The labor market continues to tighten as the economy grows. The Labor Department stated initial jobless claims dropped by 9,000 to 267,000 in the week ending April 2, 2016. The four-week moving average was 266,750. Although the number of job openings dropped in February, it continues to be very high at 5.4 million open jobs. Some of these jobs are likely to be filled by people entering the labor force; the unemployment rate increased in March to 5.4% primarily due to the fact the recovery is drawing people back into the labor force.
Core consumption prices increased to 2.3% y/y growth in February, the strongest rise of the expansion. Headline consumer prices (which include energy components and volatile food) dropped -0.2% this month. Most of this decline was caused by the 6.0% drop in energy prices. The shelter, apparel and health care components displayed firm price appreciation in the month, causing the core measure to rise. Other inflation data continued to grow in February with import prices declining less than previously forecasted, providing more evidence the consumption deflator is inching towards the Fed’s inflation target of 2%.
The 10-year U.S. Treasury note yield decreased (0.07%) to 1.72% for the week ending April 8, 2016. The Fed held short-term interest rates stable in the rage of 0.25%-0.50% in March. The Fed also lowered its projections for increasing the federal funds rate in 2016 from four to two, and Fed Chair Yellen has restated that they will proceed with caution. However, the combination of a low unemployment rate and the highest core CPI reading of the expansion, it suggests that the economic climate in the U.S. is tough enough to withstand a rate increase. J.P. Morgan Funds stated “We caution that this very easy monetary policy increases the odds that they may eventually need to tighten more sharply than the market expects.”
In its final estimate of 4Q 2015 GDP, the BEA displayed the U.S. economy growing at a seasonally adjusted annual rate (saar) of 1.4%, an increased modification from the earlier statement of 1.0% growth. Looking ahead, a larger-than-expected slowdown in inventory accumulation so far this quarter likely means the investment component of GDP will contribute less than expected in 1Q 2016 GDP. The Commerce Department posted factory orders dropped 1.7%, sales of wholesale goods declined 0.2% and durable goods orders slipped 3.0% in February. The BEA posted the trade deficit increased in February.
According to the S&P Dow Jones Indices, as of March 31, 2016, of the 15 S&P 500 Index companies reporting 1Q earnings, 13 beat analysts’ estimates. With 98% of the S&P 500 market cap having reported earnings, it is clear that companies continued to suffer due to a stronger U.S. dollar and lower energy prices in 4Q 2016. Overall earnings dropped 13.8% y/y, and the trend of companies beating on the bottom line missed on the top line continued. With the combination of persistent pain coming from a strong dollar and low energy prices, 1Q 2016 could also be a struggle for profits, but analysts expect a rebound in the latter half of the year.