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 increased by 10,000 to 272,000 in the week ending February 20, 2016. The four-week moving average was 272,000. 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.
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.
The 10-year U.S. Treasury note yield remained unchanged at 1.76% for the week ending February 26, 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.
In the BEA’s second estimate of 4Q 2015 GDP showed the U.S. economy growing at a 1.0% saar, a higher revision from the previously estimated of 0.7% growth. The higher revision reflected lower imports and more inventory investment than was initially estimated. Those positives were canceled out by tiny downward revisions to government consumption and spending. The Commerce Department noted consumer spending increased 0.4%, new home sales dropped 9.2% and durable goods orders hiked 4.9% in January. The NAR stated existing home sales increased in January. Manufacturing and services declined in February in flash Markit Economics reports.
According to the S&P Dow Jones Indices, as of February 18, 2016, of the 432 S&P 500 Index companies reporting 4Q earnings, 67.6% – 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.