MarketView for Febuary 7

 

 

Summary

 

The S&P 500 chalked up its first weekly gain in four weeks as the impact of a weak reading on the labor market was dulled by harsh weather conditions and the Street focused on expectations of further economic strength.

 

Nonfarm payrolls added 113,000 jobs in January - well shy of the forecast for 185,000. December payrolls were revised upward by only 1,000 to 75,000. The unemployment rate in January hit a five-year low of 6.6 percent, slightly above the 6.5 percent level that Fed officials have said would prompt them to consider raising benchmark interest rates from near zero.

 

The rapid decline in unemployment will make re-crafting the Federal Reserve's easy-money promise a top priority for new Chair Janet Yellen, who will probably avoid tying policy to specific targets in the labor market.

 

Strong job gains in construction hinted that cold weather was probably not a major factor in January job creation. There were also job gains in manufacturing. There is a good possibility that the January numbers will be revised upward next month.

 

Concern over our economic data added to concerns over the growth in China and a selloff in emerging market currencies and equities to push stocks sharply lower worldwide in the past few weeks. Nonetheless, near-term concerns have subsided, and the spot price for protection against drops in the S&P 500 is again below front-month contracts, following a brief inversion of that curve.

 

The CBOE Volatility Index fell 11.3 percent to end at 15.29 on Friday after trading above 21 earlier this week. One-month VIX futures slid 9 percent to 15.47.

 

As investors await a batch of fresh data in the coming month, previous expectations for sustained economic growth are still supporting stock prices. The S&P 500 closed above its 14-day moving average, a level it hadn't traded above since January 23. The 2.6 percent gain for the past two sessions marked the S&P 500's best two-day performance in four months.

 

For the week, the Dow Jones Industrial Average chalked up a gain of 0.6 percent, the S&P 500 was up 0.8 percent and the Nasdaq was up 0.5 percent. The S&P 500 fell as much as 6 percent this week from a record closing high set on January 15. Before Friday's gains, the benchmark index was facing its fourth weekly decline in a row - a losing streak not seen since July and August in 2011.

 

The tech sector received a lift from Apple after the company said it bought $12 billion worth of stock via an accelerated buyback program and $2 billion more from the open market in the two weeks since it reported earnings. Apple's stock gained 1.4 percent to close at $519.68.

 

News Corp Class A shares were up 8.7 percent to end the day at $17.41 a day after the company reported that it had cost cuts in an effort to exceed the Street’s consensus earnings expectation.

 

Expedia saw its share price rise by 14.3 percent to $74.45, making it the S&P 500's best performer a day after the company posted a higher-than-expected quarterly ernings. Shares of Priceline added 5 percent to close at $1,195.39. Orbitz Worldwide gained 4.2 percent to $7.43.

 

Thomson Reuters’ data indicated that of the 343 companies in the S&P 500 that had reported earnings through Friday morning, 67.9 percent have exceeded Street expectations, a number that was slightly above the 67 percent beat rate for the past four quarters and ahead of the 63 percent rate since 1994.

 

Bucking Friday's upward trend, shares of LinkedIn fell 6.2 percent to $209.59 after the online network for professionals gave revenue forecasts that were below those of analysts.

 

Shares of Fairway Group Holdings lost 29 percent to close at $8.12 a day after the upscale grocery store chain posted quarterly results and announced changes in management.

 

Volume was light, with about 6.09 billion shares changing hands on the three major equity exchanges, well below the 6.94 billion average in January, according to data from BATS Global Markets.

 

Economic Data Mediocre at Best

 

Employers hired far fewer workers than expected in January and job gains for the prior month were barely revised up, suggesting a loss of momentum in the economy, even as the unemployment rate hit a new five-year low of 6.6 percent.

 

Nonfarm payrolls rose only 113,000, the Labor Department said on Friday. But with construction recording the largest increase in jobs in almost seven years, cold weather probably was not a major factor in January.

 

The second straight month of weak hiring - marked by declines in retail, utilities, government, and education and health employment - could be a problem for the Federal Reserve, which is tapering its monthly bond-purchasing stimulus program as it was the weakest two months of job growth in three years. December payrolls were raised only 1,000 to 75,000.

 

The data comes on the heels of a report this past Monday showing a surprise drop in factory activity to an eight-month low in January. The economy grew at a robust 3.7 percent annual rate in the second half of 2013, buoying hopes that it was now on a path to sustained growth. That optimism is being tested, with other data in January showing slower automobile sales.

 

However, there was a bit of good news in the employment report, the jobless rate fell by a tenth of a percentage point to 6.6 percent last month, the lowest since October 2008.

 

The household survey from which the jobless rate is derived found strong gains in employment. In addition, more people came into the labor force, an encouraging sign for the labor market.

 

The participation rate, or the proportion of working-age Americans who have a job or are looking for one, increased to 63 percent from 62.8 percent in December, when it fell back to the more than 35-year low hit in October.

 

The unemployment rate is now flirting with the 6.5 percent level that Fed officials have said would trigger discussions over when to raise benchmark interest rates from near zero. However, the Fed has made it clear that rates will not rise any time soon even if the unemployment threshold is breached.

