Friday, January 6, 2017

Markets drift lower after the US created 156,000 jobs in December

Dow slid back 16, decliners over advancers nearly 2-1 & NAZ rose 14.  The MLP index was even in the 322s & the REIT index was off pennies in the 346s.  Junk bond funds crawled higher & Treasuries were sold.  Oil was off pennies & gold pulled back slightly after recent gains.

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The US labor market turned in a solid performance at the end of 2016, putting job gains above 2M for a 6th year as paychecks rose by the most during the current expansion.  The 156K increase in Dec payrolls followed a 204K rise in Nov that was bigger than previously estimated, according to the Labor Dept.  The forecast called for a 175K advance.  The jobless rate ticked up to 4.7% as the labor force grew & wages rose 2.9% from Dec 2015.  Worker shortages may become more frequent in the coming year, which means employers could have to give out bigger wage hikes even as hiring cools.  That would buoy consumer spending & underscore the case for the Fed to raise interest rates several more times in 2017, as policy makers deem the situation at or close to full employment.  As the Fed looks for signs of faster inflation, wages are showing their fastest gains since the last recession ended.  Average hourly earnings advanced by 2.9% over the 12 months ended in Dec, the most since Jun 2009, following a 2.5% boost the prior month.  Compared with Nov, worker pay increased 0.4 percent.  “That’s a very decent report,” Cleveland Fed pres Loretta Mester said.  “We’re basically at full employment.”  The Dec results were helped by more hiring in health care & social assistance, whose gain of 63K workers was the most since Oct 2015.  Factories added employees, along with leisure & hospitality businesses.  The latest payrolls tally brought the advance for 2016 to 2.16M, after a gain of about 2.7M in 2015.  The streak of gains above 2M is the longest since 1999.

U.S. Payrolls Rise 156,000 as Wages Increase Most Since 2009

The US trade deficit widened to a 9-month high in Nov as exports fell & companies & govs imported the most since Aug 2015.  The gap grew by 6.8% to $45.2B from a revised $42.4B in the prior month, Commerce Dept figures showed.  The Nov shortfall was in line with the forecast.  Weaker overseas sales of US-made goods & stronger domestic demand for imported merchandise indicate trade weighed on economic growth in Q4.  America's net export position has also been made even more tenuous given the $ rally in late 2016.  Exports decreased 0.2% to $185.8B on slower shipments of foods, capital goods & motor vehicles.  Exports of capital equipment were the weakest since Sep 2011 & reflected a sharp drop in shipments of commercial aircraft.  Imports increased 1.1% to $231.1B on more purchases of foreign-produced crude oil & foods.  Inflation-adjusted imports of petroleum were the highest since Nov 2012.  After eliminating the influence of prices, which renders the numbers used to calculate GDP, the trade deficit widened to a 5-month high of $63.6B from $60.3B in the prior month.  Trade contributed 0.85 percentage point to US economic growth in Q3, the most since Q4-2013.  A jump in soybean shipments to overseas customers that boosted exports in Q3 is in the process of unwinding.  Soybean exports declined in Nov to $1.9B from $2.2B.  Trade & inventories are 2 of the most volatile components in GDP calculations.  The merchandise trade gap with China narrowed to a seasonally adjusted $28.4B from $28.9B.  The trade deficit with Europe widened.

U.S. Trade Deficit Widened in November to a Nine-Month High

3 interest-rate increases this year is a “reasonable” assessment of what the central bank should do at a time when unemployment has declined & inflation is slowly moving up, said Federal Reserve Bank of San Francisco pres John Williams.  “The central tendency of the views of my colleagues -- around three rate hikes -- that’s, I think, a very reasonable view,” Williams said.  Officials surprised markets last month when their quarterly estimate for the appropriate rate path in 2017 shifted up to 3 qtr-point hikes from 2 projected in Sep.  Minutes of their Dec policy meeting showed officials judged upside risks to growth forecasts had increased amid a potential boost from fiscal policy.  Pres-elect Trump has pledged tax cuts & infrastructure spending after Jan 20, which could help to spur faster inflation & warrant a steeper pace of hikes than would otherwise be needed to keep prices gains near the Fed's 2% goal.  “All of these issues around fiscal policy and other policy are things that we study very closely and analyze,” Williams said.  “From my perspective, we don’t know what’s going to happen.” It can take months for Congress to agree on new policy proposals before they’re signed into law.  Williams did say that “relative to a few months ago, I think the distribution of likely outcomes in terms of fiscal policy is probably more stimulus than I was thinking a few months ago, and I built that into my own view” at the Dec meeting.  Last month, officials hiked rates for the first & only time in 2016 and revised up their outlook for rate increases this year.  They projected inflation would reach 1.9% in Q4 & the jobless rate would be 4.5%.  While faster growth could come from Trump's proposed policies, economists have warned that some of the trade measures that he discussed, including slapping tariffs on imports from China, could have the opposite effect if they sparked a wider trade war.  “Clearly if a number of countries raise trade barriers, that would, I think, have a negative impact on growth, but it also would raise inflation,” Williams said.  “There are a lot of factors that can come out of various policy actions.”

Fed’s Williams Sees Three-Hike 2017 Outlook as ‘Very Reasonable’

The jobs report gave a mixed message.  More jobs were created & the economy is running better than has been the case since the recession.  But that conjures up thoughts of rate hikes, something the bull market fears.  The reality of implementing some of Trump's plans for the economy are unsettling for some investors.  Dow remains stuck below 20K.

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