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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 grew by 8,000 to 285,000 in the week ending January 30, 2016. The four-week moving average was 284,750. 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. Although the outlook has been progressively skeptical and bearish, January’s employment report shows that essential components of the U.S. economy are sustaining growth, giving the Fed sufficient reason to pursue further 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 -0.08% to 1.86% for the week ending February 5, 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 ISM reported manufacturing contracted and services increased in January. The BEA stated the trade deficit expanded. The Commerce Department posted construction spending increased 0.1%, factory orders dropped 2.9% and consumer spending was flat in December. 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

This week confidence for the 4Q earnings season fell into negative territory after the reporting of several energy companies. With 74.2% of the market cap having reported, estimates for S&P 500 earnings slipped to $26.27, guiding to a -1.8% y/y growth rate. If we subtract energy this number is still strong at 8.9%, proof the corporate sector is showing elasticity despite the burden from the energy sector.

 

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