- President Trump agrees to meet with North Korea’s Kim Jong-un by May while making no concessions in advance of the first talks between the heads of state of the two countries.
- February’s Employment Report underscores continued significant job creation and well contained inflation, fueling a resumption in the US equity rally.
- Italy’s populist and anti-undocumented immigration election results drive another nail into the EU vision.
- Italy’s newly-elected populist leader castigates the euro, Brussels, Germany’s dominance over the European Parliament, and the Brexit negotiations being spearheaded by Brussels, France and Germany.
Last week was another week of headline-fueled misdirection, highlighted by the resignation of President Trump’s Senior Economic Advisor Gary Cohn, the official signing of the previously announced tariffs on steel and aluminum, the announcement of Trump’s willingness to meet with North Korea’s leader Kim Jong-un and a blockbuster February Employment Report. Net/net, though US equity prices did wilt mid-week, confirming the negative bias that we closed out the previous week with, they finished on a very positive note on Friday. Additionally and importantly, interest rates on US Treasuries remained relatively range-bound through the week. In fact, the 10-year yield closed out the week unchanged at 2.89%. Sam Stovall, chief investment strategist at CFRA Research, remarked, “Like a boxer who doesn’t want to stay down for the count, the S&P 500 yet again staggered back to its feet.”
As discussed last week, my cautious outlook for US equities over the near term was largely informed by the technical weakness present in markets combined with the shared apprehension that the February Employment Report may fuel further weakness in Treasuries and equities — if inflation were reported to be running at a hotter rate than consensus was calling for. As I have argued over the past four weeks, my sense is that inflation has not yet warranted any additional run-up in yields. We received that confirmation on Friday.
In last week’s note, I wrote:
“The sharp run-up in yields that defined February’s interest rate trade was an overreaction to the wage data in January’s employment report.”
“Rates have remained relatively elevated, and there is little chance there will be a meaningful move lower from here, … but they have remained range bound over the past two weeks…”
“Despite all the themes that are driving fear, equity price compression and yields higher, I remain constructive on equities.”
February’s Employment Report provided investors with confirmation that, though we have continued to see robust employment growth thus far in 2018, inflation has remained in check. That combination fueled enthusiasm for expectations of continued economic expansion while also keeping fears of hotter-than-modeled inflation and the subsequent rise in rates at bay.
The principle takeaways from February’s Employment Report:
- Well above Bloomberg consensus job growth at 313K versus 205K
- Revision higher for January’s non-farm payrolls to 239k from the prior 200k
- The unemployment rate dropped to 4% from 4.1%
- The manufacturing sector continued to contribute to job growth.
- January’s manufacturing payrolls were revised up to 25k from 15k
- February’s manufacturing payrolls jumped to 31k.
- Average hourly Y/Y earnings came in at a cooler than expected 2.6%.
- Bloomberg consensus had been calling for 2.9%.
- Record low unemployment results for both African Americans and Hispanics
Given all the themes at work in the market currently, and given the skittishness that was clearly present in markets leading up to Friday’s February Employment Report, the report was exactly what investors needed to see in order to reengage the market from the long side. At a minimum, Friday’s price action in US equities did reset the landscape in a meaningfully positive way.
This week’s economic calendar is less likely to deliver the drama for investors that last week’s did. Monday is free of economic data. Tuesday investors will receive the NFIB Small Business Optimism Index, which has and is expected to remain at multi-year highs. We also receive the Consumer CPI data for February (c. 0.2%). On Wednesday PPI-FD (c. 0.2%), retail sales and the Atlanta Fed Business Inflation Expectations Report will be the focus. We will likely see volume pick up on Thursday ahead of the quad-witching. We will also likely see a weekly jobless report that reflects a near half-century low on Thursday. Industrial production (c. 0.3%) and consumer sentiment will highlight Friday’s quad-witching session.
6:00 AM NFIB Small Business Optimism Index
8:30 AM Consumer Price Index
7:00 AM MBA Mortgage Applications
8:30 AM PPI-FD
8:30 AM Retail Sales
10:00 AM Atlanta Fed Business Inflation Expectations
10:00 AM Business Inventories
10:30 AM EIA Petroleum Status Report
8:30 AM Weekly Jobless Claims
8:30 AM Philadelphia Fed Business Outlook Survey
8:30 AM Empire State Mfg. Survey
8:30 AM Import and Export Prices
9:45 AM Bloomberg Consumer Comfort Index
10:00 AM Housing Market Index
8:30 AM Housing Starts
9:15 AM Industrial Production
10:00 AM Consumer Sentiment
10:00 AM JOLTS
1:00 PM Baker-Hughes Rig Count