The Week In Review

8/4/17

 The major averages eked out another win on Friday following the release of the Employment Situation Report for July, which showed an impressive increase in nonfarm payrolls. The Dow (+0.3%) cruised to its eighth-consecutive record close, finishing a tick above both the S&P 500 (+0.2%) and the Nasdaq (+0.2%). For the week, the S&P 500 advanced 0.2%.

In terms of job growth, the July jobs report soundly beat expectations, showing the addition of 209,000 nonfarm payrolls (Briefing.com consensus 181,000). However, in terms of wage growth, investors received another unimpressive reading as the report showed an increase of just 0.3% in average hourly earnings (Briefing.com consensus +0.3%). In other words, it was another 'Goldilocks' report.

Investors have rallied around these 'Goldilocks' reports in the past as they're not hot enough to raise rate-hike concerns that are typically present amid a pick up in economic activity and not cold enough to give investors a reason to question the state of future economic growth.

Rate-hike expectations did shift up a tad following the July jobs report with the fed funds futures market assigning an implied probability of 50.4% to a December rate hike, up from 46.8% on Thursday.

U.S. Treasuries sold off in a curve-steepening trade following the release, leaving the 10-yr yield (2.26%) and the 2-yr yield (1.35%) higher by four basis points and one basis point, respectively. Meanwhile, the U.S. Dollar Index (93.35, +0.65) rallied 0.7% to eke out a modest victory for the week (+0.3%).

In the equity market, the heavily-weighted financial sector (+0.7%) outperformed from start to finish, settling the session at the top of the leaderboard. However, the space slipped to the bottom of its trading range in the afternoon following reports that Wells Fargo's (WFC 52.84, -0.56) customer account scandal could be bigger than previously thought. WFC shares closed lower by 1.1%.

Out of the remaining sectors, seven groups--consumer discretionary (unch), industrials (+0.2%), energy (+0.4%), materials (+0.5%), technology (+0.3%), telecom services (+0.5%) and real estate (+0.3%)--finished in positive territory. As for the laggards--health care (-0.2%), consumer staples (-0.2%), and materials (-0.3%)--the losses were modest.

On the earnings front, a handful of notable small-cap companies dominated the headlines, including Yelp (YELP 40.05, +8.68), GrubHub (GRUB 52.62 +4.37), GoPro (GPRO 9.85, +1.59), and Weight Watchers (WTW 41.39, +8.31). Weight Watchers and GoPro surged 25.1% and 19.3%, respectively, after both companies beat top and bottom line estimates and issued positive guidance.

Meanwhile, Yelp and GrubHub spiked 27.7% and 9.1%, respectively, after GrubHub said it plans to buy Yelp's Eat24 business for $287.5 million in cash. As for earnings, GRUB's latest report was in line with expectations while YELP's showed better than expected earnings and revenues. The small-cap Russell 2000 settled ahead of the broader market, climbing 0.5%.

Reviewing Friday's economic data, which included the Employment Situation Report for July and the June Trade Balance:

Employment Situation Report for July

July nonfarm payrolls hit 209,000 while the Briefing.com consensus expected a reading of 181,000. The prior month's reading was revised to 231,000 from 222,000. Nonfarm private payrolls added 205,000 while the Briefing.com consensus expected an increase of 175,000. The previous month's reading was revised to 194,000 from 187,000.

The unemployment rate declined to 4.3% (Briefing.com consensus 4.3%). Average hourly earnings increased 0.3% (Briefing.com consensus +0.3%), while the previous month's reading was left unrevised at 0.2%. The average workweek was reported at 34.5, as expected. The previous month's reading was left unrevised at 34.5.

The key takeaway from the report is that it fit that sweet spot yet again for the stock market where job growth was strong but wage growth was not. The assumption, therefore, is that the Fed will continue to wait on its next rate hike.

Trade Balance for June

The June trade balance showed a deficit of $43.6 billion while the Briefing.com consensus expected the deficit to hit $44.9 billion. The previous month's deficit was revised to $46.4 billion (from $46.5 billion).

The key takeaway from the report is that it should factor favorably in the revision to Q2 GDP.

On Monday, investors will receive just one economic report--June Consumer Credit (Briefing.com consensus $16.2 billion)--which will cross the wires at 15:00 ET.

Nasdaq Composite +18.0% YTD

S&P 500 +10.6% YTD

Dow Jones Industrial Average +11.8% YTD

Russell 2000 +4.1% YTD

Week In Review: Dow Domination

According to the Dow Jones Industrial Average, the stock market had yet another bullish week; the industrial average ended Friday at a record high, for the eighth session in a row, and a weekly gain of 1.2%. However, the S&P 500 and the Nasdaq tell a less conclusive story; the S&P 500 muscled its way to a modest victory, adding 0.2%, while the Nasdaq dropped 0.4%.

Regardless of this week's mixed performance, there's no question that investors are still bullish as stocks hover near all-time highs and the CBOE Volatility Index (VIX) hovers near an all-time low.

The week's most notable headlines in chronological order:

Crude oil settled July with its best one-month gain (+9.0%) since April 2016

The core PCE Price Index for June hit expectations (+0.1%), as did personal spending (+0.1%), but personal income fell short (0.0% vs 0.3%)

Sprint (S) spiked after beating earnings estimates, raising its profit guidance, and saying it believes an M&A announcement will come "in the near future"

American automakers General Motors (GM) and Ford Motor (F) tumbled following disappointing July sales figures

Apple (AAPL) jumped after beating both top and bottom line estimates and implying that its much-anticipated iPhone 8 release is on track

Treasuries rallied after the Bank of England decided to leave interest rates unchanged in a 6-2 vote

Tesla (TSLA) beat both top and bottom line estimates and announced that its Model 3 production is on track

The Employment Situation Report for July soundly beat estimates, showing the addition of 209,000 nonfarm payrolls (Briefing.com consensus 181,000)

However, average hourly earnings remained subdued, increasing just 0.3% (Briefing.com consensus +0.3%)

Of those headlines, two are worth a closer look--Apple's earnings report and the Employment Situation Report for July. Apple is the S&P 500's largest component by market cap and has played a huge role in the stock market's 2017 advance, evidenced by the massive 29.6% year-to-date gain it took into Tuesday night's earnings release.

Needless to say, it's quite impressive that the company was able to deliver in the face of such lofty expectations. However, it's also important to note that much of the positive sentiment surrounding the company has to do with its upcoming iPhone 8 release, which has been generating hype for months. So far, everything looks to be on track for the fall release, but if that changes, so might the bullish bias.

As for the July jobs report, the key take away is it hit the sweet spot once again as job growth was strong but wage growth was not, keeping inflationary concerns at bay. The fed funds futures market points to the December FOMC meeting as the most likely time for the next rate-hike announcement with an implied probability of 50.4%. Last week, the market expected the next hike to occur in January.

Four sectors settled the week in the green--financials (+1.8%), utilities (+1.5%), industrials (+0.8%), and technology (+0.4%)--while seven groups finished in the red--energy (-1.0%), materials (-0.8%), health care (-0.6%), consumer staples (-0.6%), consumer discretionary (-0.4%), real estate (-0.2%), and telecom services (-0.1%).

Outside of the equity market, the benchmark 10-yr yield slipped three basis points to 2.26%, crude oil dropped 0.5% to $49.44/bbl, and the U.S. Dollar Index climbed 0.3% to 93.35.