Day Traders Diary

3/6/15

The major averages ended the week on a broadly lower note with the Dow (-1.5%) and S&P 500 (-1.4%) surrendering the bulk of their 2015 gains. The two indices narrowed their respective quarter-to-date gains to 0.2% and 0.6% while the Nasdaq Composite (-1.1%) outperformed and remains higher by 4.0% since the end of 2014.

Equity indices succumbed to selling pressure that began during pre-market action after the February Nonfarm Payrolls report came in ahead of expectations. According to the report, 295,000 payrolls were added last month while the Briefing.com consensus expected a reading of 240,000. The Unemployment Rate fell to 5.5% from 5.7%, but that resulted from shrinking labor force participation. Also of note, hourly earnings increased just 0.1% after a 0.5% increase in January (Briefing.com consensus 0.2%).

In addition to pressuring equities, the better than expected headline number was met with aggressive selling in the Treasury market, sending the 10-yr yield higher by 12 basis points to 2.24%. Altogether, today's congruent weakness in stocks and bonds suggests participants believe this report increased the likelihood that the Fed will hike rates as early as June. That being said, the anemic wage growth provides some ammunition for the other side of the rate hike argument.

What the FOMC is thinking—or what we should say is what the market thinks the FOMC is thinking—is that there is no way wage growth isn't going to accelerate with the type of payroll gains we have seen over the last 12 months. Accordingly, it would be prudent to raise the fed funds rate sooner rather than later (i.e. at or close to the middle of the year). That sentiment was echoed by Richmond Fed President and FOMC voting member, Jeffrey Lacker, who voiced his support for raising rates as early as June.

Given that narrative, the greenback rallied, sending the Dollar Index (97.66, +1.28) to its highest level since September 2003. Conversely, that strength weighed on commodities like gold (1164.20/ozt, -32.00) and crude oil (49.62/bbl, -1.14) with crude notching its low after the latest Baker Hughes rig count revealed the 13th consecutive weekly decline in the number of operational oil and gas rigs in the U.S. (down 75 to 1192).

On a related note, the energy sector (-1.7%) settled behind the other cyclical groups, but it was the countercyclical side that faced the most aggressive selling. The utilities sector lost 3.1% to widen its 2015 decline to 8.8% while consumer staples (-1.9%), health care (-1.9%), and telecom services (-1.5%) settled a bit closer to the broader market.

Meanwhile, most cyclical sectors ended near the S&P 500 while financials (-0.8%), consumer discretionary (-1.2%), and technology (-1.2%) outperformed slightly. The financial sector began the day with a solid gain, but succumbed to the overall market pressure. The early strength followed last night's news that all 31 major banks cleared the Fed's baseline for required capital levels.

As for the top-weighted technology sector, the group spent the day ahead of the broader market thanks to the shares of Apple (AAPL 126.60, +0.19). The largest stock by weight ended flat, but was up more than 2.0% after the Wall Street Journal reported the stock will replace AT&T (T 33.48, -0.52) in the Dow Jones Industrial Average on Thursday, March 19.

Apple's daylong retreat from its early high proved that the Friday session focused more on the broad macro environment rather than moves among individual stocks.

For the first time this week, NYSE floor volume crossed the 750 million mark as more than 883 million shares changed hands.

Economic data reported this morning was limited to Nonfarm Payrolls and Trade Balance:

Nonfarm payrolls added 295,000 jobs in February after adding a downwardly revised 239,000 (from 257,000) while the Briefing.com consensus expected an increase of 240,000 

It is difficult to label this report as good. Headline payrolls topped expectation, which is obviously a good result; however, average hourly earnings increased marginally (0.1%) after growing by 0.5% in January

Lackluster wage growth combined with the improvement in payrolls led to a 0.4% increase in aggregate wages. To put that in perspective, even after the downward revision to the January payroll numbers, aggregate income increased a much stronger 0.7% last month

Since consumption growth and economic growth in general follow the trend in income, the February employment results were decidedly worse than January even though this month's headline payroll number far exceeded both expectations and the prior level.

The unemployment rate fell to 5.5% in February from 5.7% in January while the consensus expected a drop to 5.6% 

The decline was completely due to another exodus in labor market participation that dropped the participation rate to 62.8% from 62.9% in January

The U.S. trade deficit declined to $41.80 billion in January from a downwardly revised $45.60 billion (from $46.60 billion) while the Briefing.com consensus expected a decline to $42.00 billion 

The goods deficit declined by $3.40 billion to $61.60 billion from $65.00 billion. The services surplus increased to $19.90 billion from $19.40 billion, a gain of $0.50 billion

Monday's session will be free of economic data.

Nasdaq Composite +4.0% YTD

Russell 2000 +1.1% YTD

S&P 500 +0.6% YTD

Dow Jones Industrial Average +0.2% YTD

Week in Review: Sliding From Record Highs