Weekly Market Update – 12 March 2018 BMO

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Week in Review: Bulls Bounce Back, Nasdaq Navigates to New Records

U.S. equities rallied this week, more than reclaiming last week’s losses, as investors navigated their way through a host of happenings, including a battle over tariffs in Washington, the latest European Central Bank policy meeting, and the release of the Employment Situation Report for February. The tech-heavy Nasdaq Composite led the charge with a weekly gain of 4.2%, closing Friday at a new all-time high, while the S&P 500 and the Dow Jones Industrial Average advanced 3.5% and 3.3%, respectively.

The tariff saga continued this week as some congressional Republicans and officials within the White House urged President Trump to reconsider the duties on steel and aluminum imports that he proposed last week, fearing that they could cause a trade war. The president refused to back down though, leading to the resignation of his top economic advisor Gary Cohn on Tuesday.

Mr. Trump signed a proclamation to implement the tariffs on Thursday afternoon, but, to the market’s delight, exempted Canada and Mexico. The president also left open the possibility of exemptions for other countries depending on their willingness to renegotiate trade deals. The tariffs will take effect on March 23.

Overseas, the European Central Bank left its key policy rates unchanged on Thursday, as expected, and removed from its policy statement a promise to increase its bond purchases if needed. The latter move was seen as a small step towards normalization following years of ultra-accommodative policy. In addition, the ECB reaffirmed that its net asset purchases will remain at a monthly pace of EUR30 billion until the end of September 2018, or beyond, if necessary.

In Asia, North Korean leader Kim Jong Un on Thursday extended an invitation to meet with President Trump, which Mr. Trump accepted. The summit, which will reportedly take place by the end of May, would mark the first face-to-face meeting between a sitting U.S. president and a sitting North Korean leader.

The Employment Situation Report for February was released on Friday morning, showing robust job growth and a deceleration in the year-over-year change in average hourly earnings. Nonfarm payrolls increased by 313,000 (consensus 210K), while average hourly earnings increased 0.2%, as expected, and the unemployment rate stayed at 4.1% (consensus 4.0%). The report helped Wall Street close out the week on a positive note, boosting the major averages more than 1.5% apiece on Friday.

11 of 11 S&P sectors finished with weekly gains. Economically-sensitive groups like financials (+4.4%), technology (+4.3%), industrials (+4.4%), and materials (+4.1%) were the top-performing sectors, while countercyclical spaces like consumer staples (+1.7%), utilities (+0.8%), and telecom services (+1.8%) showed relative weakness.

Following this week’s rally, the S&P 500 is about 3.0% below its record high (2873), which is a big improvement from -10.1% at the bottom of the February sell off.

(Excerpts from Briefing.com)

Friday Update: Nasdaq Hits New Record Following February Jobs Report

Stocks advanced on Friday, climbing steadily over the course of the session, as investors cheered the Employment Situation Report for February, which showed strong jobs growth while keeping inflation concerns at bay. The Nasdaq Composite climbed 1.8% to finish at a new record high (7560.81), its first record finish since before a volatile round of selling at the beginning of February. Meanwhile, the S&P 500 and the Dow Jones Industrial Average advanced 1.7% and 1.8%, respectively.

Nonfarm payrolls increased by 313,000 in February, blowing past the consensus estimate of 210,000, and the January increase was revised upward to 239,000 (from 200,000). Meanwhile, average hourly earnings increased 0.2%, as expected, which brought the year-over-year increase down to 2.6% from 2.8% in January. The unemployment rate stayed at 4.1%, which is slightly higher than the Briefing consensus estimate of 4.0%, but still good enough for a 17-year low, and the average workweek ticked up to 34.5 from a revised 34.4 in January (consensus 34.4).

In short, it was another ‘Goldilocks’ report, pointing to strong economic growth via the impressive nonfarm payroll additions while at the same time giving the market no reason to believe that the Fed will need to be more aggressive in its path to normalization–evidenced by the deceleration in year-over-year wage growth.

U.S. Treasuries sold off in reaction to the jobs report, pushing yields back towards the multi-year highs they hit a couple of weeks ago; the benchmark 10-yr yield advanced to 2.89% after finishing Thursday at 2.87%. The uptick in yields helped underpin the financial sector (+2.5%), which finished at the top of the sector standings.

Within the financial space, Goldman Sachs (GS) settled behind its peers following reports that its CEO Lloyd Blankfein is preparing to step down after serving at the helm for more than 12 years. Co-presidents Harvey Schwartz and David Solomon are the two front runners to replace Mr. Blankfein.

10 of 11 S&P groups finished Friday in the green, with the lightly-weighted telecom services space (-0.1%) being the lone laggard. In addition to financials, industrials (+2.2%), technology (+2.0%), materials (+1.9%), and energy (+1.9%) outperformed, while the consumer staples (+0.6%), real estate (+0.7%), and utilities (+0.3%) groups were relatively week. The energy space was helped by an increase in the price of crude oil, with West Texas Intermediate crude futures climbing 3.1% to $62.05 per barrel following a two-day skid.

