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Jobs

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. The Labor Department posted initial jobless claims dropped by 10,000 to 277,000 in the week ending January 2, 2016. The four-week moving average was 275,750. The ADP National Employment Report stated the U.S. added 257,000 private sector jobs in December.

Inflation

In November, headline consumer prices remained flat, in line with the consensus anticipation, dragged lower by falling food and oil prices. Headline inflation is currently up 0.5% from November 2014, while the energy index is down 14.7% from November 2014. Core CPI increased to 2.0% y/y growth and has improved by 0.1% m/m. With the burden from energy prices set to dissolve in early 2016, headline inflation should also shift closer to the Fed’s 2.0% mandate in the medium term.

Rates

The 10-year U.S. Treasury note yield dropped -0.14% to 2.13% for the week ending January 8, 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 construction spending dropped 0.4%, wholesale trades dropped 1.0% and factory orders slipped 0.2% in November. ISM posted manufacturing contracted and services increased at a slower pace in December. The BEA noted the trade deficit dropped in November. 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

According to the S&P Dow Jones Indices, as of December 31, 2015, operating earnings for S&P 500 Index companies are expected to drop 5.9% for 2015. Excluding the energy sector, the operating earnings are estimated to increase 5.7%.

 

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