Market Insights 1/4/2019

U.S. stocks rallied back from yesterday’s sharp drop, with a stronger-than-expected December labor report appearing to ease global economic uneasiness, which was followed by more dovish commentary from Fed Chairman Jerome Powell that seemed to ease policy mistake concerns.

Treasury yields moved solidly higher and the U.S. dollar dipped. Crude oil prices added to a weekly surge and gold fell.

The Markets…

The Dow Jones Industrial Average jumped 747 points (3.3%) to 23,433

The S&P 500 Index rallied 84 points (3.4%) to 2,535

The Nasdaq Composite surged 275 points (4.3%) to 6,739

In moderately heavy volume, 1.1 billion shares were traded on the NYSE and 2.5 billion shares changed hands on the Nasdaq

WTI crude oil rose $0.87 to $47.96 per barrel and wholesale gasoline was little changed at $1.35 per gallon

The Bloomberg gold spot price fell $9.36 to $1,284.91 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—dipped 0.1% to 96.17

Markets were higher for the week, as the DJIA rose 1.7%, the S&P 500 Index grew 1.9%, and the Nasdaq Composite advanced 2.4%

Fed Chair says will be patient, flexible with rate hikes

Non-farm payrolls rose by 312,000 jobs month-over-month in December, compared to the Bloomberg forecast of a 184,000 increase, and the rise of 155,000 seen in November was revised upward to a gain of 176,000 jobs. The total upward adjustment to October and November was an increase of 58,000. Excluding government hiring and firing, private sector payrolls increased by 301,000, versus the anticipated gain of 185,000, after rising by an upwardly revised 173,000 in November.

Treasuries dropped, with the yields on the 2-year and 10-year notes jumping 11 basis points to 2.49% and 2.66%, respectively, while the 30-year bond rate rallied 7 bps to 2.97%.

The unemployment rate ticked higher to 3.9%, above estimates of 3.7%, while average hourly earnings were up 0.4% m/m, slightly above projections of 0.3% and above November’s unrevised 0.2% gain. Y/Y, wage gains were 3.2% higher, exceeding estimates and November’s rise. Finally, average weekly hours were 34.5, up slightly from November’s unrevised 34.4 rate, and matching estimates of 34.5.

Global markets rally on U.S. data, Fed dovishness and China optimism

European equities rallied after dovish comments during a joint interview with U.S. Fed Chair Powell that appeared to soothe policy mistake concerns even after U.S. December employment data was much stronger than expected. The move was also fueled by optimism coming out of China that helped lift Asian markets.

The euro and British pound moved higher versus the U.S. dollar and bond yields in the region were higher. Markit’s Eurozone Composite PMI Index—a gauge of business activity in the manufacturing and services sectors—was unexpectedly revised slightly lower but held modestly in expansion territory, while inflation reports came in cooler than expected and the German unemployment change declined slightly more than anticipated.

Stocks in Asia finished mostly to the upside, led by solid gains in the Chinese markets, on the heels of an announcement by China’s commerce ministry that vice-ministerial level trade talks with the U.S. will be held on Monday and Tuesday. Also, a read from Caixin showed growth in the key Chinese services sector unexpectedly accelerated to a six-month high, contrasting the week’s disappointing reads on manufacturing output.

Sentiment also got a boost by optimism of further stimulus measures. After the markets closed, the People’s Bank of China cut its reserve ratio—slicing the amount of cash that lenders must hold—a monetary policy move to release liquidity ahead of a traditionally tight period before the Chinese New Year.

Japanese stocks moved solidly lower, returning to action after the New Year holiday break, during which the global markets and the yen saw heightened volatility. Australian stocks dipped, while South Korean and Indian markets moved higher though the markets may have been a bit cautious ahead of the U.S. employment report and the comments from Fed Chairman Powell.

Stocks post weekly rise but volatility carries over into the New Year

Stocks managed to post a gain for the holiday-shortened first week of 2019, though volatility remained amid lingering global growth concerns and trade uncertainty, while the markets grappled with whether the Fed was on the verge of making a policy mistake. The markets rallied in the final session of 2018, with President Donald Trump offering comments suggesting trade talks with China were progressing.

Monday’s gains were wiped away and the markets moved into the red for the week after falling sharply, courtesy of a double whammy of global growth and trade concerns. Soft manufacturing reports out of China and the Eurozone—with the former signaling contraction—were followed by the largest point drop in the ISM U.S. Manufacturing Index since 2008, while Dow member Apple Inc. surprised the markets with a substantial cut to its Q1 revenue guidance, placing the blame mostly on weakness in China and rising trade tensions.

However, the markets found some resiliency in the final session of the week, rallying back into positive territory as the stronger-than-expected December labor report appeared to ease economic concerns and was followed by comments from Fed Chairman Jerome Powell that soothed Fed policy mistake fears. The U.S. dollar and Treasury yields moved lower, while crude oil prices rallied after data showing Saudi Arabia cut output suggested OPEC was following through with its production cut agreement. The energy sector lead an advance by most major sectors but technology issues were hamstrung and utilities dipped.

Next week, although the markets will return to a normal schedule, the economic calendar will likely be stunted by the partial government shutdown but still deliver some key reports that could garner heightened scrutiny given the global economic and Fed skittishness. The data will begin with Monday’s ISM non-Manufacturing Index, with the gauge of service sector activity that makes up the bulk of U.S. economic output projected to dip to 59.5 last month from November’s 60.7 level and remain comfortably in expansion territory (a reading above 50).