The Week In Review

2/6/15

The major averages capped a strong week with a defensive finish. The S&P 500 lost 0.3%, to narrow its weekly gain to 3.0% while the Nasdaq (-0.4%) underperformed, but managed to end the week higher by 2.4%.

Equities climbed at the open in reaction to the release of a better than expected Nonfarm Payrolls report for January. According to the Bureau of Labor Statistics, January payrolls increased by 257,000 (Briefing.com consensus 235,000) while the December reading saw a large upward revision to 329,000 from 252,000. Hourly earnings (+0.5%; consensus +0.3%) surpassed estimates, which bolstered the report.

The gain in hourly earnings shaped a consensus view that the employment report showcased strong labor market conditions, but that analysis may not be completely correct. According to the National Conference of State Legislators, the minimum wage in 20 states increased on January 1, 2015. The change in state policies resulted in a 0.3% increase in the average minimum wage, with all of the states equally weighted. When weighted by state payrolls, the average minimum wage increased by a slightly less but still hefty 0.2%, which is not a trivial gain. Since the Bureau of Labor Statistics reports wages based on averages and not medians, the increase in the bottom of the wage spectrum caused an overall increase in average wages. Just about 0.2 percentage points of the 0.5 percentage point gain in hourly earnings came from the three lowest paid sectors -- retail trade, leisure and hospitality, and other services. Those three sectors are also the most likely to employ minimum wage workers.

That being said, the report caused participants to reassess their expectations for the timing of the first fed funds rate hike. On that note, The Wall Street Journal's Jon Hilsenrath said today's jobs report increased the chance that the Fed will alter the language that indicates plans to remain 'patient' before hiking rates. In addition, this year's FOMC voting member and Atlanta Fed President Dennis Lockhart said liftoff should begin "around mid-year, or a little later."

Accordingly, the Treasury complex responded with a slide led by the 5-yr note. The 5-yr yield surged 17 basis points to 1.48% while the benchmark 10-yr yield climbed 12 basis points to 1.94%, representing a 27-basis point rally since last Friday.

Equities held modest gains through the first half of the session, but market breadth never turned positive, which hinted at a potential reversal. That reversal materialized after Standard & Poor's downgraded Greece to 'B-' and said another downgrade could be in the cards. Later in the day, Eurogroup Chief Jeroen Dijsselbloem said Greece must apply for a bailout extension by February 16 in order to maintain financial backing from the eurozone.

The downgrade and subsequent comments from Mr. Dijsselbloem sparked some profit taking after a strong run earlier this week; however, it is worth mentioning that the market was probing a resistance level and its failure to clear that area could signal more downside in the near term. Despite the afternoon slip, nine sectors posted weekly gains between 0.7% (health care) and 7.0% (telecom services), while the rate-sensitive utilities sector lost 4.1% today to end the week lower by 3.7%.

Outside of utilities, the health care sector (-0.8%) was the only group that lost more than 0.6%. Biotechnology contributed to the relative weakness with the iShares Nasdaq Biotechnology ETF (IBB 315.59, -4.32) falling 1.4% to end the week lower by 1.9%. 

On the upside, telecom services (+1.9%) and financials (+0.7%) held gains throughout the session. The telecom sector was underpinned by Verizon (VZ 49.33, +1.47), which surged 3.1% after confirming a sale of its wireless assets in three states to Frontier Communications (FTR 7.93, +0.23) for $10.54 billion, leasing the rights to over 11,300 wireless towers to American Tower (AMT 95.73, -3.86) for about $5 billion, and entering into an accelerated $5 billion share repurchase program.

Meanwhile, financials benefited from the rise in short-term interest rates with the sector adding 4.8% for the week. Elsewhere among cyclical groups, the energy sector lost 0.3%, but jumped 5.4% for the week as crude oil rallied 2.4% to $51.67/bbl. The energy component spiked more than 9.0% since last Friday.

Also of note, the top-weighted technology sector (-0.6%) settled a bit behind the broader market. Earnings were in focus today with LinkedIn (LNKD 263.40, +25.43) and Twitter (TWTR 48.01, +6.75) soaring 10.7% and 16.4%, respectively, after beating estimates. On the flip side, GoPro (GPRO 47.12, -7.25) and Yelp (YELP 45.11, -12.36) stumbled. GoPro slid 13.3% in reaction to cautious guidance while Yelp tumbled 21.5% after its report revealed a slowdown in user growth.

Today's participation was ahead of average with more than 900 million shares changing hands at the NYSE floor.

Economic data was limited to Nonfarm Payrolls and Consumer Credit:

Nonfarm payrolls added 257,000 new jobs in January after adding an upwardly revised 329,000 (from 252,000) in December while the Briefing.com consensus expected a reading of 235,000 

Private payrolls increased by 267,000 in January, down from an upwardly revised 320,000 (from 240,000) in December while the consensus an increase of 225,000

The decline in the average hourly wage in December (-0.2%) was more than offset by a surge in wage growth (0.5%) in January, which easily topped the consensus forecast of a 0.3% gain. However, the sustainability of this growth remains in question considering 20 states raised their minimum wage in January

The unemployment rate ticked up to 5.7% in January from 5.6% in December as a result of an uptick in the labor force participation rate

Consumer credit increased by $14.80 billion in December, up from a downwardly revised $13.50 billion in November while the Briefing.com consensus expected an increase of $15.00 billion

Monday's session will be free of economic data.

Nasdaq Composite +0.2% YTD

Russell 2000 +0.2% YTD

Dow Jones Industrial Average UNCH YTD

S&P 500 -0.2% YTD