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Friday, November 6, 2015
Markets waver after favorable jobs report
Dow slipped back 10, decliners over advancers 3-1 & NAZ rose 3. The MLP index lost 4+ to the 324s & the REIT index sank 7+ to the 319s. Junk bond funds drifted lower & Treasuries saw selling. Oil is back below 45 after its recent rally & gold fell below 1100, an important support level.
The US added 271K jobs in Oc, well above expectations, as
the Federal Reserve looks for evidence that the economy is ready for
higher interest rates. The headline unemployment rate was 5%, the lowest since Apr 2008.
Analysts had forecast 180K new jobs last month & that the
unemployment rate would hold steady at 5.1%. The Oct results represent a strong rebound from the disappointing
Sep report which revealed that just 142K new jobs were created, well below expectations. Wages also grew more than expected, rising 2.5% from a year ago,
according to the Labor Dept. The Oct data will undoubtedly fuel expectations of a Dec
rate hike. Prior to the lousy Sep report, jobs data had been
relatively strong for months, with the US adding around 200K new
jobs each month & the unemployment rate falling to its lowest level in 7 years. The Fed has pointed to the relative strength of the labor market as
it highlights reasons rates might start moving higher later this year. One sticking point has been wages, which have remained essentially
stagnant despite the healthy job growth & rapidly falling unemployment
rate. That may have started to change in Oct. The year over year jump in wages was the strongest since 2009. Employment in professional & business services increased 78K, compared with an average gain of 52K per month over the
prior 12 months. In Oct, job gains occurred in administrative &
support services, computer systems design & related services, &
architectural & engineering services. Health care added 45K, while employment in retail
trade rose by 44K, compared with an average monthly gain
of 25K over the prior 12 months. Food services & drinking places
added 42K jobs in Oct. Construction employment increased by 31K, while
employment in mining continued to trend down in Oct. The industry
has shed 109K jobs since reaching a recent employment peak in
Dec 2014. In Oct, average hourly earnings for all employees on private
nonfarm payrolls rose by 9¢ to $25.20.
China will lift a 5-month freeze on IPOs by
the end of the year, removing one of its key measures of support for the
stock market as equities recover from a $5T rout. New
share offerings will restart after improvements to the listing system amid concern that new offerings will
divert funds from existing equities. The resumption suggests
authorities are becoming more confident the stock market can stand on
its own after the Shanghai Composite Index rallied back into a bull
market this week. The move will also help Chinese companies tap into an
important source of financing as they seek to cut debt levels from near
record highs. The rally in China follows an
unprecedented state campaign to prop up share prices, along with
increased monetary stimulus to combat an economic slowdown. While the
support has helped revive confidence among local investors, foreigners
have been selling mainland equities through the Shanghai-Hong Kong
exchange link for 4 straight weeks. The Shanghai Composite climbed
to its highest close in 11 weeks before the CSRC
announcement, taking gains since its Aug 26 low to 23%.
Unlike
in most major stock markets, Chinese regulators control the timing &
pricing of new listings. While policy makers have pledged to loosen
their grip on the process, almost all of this year’s deals have been
priced at levels below 23 times earnings. The valuation cap has led to
nearly guaranteed gains once new shares start trading, spurring investors to place bids during each round of new listings.
Federal Reserve Bank of St. Louis pres James Bullard said a
stronger labor market & reduced financial market stress are among the
factors supporting the case for the Fed to raise rates for the first
time since 2006. “In October, the committee removed the key
sentence citing global factors and suggested that the zero interest rate
policy could be ended soon, depending on incoming data,” Bullard said. “The market-based probabilities of a near-term end
to the zero interest rate policy have increased.” Fed Chair Janet
Yellen told Congress this week that the US economy was performing well & that a Dec rate hike is a "live possibility." Bullard said the
labor market was close to what the policy-setting Federal Open Market
Committee judged to be full employment. “U.S.
labor markets have largely normalized,” Bullard said. The Fed’s labor
market conditions index, which includes a variety of indicators, “is
well above historical norms, indicating excellent labor market health.”
The good news on the jobs front was muted by the thought that this data will bring on a rate hike next month. Something is radically wrong with this market when the main worry after good news is negative thoughts about a long, overdue rate hike.
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