 

Looking at some numbers, the private sector accounted for all the hiring in January, while government payrolls fell by 29,000 jobs, the largest decline since October 2012. Manufacturing employment increased by 21,000 jobs, rising for a sixth month. Retail sector jobs fell 12,900 after strong increases in the prior months, the first decline since March.

 

Construction payrolls bounced back with 48,000 jobs after being depressed by the weather in December. It was the largest increase since March 2007. Average hourly earnings rose five cents. The length of the workweek was steady at an average of 34.4 hours.

 

Friday's report included revisions to data on payrolls, the workweek and earnings going back to 2009. Revisions to this data, which is drawn from a survey of employers, indicated 369,000 more jobs than previously thought were created in the 12 months through March 2013, on a seasonally adjusted basis. The report also incorporated new population estimates.

 

Consumer Credit Rises

 

Consumer credit grew in December by the largest amount in nearly a year due to a sharp increase in credit card usage, a potentially positive sign for the economy. Total consumer credit rose by $18.8 billion to $3.1 trillion, the Federal Reserve said on Friday. That was the largest gain since February.

 

Revolving credit, which mostly measures credit-card use, rose by $5 billion in December after climbing $465 million in November. Revolving credit figures can be volatile. Non-revolving credit, which includes auto loans as well as student loans made by the government, increased $13.8 billion in December.

 

Job Creation Slows

 

Job creation slowed sharply over the past two months, turning in the weakest performance in three years and raising the prospect that the economy may be losing momentum. Yet, the unemployment rate hit a new five-year low of 6.6 percent in January even as Americans piled back into the labor market to search for work.

 

Nonfarm payrolls rose only 113,000 last month after a meager 75,000 gain in December, the report showed. Economists had expected payrolls to rise 185,000 in January and had looked for a big upward revision to December. Instead, December's figure was revised upward by just 1,000, although November's payroll number was raised by 33,000 to 274,000, the largest gain since February.

 

Taken together, job growth averaged just 94,000 jobs in December and January, a large slowdown from the 204,000 average for the first 11 months of last year. Although the weather was believed to have weighed on hiring in December, it did not appear to be a major factor last month.

 

There were strong gains in the weather-sensitive construction sector, and while a survey of households found 262,000 individuals were unable to work due to the weather, the Labor Department said that was in line with historical trends.

 

The decline in the jobless rate brings it close to the 6.5 percent level that the Fed has said would trigger discussions over when to raise benchmark interest rates from near zero. At the same time, the Fed has made it clear that rates will not rise any time soon even if the unemployment threshold is breached, and they seem certain to revisit their guidance on policy.

 

Meanwhile, money flooded into the safety of the bond market but the flow soon ebbed, leaving bond prices up but not as sharply. The dollar sold off against the euro, but that trade also later eased.

 

The economy grew at a robust 3.7 percent annual rate in the second half of 2013, buoying hopes that it was kicking into a higher gear after a slow recovery from the 2007-2009 recession. However, that optimism is now being tested. A report on Monday showed a surprise drop in factory activity to an eight-month low in January and automakers have reported slower sales.

 

The tenth of a percentage point drop in the jobless rate in January, which took it to the lowest level since October 2008, provided a silver lining in the employment report, and kept hopes of stronger growth alive.

 

Unlike the poll of employers used to calculate the payrolls figures, the household survey from which the jobless rate is derived found more than 600,000 jobs were created in January.

 

The rise in the number of people in the labor market last month also provided an encouraging sign. The participation rate or the proportion of working-age Americans who have a job or are looking for one, has increased to 63 percent. In December it stood at 62.8 percent, the more than 35-year low it hit in October. While a decline in participation over the last year played a role in the 1.3 percentage point drop in the jobless rate since January 2013, rising employment has also been a big contributor.

 

In another bright sign, a broad gauge of the labor market's health - the percentage of working-age Americans with a job - rose to 58.8 percent last month, the highest since October 2012.

 

In addition, a measure of underemployment that includes people who want a job but who have given up searching and those working part time because they cannot find full-time jobs dropped to 12.7 percent, its lowest level since November 2008.

 

The report also showed that the long-term unemployed were finding jobs. The duration of unemployment fell to 35.4 weeks last month, the lowest in a year. The private sector accounted for all the hiring in January.

 

Government payrolls fell 29,000. It was their largest decline since October 2012 and reflected losses on all levels of government, including the Postal Service. Manufacturing employment increased 21,000, a sixth consecutive monthly gain.

 

Retail sector jobs fell 12,900 after strong increases in the prior months. It was the first drop since March and was concentrated in the sporting goods, hobby, book and music store area, where payrolls fell 22,300.

 

Construction payrolls bounced back 48,000, with residential construction accounting for the bulk of the gains, after a decrease of 22,000 in December that was pinned on the weather. January's gain was the largest since March 2007. Average hourly earnings rose five cents. The length of the workweek was steady at an average of 34.4 hours.

 

Friday's report included revisions to data on payrolls, the workweek and earnings going back to 2009. The revisions showed 369,000 more jobs were created than previously thought in the 12 months through March 2013.