The U.S. stock market was a bundle of nerves this past week as prices chopped up and down, day after day, driven by headlines that included the U.S. economy, the Federal Reserve, and geopolitical events. Though the news was generally positive on the direction of the U.S. economy, investors displayed their nervousness as they bought high quality Treasury bonds early in the week, driving interest rates lower, even in the face of inflationary news.
On Monday, the ISM Manufacturing Index reported a March reading of 57.2. (Any reading of 50 or above indicates expansion in the manufacturing sector.) Though this was five tenths below the February reading, the first slowing in seven months. The report showed new orders had the second strongest reading since December. Likewise, export orders were robust, up four points for the month to 59.0, the highest reading since November 2013. Finally, backlog orders gained a half a point to 57.5, a level that was last seen in March of 2014, and last exceeded in April of 2011.
Signs of continued strength in the U.S. economy turned investors’ attention to the possibility of a reflation trade, meaning higher interest rates, later this year. Those concerns were confirmed on Wednesday when the March FOMC meeting minutes disclosed discussion among committee members to wind down the Feds $4.5 trillion balance sheet of bonds. The Fed purchased the bonds as part of its quantitative easing measures following the Great Recession, in order to keep interest rates low as the U.S. economy recovered. The Fed’s first step will be to discontinue reinvesting the interest on the bonds later this year, followed by a phase-out of its holdings in Treasury and mortgage-backed bonds.
Conflicting jobs numbers kept investors guessing this past week, first with the ADP employment report released on Wednesday showing 263,000 private payrolls added during March. Then Friday’s non-farm payroll report indicated only 98,000 jobs were added during the month. With most analysts expecting the Category 3 storm that hit the Northeast in mid-March to lower this month’s employment report, investors decided to throw out the higher than expected ADP employment numbers and accept the lower report.
Also released on Friday, was the unemployment rate for March which fell two tenths to 4.5 percent. This is the lowest unemployment reading since April 2007, and has some analysts looking for signs of wage inflation. Low unemployment readings like these suggest that the U.S. economy is near full employment, such that employers would need to pay higher wages, either to attract employees, or offer longer workweeks. However, for the month, hourly earnings only increased by 0.2 percent, while year-over-year is higher by 2.7 percent. The average work week dipped one tenth to 34.3 hours, likely caused by the bad weather.
Finally, investors waded through geopolitical risks that began with a chemical attack by Syrian President Bashar al-Assad against a rebel-held town in his own country, killing women and small children. This was followed by a U.S. air strike Thursday night against the Syrian air base that carried out the deadly mission.
If there was a silver lining to this past week, it was that the stock market remained relatively buoyant as investors digested the implications of the week’s news. On the other hand, the U.S. stock market’s stagnation over the past month and a half is causing some impatient investors to question whether there is more upside left in the tank. Growing pessimism is a bullish sign for the stock market, if and when investors can find a reason to become buyers again.
Laif E. Meidell, CMT
We hope you have a great week,
Pat Meidell, Laif Meidell and Heidi Foster
Weekly Economic Update
COMPANIES ADDED FEWER WORKERS IN MARCH
Just 98,000 net new jobs were created last month, and some analysts think Winter Storm Stella may have held hiring back. Even so, the Department of Labor’s latest employment report showed the U-3 jobless rate decreasing 0.2% to 4.5%; the broader U-6 rate fell 0.3% to 8.9%. The big factor in both declines: 326,000 people leaving the ranks of the unemployed. If all this seems incongruous, consider that the Bureau of Labor Statistics compiles data from two separate surveys: one focusing on payroll growth; the other, on the employment status of individuals.1
STRONG EXPANSION FOR SERVICE, FACTORY SECTORS
Another month, another wave of growth for industry and retail businesses – this was the tale told by the two purchasing manager indices at the Institute for Supply Management. For March, ISM’s service sector PMI came in at 55.2; its factory PMI, at 57.2. The services PMI lost 2.4 points from its February mark; the factory PMI, 0.5 points. Still, these readings were well above the crucial 50 level.2
FED MAY START TO REDUCE ITS BALANCE SHEET
According to the minutes of the March Federal Reserve policy meeting, most Federal Open Market Committee members believe that the central bank should begin shrinking its vast portfolio of mortgage-backed securities and Treasuries later in 2017. The minutes noted that whether the FOMC decides to phase out or halt reinvestments, the shift in balance sheet policy “should be communicated…well in advance of an actual change.”3
STOCKS MOVE SLIGHTLY LOWER
Wall Street’s three major equity indices pulled back a bit last week. Over five days, the Dow ceded just 0.03% to 20,656.10. But the S&P 500 (closed at 2,355.54) and Nasdaq (closed at 5,877.81) took deeper respective losses of 0.30% and 0.57%. The Russell 2000 slipped 1.54% for the week to 1,364.56; the CBOE VIX “fear index” rose 4.04% to 12.87.4
On Monday evening, Federal Reserve chair Janet Yellen discusses monetary policy at the University of Michigan. Bank of the Ozarks reports Q1 results Tuesday. Earnings from Delta Air Lines, Fastenal, and Pier 1 Imports arrive Wednesday. On Thursday, the Q1 earnings season gathers steam, with Citigroup, JPMorgan Chase, PNC Financial Services Group, and Wells Fargo all reporting; apart from that, the March Producer Price Index, the preliminary April University of Michigan consumer sentiment index, and a new initial claims report also appear. Friday brings March retail sales figures and the March Consumer Price Index.