The Week In Review

3/2-3/6/15

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

The first trading day of March was a good day for the stock market and a lousy day for the Treasury market. The former rallied, featuring a return above 5,000 for the Nasdaq Composite and new record closes for both the Dow Jones Industrial Average and S&P 500. The latter, meanwhile, languished and perhaps breathed some added life into the stock market on rebalancing efforts. To be fair, both the stock and bond markets had reason to advance today. The People's Bank of China cut its key lending rate by 25 basis points to 5.35% and each piece of economic data out of the U.S. fell short of consensus estimates. While the rout in the Treasury market was unfolding, a rally in the stock market was playing out, suggesting perhaps that a rotational move out of Treasuries and into stocks was helping to support things.

The stock market endured a broad-based retreat on Tuesday that caused the S&P 500 (-0.5%) to surrender the bulk of its advance from Monday. The benchmark index settled ahead of the Nasdaq Composite (-0.6%) with eight sectors registering losses. All in all, it is worth pointing out that the pullback occurred after the S&P 500 rallied nearly 3.5% in just three weeks, suggesting the retreat resulted from profit taking after a big run. Equity indices began the day amid pressure from a few influential sectors like health care (-0.9%), technology (-0.8%), and industrials (-0.7%). The three sectors lagged throughout the day while the remaining sectors finished closer to their flat lines.

Equity indices registered their second consecutive retreat on Wednesday with the S&P 500 losing 0.4%. The benchmark index managed to cut its loss in half by the closing bell while the Nasdaq Composite (-0.3%) outperformed. For the second day in a row, the market opened amid broad pressure, but heavily-weighted health care and technology sectors hit their lows during the opening hour and climbed off those lows into the afternoon. The health care sector (+0.4%) registered a modest gain while technology (-0.3%) finished ahead of most other cyclical sectors.

The market ended Thursday on a modestly higher note with the Nasdaq Composite (+0.3%) settling in the lead while the S&P 500 (+0.1%) ended just above its flat line. In a way, the Thursday session fit right in with recent affairs as equity indices maintained narrow ranges amid light volume. The S&P 500 spent the day inside a nine-point range while NYSE floor volume totaled fewer than 675 million shares (50-day average 766 million). Six of ten sectors registered gains with three of four countercyclical groups ending ahead of the broader market. To that point, consumer staples (+0.3%), health care (+0.4%), and utilities (+0.8%) spent the day ahead of the S&P while telecom services (-0.1%) lagged.