The Week In Review

4/1/16

The stock market ended an upbeat week on a higher note as investors focused on the largely in-line reading of the March jobs report. Additional factors that impacted today's trade included a downturn in oil, a transitory rebound in the dollar, and leadership from the heavily-weighted health care (+1.3%), technology (+0.9%), and financial (+0.8%) sectors. The Nasdaq Composite (+0.9%) finished the day ahead of the Dow Jones Industrial Average (+0.6%) and the S&P 500 (+0.6%).

Today's session started on a wobbly note as investors adopted a risk-off posture ahead of and immediately following the release of the Employment Situation Report for March. The reading of the report showed progress towards the Fed's dual mandate, as nonfarm payrolls increased by 215,000 (Briefing.com consensus 200,000) and average hourly earnings ticked higher by 0.3% (Briefing.com consensus 0.3%). However, the near-term impact of this report is likely to be diminished considering recent dovish commentary from Fed Chair Janet Yellen. In remarks made on Wednesday, Ms. Yellen had acknowledged strong employment readings, but still called for a cautious path towards interest rate normalization given global economic concerns.

The broader market staged a rebound off its low as heavily-weighted health care (+1.3%), technology (+0.7%), and financials (+0.8%) moved up the leaderboard in the opening hour. The groups were able to maintain their leadership positions throughout the session and finished their day ahead of the broader market.

Conversely, the energy sector (-1.4%) ended its day with the largest loss as a slump in oil weighed on the sector. The energy component was pressured throughout the day as commentary from Saudi Arabian Crown Prince Mohammed bin Salman cast doubts on the country's participation in a supply freeze agreement. Additionally, early strength from the dollar also weighed. WTI crude ended its day lower by 4.0% at $36.76/bbl.

Biotechnology outperformed in the countercyclical health care (+1.3%) as the group rebounded from its difficult start to the year. The iShares Nasdaq Biotechnology ETF (IBB 268.31, +7.50) gained 2.8% as the sub-group moved higher in sympathy with Regeneron Pharmaceuticals (REGN 405.25, +44.81). Regeneron spiked 12.4% today after reporting positive results in two phase-three trials of its Dupilumab medication. The broader health care space extended its week to date gain to 1.9%.

The heavily-weighted financial sector (+0.8%) also rebounded from larger losses today, as the space trimmed its 2016 decline to 4.8%. The group demonstrated broad strength as credit service names and investment brokerage companies outperformed. On that note, Dow component Goldman Sachs (GS 159.82, +2.84) topped the price-weighted index.

The Dow Jones Transportation Average (-0.7%) underperformed today as the sector pulled back from larger year to date gains. Major airlines showed the largest losses in the index as American Airlines (AAL 39.52, -1.49) and United Continental (UAL 56.72, -3.14) surrendered 3.6% and 5.3%, respectively, after receiving downgrades at Deutsche Bank.

The U.S. Dollar Index (94.58, +0.00) surrendered early gains, falling to its flat line in the early afternoon. The euro gained 0.1% against the dollar and ended at 1.1394 while the dollar/yen pair finished at 111.63 (-0.8%).

The Treasury complex traversed a narrow range today as the yield on the 10-yr fluctuated between 1.77% (UNCH) and 1.80% (+3 bps). The yield on the 10-yr note ended higher by one basis point at 1.78%.

Today's participation was above the recent average as more than 958 million shares changed hands on the NYSE floor.

Today's economic data included the Employment Situation Report for March, ISM Index for March, Construction Spending for February, and the final reading of Michigan Consumer Sentiment:

Nonfarm payrolls increased by 215,000 (Briefing.com consensus 200,000)

February nonfarm payrolls revised to 245,000 from 242,000

Private sector payrolls increased by 195,000 (Briefing.com consensus 195,000)

February private sector payrolls revised to 236,000 from 230,000

Unemployment rate was 5.0% (Briefing.com consensus 4.9%) versus 4.9% in February

The U-6 unemployment rate, which accounts for the total unemployed plus persons marginally attached to the labor force and the underemployed, was 9.8% versus 9.7% in February

March hourly earnings were up 0.3% (Briefing.com consensus +0.3%) after being down 0.1% in February.

