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Wall Street Takes August Jobs Report in Stride
01-Sep-17 16:30 ET
Dow +39.46 at 21988.86, Nasdaq +6.67 at 6435.31, S&P +4.90 at 2478.00
https://www.briefing.com/investor/markets/stock-market-update/2017/9/1/wall-street-takes-august-jobs-report-in-stride.htm

[BRIEFING.COM] Equities ended another positive week on a positive note as investors took a relatively disappointing August jobs report in stride, pushing the Nasdaq (+0.1%) to a new record high (6,435.33). The S&P 500 and the Dow climbed 0.2% apiece, ending the day in the middle of their trading ranges. Trading volume was especially light as many investors got a jump start on the extended Labor Day weekend.

The Employment Situation Report for August disappointed on nonfarm payrolls (156K actual vs 183K Briefing.com consensus), nonfarm private payrolls (165K actual vs 173K Briefing.com consensus), the unemployment rate (4.4% actual vs 4.3% Briefing.com consensus), and the average workweek (34.4 actual vs 34.5 Briefing.com consensus). However, another tepid average hourly earnings reading (+0.1% actual vs +0.2% Briefing.com consensus) overshadowed the less-than-stellar metrics.

Average hourly earnings have been reluctant to pick up despite a tightening of the labor market, effectively tempering inflation and, therefore, the market's rate-hike expectations. The fed funds futures market currently places the chances of an additional rate hike this year--which the Fed needs to meet its forecast of three rate hikes in 2017--at 41.4%.

Treasury yields moved solidly higher on Friday to end the week relatively flat. The 10-yr yield climbed four basis points to 2.16%, registering a weekly loss of one basis point, while the 2-yr yield jumped three basis points to 1.35%, settling the week higher by one basis point. Meanwhile, the U.S. Dollar Index (92.77, +0.18) added 0.2% to end the week higher by 0.1%.

Seven of the eleven sectors settled Friday's session in positive territory, but the underperformance of the influential health care (-0.1%) and technology (-0.2%) spaces kept the broader market's gain in check. Still, the two groups ended the week at the top of the leaderboard--in first and second place, respectively. Health care climbed 3.0% for the week while technology added 2.1%.

The energy sector (+0.8%) was the top performer on Friday, followed closely by the financials (+0.4%), consumer discretionary (+0.5%), and materials (+0.7%) groups. Within the consumer discretionary space, automakers outperformed after reporting their U.S. sales for the month of August.

Fiat Chrysler (FCAU 15.86, +0.73), Ford Motor (F 11.35, +0.32), and General Motors (GM 37.36, +0.82) showed notable strength, climbing 4.8%, 2.9%, and 2.2%, respectively. However, GM was the only one to report an increase in sales (+7.5%). FCAU and F reported respective year-over-year declines of 11.0% and 2.1%.

On the earnings front, lululemon athletica (LULU 61.68, +4.13) jumped 7.2% after beating both top and bottom line estimates and issuing above-consensus guidance. The SPDR S&P Retail ETF (XRT 39.70, +0.53) finished higher by 1.4%.

In Washington, reports indicate that the White House will not shut down the government in October in an attempt to gain funding for President Trump's promised barrier along the U.S.-Mexico border. The decision will potentially make it easier for Congress to reach a deal on a short-term budget.

Reviewing Friday's economic data, which included the Employment Situation Report for August, the August ISM Manufacturing Index, July Construction Spending, and the final reading of the University of Michigan Consumer Sentiment Index for the month of August:

The August Employment Situation Report:
August nonfarm payrolls hit 156,000 while the Briefing.com consensus expected a reading of 183,000. The prior month's reading was revised to 189,000 from 209,000. Nonfarm private payrolls added 165,000 while the Briefing.com consensus expected an increase of 173,000. The previous month's reading was revised to 202,000 from 205,000.
The unemployment rate rose to 4.4% (Briefing.com consensus 4.3%). Average hourly earnings increased 0.1% (Briefing.com consensus +0.2%), while the previous month's reading was left unrevised at 0.3%. The average workweek was reported at 34.4 (Briefing.com consensus 34.5). The previous month's reading was left unrevised at 34.5.
The key takeaway from the report is that wage inflation is still not picking up despite the low unemployment rate. That will keep the Goldilocks narrative in place, which has served as a perfectly-cooked bowl of porridge for a stock market that has feasted on a backdrop of modest growth and low inflation.
The ISM Index for August rose to 58.8 from an unrevised reading of 56.3 in July while the Briefing.com consensus expected an uptick to 56.8.
The key takeaway from the survey is that it connotes a manufacturing sector running with a full head of steam, although that interpretation conflicts somewhat with the drop in the manufacturing workweek reported in the Employment Situation report for August.
The Construction Spending report for July declined 0.6% while the Briefing.com consensus expected an increase of 0.5%. The prior month's reading was revised to -1.4% from -1.3%.
The key takeaway from the report is that the decline in construction spending will act as a drag on Q3 GDP forecasts.
The final reading of the University of Michigan Consumer Sentiment Index for August declined to 96.8 (Briefing.com consensus 97.1) from 97.6 in the preliminary reading.
The key takeaway from the report is that consumer sentiment remains at high levels despite the (geo)political drama as consumers reportedly have maintained a favorable assessment of their own financial situations.

