the Fed’s 2.0% mandate. Producer prices continued to fall. The producer price index dropped 1.0% y/y in December, after dropping 1.1% the previous month.

Rates

The 10-year U.S. Treasury note yield increased 0.04% to 2.07% for the week ending January 22, 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

The Commerce Department reported housing starts dropped 2.5% in December. The Conference Board Leading Economic Index dropped in December. The NAR stated existing home sales hiked 14.7% in December. The U.S. economy grew at a 2.0% q/q saar pace, the BEA showed in its final estimate of 3Q 2015 GDP. The data shows a larger inventory overhang than originally estimated, leading to a moderate revision downward from the second estimate. Inventory accumulation in the first half of the year reduced 0.7% from 3Q 2015 growth, revised up from the original estimate of -1.4%. However, the lower-than-expected negative hit from inventory accumulation means a forceful headwind to future growth as the pace of inventory accumulation returns to average levels. Consumption remained steady in 3Q, with consumer expenditures increasing 3.0% y/y following a 3.6% rise in 2Q.

Profits

The 4Q earnings season has started out on a positive route compared to the past three quarters in 2015. With 17.6% of market cap reporting, overall earnings estimates are $28.94 for a growth rate of 8.2% y/y. Ex-energy rises to 14.2%. Even though these numbers might come down over the next few weeks as energy companies begin to report, the corporate sector is showing resilience in spite of skepticism over the slowing global growth. According to the S&P Dow Jones Indices, 22 of the 32 S&P 500 Index companies reporting 4Q earnings beat analysts’ estimates, as of January 4, 2016.

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