Over the last 12 months, average hourly earnings have risen 2.3% versus 2.2% in February

The average workweek was unchanged at 34.4 (Briefing.com consensus 34.5)

The labor force participation rate was 63.0% versus 62.9% in February

The ISM Index for March checked in at 51.8, up from 49.5 in February and above the Briefing.com consensus estimate of 50.6.

A number below 50.0 denotes contraction, which is where the index has been trapped for five consecutive months prior to today's release. The five-month streak of readings below 50 was the longest stretch of this kind since 2009.

The March improvement was driven by increases in most sub-indices of the report. The New Orders Index rose to 58.3 from 51.5; the Imports Index rose to 49.5 from 49.0; the Exports Index increased to 52.0 from 46.5; the Supplier Deliveries Index rose to 50.2 from 49.7; and the Prices Index surged to 51.5 from 38.5.

Although the vast majority of components improved, the Employment Index slipped to 48.1 from 48.5.

Total construction spending was down 0.5% in February (Briefing.com consensus +0.2%). Furthermore, construction spending in January was revised up to 2.1% from 1.5%.

Total construction spending is up 10.3% year-over-year, with private construction spending up 10.6% and public construction spending up 9.2%.

The final reading for the University of Michigan Consumer Sentiment Survey for March increased to 91.0 (Briefing.com consensus 90.5) from the preliminary reading of 90.0.

Despite the upward revision, the March reading marked a downturn from the final reading of 91.7 for February and a similar showing in January (92.0).

Monday's economic data will be limited to the 10:00 ET release of Factory Orders for February (Briefing.com consensus -1.7%).

Nasdaq Composite -1.8% YTD

Russell 2000 -1.6% YTD

S&P 500 +1.4% YTD

Dow Jones +2.1% YTD

Week in Review: Stocks Climb as Fed Chair Remains Dovish

The major averages enjoyed another round of weekly gains as the first quarter came to a close. The S&P 500 gained 1.8% for the week while the Nasdaq Composite outperformed, climbing 3.0% since last Friday.

Although the Nasdaq showed relative strength during the week, the tech-heavy index remains down 1.9% for the year versus a 1.4% gain in the S&P 500.

The first two days of the week were very quiet with investors sitting on their hands ahead of Fed Chair Janet Yellen's speech that was scheduled for Wednesday. Ms. Yellen spoke before the Economic Club of New York and her remarks were interpreted as decidedly dovish. All in all, Fed Chair Yellen echoed her recent comments in the speech, which was a relief for the market that was becoming concerned about the Fed Chair assuming a more hawkish posture, akin to St. Louis Fed President and FOMC voting member James Bullard.

Over the past couple weeks Mr. Bullard was quoted by various outlets as cautioning that the next rate hike is not far off and that a hike in April is entirely possible. However, all those worries were cast aside after Ms. Yellen's speech focused heavily on global growth concerns and emphasized the importance of employing a cautious approach to raising rates. As a result, stocks, Treasuries, and gold surged at the expense of the dollar.

By putting so much emphasis on international developments, Fed Chair Yellen essentially moved the goalposts, indicating the Fed is no longer targeting just "progress towards 2.0% inflation and an unemployment rate below 6.5%," but also looking to maintain global economic stability.

As the week wore on, investors received the Employment Situation report for March (215K; Briefing.com consensus 200K), which showed average hourly earnings growth of 0.3% (Briefing.com consensus +0.3%). This report strengthened the rate hike argument, but Fed Chair Yellen's speech was still fresh in the minds of investors. Accordingly, stocks began Friday under pressure, but rallied off their lows as investors weighed domestic economic conditions against the global growth picture.

On Friday afternoon the fed funds futures market priced in a 53.0% chance of the next rate hike taking place in September after assigning a 41.3% chance to a September hike on Thursday.