The U.S. equity market will be closed on Monday in observance of Labor Day.

Nasdaq Composite +19.6% YTD
S&P 500 +10.6% YTD
Dow Jones Industrial Average +11.3% YTD
Russell 2000 +4.2% YTD

Week In Review: Back to Record Territory

The stock market moved notably higher for the second week in a row as investors continued to buy the mid-August dip that pulled the major averages from their all-time highs. The Nasdaq moved back into record territory, climbing 2.7% to settle the week at a new all-time high. Meanwhile, the Russell 2000, the S&P 500, and the Dow added 2.6%, 1.4%, and 0.8%, respectively.

Eight sectors settled the week in the green--health care (+3.0%), technology (+2.1%), industrials (+1.5%), materials (+1.9%), consumer discretionary (+1.6%), energy (+0.8%), consumer staples (+0.5%), and real estate (+0.4%)--while three groups finished in the red--financials (-0.1%), utilities (-0.6%) and telecom services (-1.4%).

The week's most notable headlines in chronological order:

Monday--S&P 500 +0.1%, Nasdaq +0.3%, Dow unch
Crude futures drop and gasoline futures rise after Hurricane Harvey, which hit the Texas coast over the weekend, forced the closure of many oil refineries.
Reports indicate that Apple (AAPL) will hold a product event on September 12, in which the company is expected to unveil its much-anticipated iPhone 8.
Gilead Sciences (GILD) announces that it will acquire Kite Pharmaceuticals (KITE) for approximately $11.9 billion, or $180.00 per share, in cash.
Tuesday--S&P 500 +0.1%, Nasdaq +0.3%, Dow +0.3%
North Korea fires a ballistic missile over the Japanese island of Hokkaido, marking the first time since 2009 that Pyongyang has fired over Japan's main islands.
President Trump says "all options are on the table" in response to North Korea's latest missile test.
Wednesday--S&P 500 +0.5%, Nasdaq +1.1%, Dow +0.1%
Second estimate of second quarter GDP beats estimates (3.0% actual vs 2.7% Briefing.com consensus).
ADP National Employment Report for August comes in better than expected (237,000 actual vs 180,000 Briefing.com consensus).
Thursday--S&P 500 +0.6%, Nasdaq +1.0%, Dow +0.3%
The latest reading of the core PCE Price Index shows that consumer prices decelerated on a year-over-year basis in July--dropping to +1.4% from +1.5% in June.
July personal income beats estimates (+0.4% actual vs Briefing.com consensus +0.3%) while personal spending falls short (+0.3% vs Briefing.com consensus +0.4%).
Friday--S&P 500 +0.2%, Nasdaq +0.1%, Dow +0.2%
The Employment Situation Report for August misses estimates; nonfarm payrolls (156K actual vs 183K Briefing.com consensus).
The ISM Manufacturing Index comes in better than expected (58.8 actual vs 56.8 Briefing.com consensus).
Reports indicate that the White House will not attempt to shut down the government, even if it doesn't secure funding for a barrier along the U.S.-Mexico border.

Economic data was the focal point this week as investors received a slew of economic reports--the most notable of which were the Employment Situation Report for August and the core PCE Price Index for July. Both reports helped ease the market's rate-hike concerns, providing further evidence that inflation has been, and will continue to be, relatively sluggish.

The core PCE Price Index, which excludes food and energy, increased by 0.1% in July (Briefing.com consensus 0.1%), but dropped on a year-over-year basis to +1.4% from +1.5% in June. The Fed has set a year-over-year target of 2.0% for inflation so July's deceleration doesn't bode well for the notion that the Fed will be able to follow through with its forecast of one additional rate hike this year.

In addition, the August jobs report provided no signs of a pick up in inflation in the near term as it showed another relatively weak increase in average hourly earnings (0.1% actual vs 0.2% Briefing.com consensus). On a year-over-year basis, average hourly earnings have risen 2.5%, unchanged from the 12-month period ending in July.

The fed funds futures market currently places the chances of another rate hike this year at 41.4% and considers the June 2018 FOMC meeting as the most likely time for the next rate-hike announcement with an implied probability of 54.4%. Last week, the market expected the next rate hike to occur in June 2018 with an implied probability of 58.0%.

Looking ahead, the market's attention will likely shift from rate hikes to the Fed's balance sheet during the next FOMC meeting, which is scheduled to take place September 19-20, as the U.S. central bank is expected to announce the start of a plan to reduce its massive $4.5 trillion balance sheet.