The Week In Review

4/7/17

There was a lot to talk about on Friday, but the market was not sure what to make of it all, as stocks slipped out of the gate, but spent the day in a slow climb to end little changed. The S&P 500 shed 0.1%, ending the week lower by 0.3%.

Overnight, the U.S. Navy launched 59 Tomahawk missiles at the Shayrat base in Syria, which was reportedly the origin of a chemical attack that took place on Tuesday. Most U.S. allies spoke in favor of the strikes while Russia, China, and Iran voiced their displeasure with the action. The storyline is likely to continue into next week, considering Syrian fighter jets were taking off from the Shayrat base by the end of the day, according to the Syrian observatory for human rights.

The news of missile strikes weighed on equity futures, but a swift rebound took place in time for the release of the Employment Situation report for March. The report disappointed, showing the addition of just 98,000 nonfarm payrolls (Briefing.com consensus 180,000). However, the reaction in the market was muted.

The S&P 500 navigated a 13-point range, closing near the middle amid gains in five out of eleven sectors. Industrials (+0.1%) spent the day in the green thanks to broad strength among defense contractors like General Dynamics (GD 188.04, +1.74), Lockheed Martin (LMT 270.24, +3.13), and Raytheon (RTN 152.96, +2.21). The three names advanced between 0.9% and 1.5% while the broader sector slipped from its high due to losses in transport stocks. The Dow Jones Transportation Average shed 0.3%, ending the week lower by 0.1%.

Looking past industrials, the remaining gains were confined to countercyclical sectors. Consumer staples (+0.3%), real estate (+0.2%), and telecom services (+0.2%) displayed strength throughout the day while health care (+0.2%) found buying interest in afternoon action.

On the downside, the energy sector (-0.4%) was among the laggards even though crude oil jumped 1.0% to $52.25/bbl. Another cyclical group—financials (-0.3%)—also struggled to keep pace with the market as flattening in the yield curve weighed on bank stocks. The financial sector lost 1.0% for the week, narrowing its 2017 gain to 1.1%.

Treasuries spiked to highs immediately after the release of the jobs report, but reversed in short order and continued sliding into the close. The 2-yr yield (1.27%) and the 10-yr yield (2.37%) jumped three basis points apiece while the long bond resisted the pressure. The 30-yr yield increased one basis point to 3.00%.

Investor participation was a bit below average as 935 million shares changed hands at the NYSE floor.

Economic data included Employment Situation report, Wholesale Inventories, and Consumer Credit:

March nonfarm payrolls increased by 98,000 (Briefing.com consensus 180,000) and March private sector payrolls increased by 89,000 (Briefing.com consensus 175,000)

The key takeaway from the report is that it spoke to the ongoing disconnect between the hard data and the soft data and it will challenge -- or should challenge -- the stock market's economic growth assumptions

The unemployment rate fell to 4.5% due to a higher change in workers being employed (+472,000) as the labor force participation rate held steady at 63.0%

March average hourly earnings increased 0.2% (Briefing.com consensus +0.3%) after increasing an upwardly revised 0.3% (from 0.2%) in February

The average workweek in March was 34.3 hours (Briefing.com consensus 34.4), versus a downwardly revised 34.3 hours (from 34.4) in February

Wholesale inventories increased 0.4% month-over-month in February, as expected, versus a 0.2% decline in January. Wholesale sales for February increased 0.6% on the heels of an upwardly revised 0.3 increase (from -0.1%) for January.

The inventory-to-sales ratio was unchanged at 1.28 in February but down from 1.36 in the same period a year ago.

Total outstanding consumer credit increased by $15.20 billion in February (Briefing.com consensus $14.00 billion) after increasing an upwardly revised $10.90 billion (from $8.80 billion) in January.

Investors will not receive any economic data on Monday.

Nasdaq Composite +9.2% YTD

S&P 500 +5.2% YTD

Dow Jones Industrial Average +4.5% YTD

Russell 2000 +0.5% YTD

Week in Review: Which Way Next?

The stock market saw limited movement during the past week, leaving the S&P 500 just below its closing level from last Friday. The benchmark index bounced around a 34-point range before locking in a modest weekly loss (-0.3%) while the Dow Jones Industrial Average (unch) outperformed.

Geopolitical developments were in focus from the jump. On Monday, President Donald Trump was quoted as saying he is ready to act alone on North Korea if China does not change the current situation on the Korean peninsula. The comments were made just days before Chinese President Xi Jinping's visit to President Trump's resort in Florida and ahead of a joint military exercise held by South Korea, the United States, and Japan. North Korea was back in the headlines on Wednesday when it conducted another missile test.

The geopolitical conversation did not end there. On Friday morning, participants learned that the U.S. Navy conducted an overnight strike against the Shayrat airbase in Syria, which was deemed responsible for a chemical attack that was reportedly conducted on Tuesday. The action was supported by several U.S. partners while Russia suspended its information sharing agreement with the U.S. that was put into effect when Russia launched an air campaign in Syria in 2015.

In addition to the geopolitical developments, participants received the latest Employment Situation report, which was a disappointment. Only 98,000 nonfarm payrolls were added in March, which was a far cry from the Briefing.com consensus estimate of 180,000. Average hourly earnings increased 0.2% (Briefing.com consensus 0.3%) and February earnings growth was revised up to 0.3% from 0.2%.

The report spoke to the ongoing disconnect between the hard data and the soft data and it should challenge the stock market's economic growth assumptions. The growth assumptions may also be put to a test by policy actions from the Federal Reserve, considering the FOMC Minutes that were released on Wednesday revealed a discussion about a reduction to the Fed's balance sheet in the near term.

As for rate hike expectations, the fed funds futures market does not expect a rate hike to be announced in May (4.3%), but expectations for a June hike have firmed a little, with the corresponding probability rising to 70.6% from last week's 62.5%.