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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 16,000 to 269,000 in the week ending February 6, 2016. The four-week moving average was 281,250. 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

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 dropped -0.12% to 1.74% for the week ending February 12, 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 Commerce Department reported sales of wholesale goods slipped 0.3% in December, and retail sales increased 0.2% in January. Business inventories rose 0.1% in December. The BLS noted both import and export prices 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 4, 2016, of the 315 S&P 500 Index companies reporting 4Q earnings, 69.2%- beat analysts’ estimates. Confidence for the 4Q earnings season fell into negative territory after various companies reported weaker than expected revenues. With 84.4% of the market cap having reported, estimates for S&P 500 earnings slipped -0.19 to $26.08, showing a -2.5% y/y growth rate. If we subtract energy this number is still strong at 8.4%, indicating American businesses have not forgotten how to grow their earnings.

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