News that President Trump accepted an invitation to meet with North Korean leader Kim Jong Un helped underpin Wall Street on Friday. The meeting, which will reportedly take place by the end of May, would mark the first meeting between a sitting U.S. president and a member of the Kim dynasty.

In addition, investors were still chewing on President Trump’s tariff announcement on Friday, which went better than many were expecting. The president officially approved tariffs on steel and aluminum imports shortly before Thursday’s closing bell, but gave Canada and Mexico an exemption and said that other countries might also receive an exemption depending on their willingness to renegotiate trade deals with the U.S.

Market Internals – Friday 9 March – AMC

Goldilocks Born Again in February Employment Report

The February employment report resuscitated the Goldilocks narrative. Specifically, it was highlighted by robust job growth and a deceleration in the year-over-year change in average hourly earnings, which helped temper the angst about increasing wage-based inflation pressures that were borne out of the January employment report.

The notable headlines from the Employment Situation Report are as follows:

Dollar: Dollar Index Finds Resistance

The U.S. Dollar Index was off 0.1% at 90.11, narrowing the week’s gain to 0.2%. The Dollar Index made a run at its third consecutive advance after the release of a much stronger than expected February jobs report, but the Friday morning rally ran out of steam just above the descending 50-day moving average at 90.25. The greenback has seen limited movement against the euro, but it has shown strength against the yen. The rally versus the yen took place Friday night, after President Trump agreed to meet with North Korea’s Supreme Leader Kim Jong-un by May. This will be the first meeting between a sitting U.S. president and a member of the Kim dynasty, but the site of the meeting has yet to be announced. Switzerland has reportedly expressed willingness to host the parley.

Bonds: February Jobs Report Weighs on Treasuries

U.S. Treasuries ended the week on a modestly lower note, though the market climbed off its worst levels of the day. Treasury futures inched lower in overnight action after last night’s surprise news from Washington boosted global risk appetite. A couple hours after President Trump signed an order on tariffs on imports of steel and aluminum, it was revealed that he has agreed to meet with North Korea’s Supreme Leader Kim Jong-un by May. This will be the first meeting between a sitting U.S. president and a member of the Kim dynasty, but the site of the meeting has yet to be announced. Switzerland has reportedly expressed willingness to host the parley. Treasuries began the cash session with modest losses, sliding to new lows in response to the February Employment Situation report (actual 313,000; consensus 210,000), which soared past headline estimates, but showed a slowdown in average hourly earnings growth (2.6% year-over-year versus 2.8% in January). Treasuries found support near levels from February 27, trimming their losses in afternoon action.

The entire yield curve rose over the week. The spread between the 5s10s remained unchanged at 24bps from the previous week as did the 10s30s at 27bps from the previous week.

Crude: Bounces Back, Closes Above 62.00

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 2.4 mln barrels from the previous week. At 425.9 mln barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year. Total motor gasoline inventories decreased by 0.8 mln barrels last week, and are in the upper half of the average range. Finished gasoline inventories decreased and blending components inventories remained unchanged last week. Distillate fuel inventories decreased by 0.6 mln barrels last week and are in the middle of the average range for this time of year. Propane/propylene inventories decreased by 1.6 mln barrels last week, and are in the lower half of the average range. Total commercial petroleum inventories remained virtually unchanged last week.

Baker Hughes total U.S. rig count increased by 3 to 984 following last week’s increase of 3.

Metals: Downtrend Persists on Gold

Agriculture: Corn Gains, Wheat and Soy Fall Back

Commodities measured by the Bloomberg Commodity Index closed at 87.9546, lower than 88.1477 the previous week.

THE WEEK AHEAD

Monday 12 to 16 March (Week 11)

The eleventh week of 2018 (wk11) usually swings up and down unreliably on the SPY and DIA over the 5 and 10 year averages while the 15 year average tends to be bullish for most of the week. Monday is supposed to be the most bullish day of the week for both benchmarks.

Key Economic Dates

In the US, the most important releases will be inflation rate, retail trade, industrial production, housing data and the preliminary reading of Michigan consumer sentiment. Elsewhere, the UK government will publish its Spring Statement.

Other important economic data include: China retail trade, industrial production and fixed asset investment; Australia business and consumer morale; and India inflation rate and industrial production.

Mon 12 March

Tue 13 March

Wed 14 March

Thu 15 March

Fri 16 March

SUMMARY

The DOW broke above its 50DSMA on Friday for some respite, joining the other benchmarks above their respective 50DSMAs in a show of resilience in spite of the scares from Powell and Trump the previous week. 

I still think that the US economy remains buoyant with little or no fear of any economic threat on the horizon. The broader market should drive itself out of the funk that February brought and should break higher highs in the months of March and April. Commodities could also see a nice run upwards as we get into the final weeks of quarter one.

For now, I remain cautiously bullish.

Happy Hunting!

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