Decent Jobs Reports Has Warts
After coming under pressure early in the session, stocks showed a substantial rebound during Friday. The turnaround lifted the Dow to its best closing level for the year, while the Nasdaq and the S&P 500 reached three-month closing highs.
For the week, the tech-heavy Nasdaq soared by 3 percent, while the Dow and the S&P 500 jumped by 1.6 percent and 1.8 percent, respectively. But the NYSE and the small cap Russell 2000 continue to lag – struggling below the 200-day moving average and well below recent highs in 2015 – suggesting this support for equities may be limited and short-lived.
Overseas, the Asia-Pacific region moved mostly lower on Friday. Japan’s Nikkei 225 Index plunged by 3.6 percent, while Hong Kong’s Hang Seng Index tumbled by 1.3 percent. China’s Shanghai Index was essentially flat, up by 0.19%.
The major European markets also came under pressure on the day. While the U.K.’s FTSE 100 Index dropped by 0.5 percent, the French CAC 40 Index and the German DAX Index slumped by 1.4 percent and 1.7 percent, respectively.
The initial weakness for US markets came following the release of the Labor Department’s closely watched monthly jobs report, where the government reported that non-farm payroll employment climbed by 215,000 jobs in March after jumping by an upwardly revised 245,000 in February. Economists had expected an increase of about 210,000 jobs.
A negative aspect of this month’s jobs report showed that the unemployment rate inched up to 5.0 percent in March from 4.9 percent in February. The unemployment rate had been expected to remain unchanged. Spinners are claiming that an improved labor market is bringing long-sidelined unemployed back out looking for jobs – as you know they haven’t counted as unemployed once they no longer keep looking.
The warts on this jobs report are that nearly 30,000 jobs were lost in the manufacturing sector and the bulk of new jobs came in the part-time retail sales area. We are declining in good paying manufacturing jobs and creating low-paying service sector jobs – a strong reason why wages have remained stagnant for so many years.
Manufacturing Rebound?
In an ironic twist, or should we say “spin”, many market analysts claimed that Friday’s strong rebound came following the release of the ISM report from the Institute for Supply Management showing a stronger than expected rebound in manufacturing activity in March.
I hope you get the irony of losing a huge number of jobs reported in the jobs report while the ISM report claims an unexpected rebound in manufacturing.
The ISM said its purchasing managers index climbed to 51.8 in March from 49.5 in February, with a reading above 50 indicating growth in the manufacturing sector. Economists had expected the index to inch up to 50.5.
I say someone is playing with spreadsheets so we don’t have to see a real confirmed “contraction” from our important economic metrics. What a joke!
If this bump in manufacturing is real it means this is the first indication of growth in the ISM indicator since August of 2015. Yet on this same day, the University of Michigan reported a smaller than previously estimated drop in consumer sentiment in March, while the Commerce Department reported an unexpected decrease in construction spending in February.
It takes some good spinners to make sense of all these economic reports, as some confirm ongoing weakness leading into recessionary conditions while others purport to support the government’s claim of an ongoing recovery in progress. I suggest we take opportunity to examine the bottom line profits and revenues of companies in this coming earnings season to get to the truth of how strong our economy really is.
Divergent Data Suggests Weakness
I suppose we should just celebrate any economic report of strength, but it is hard to reconcile when equity prices run divergent to highly reliable correlations – especially when it comes to commodity prices. For example, on Friday energy stocks remained under pressure after the initial weakness, with a steep drop by the price of crude oil weighing on the sector. Crude for May delivery tumbled $1.55 to $36.79 a barrel.
Reflecting the weakness in the energy sector, the Philadelphia Oil Service Index plunged by 3.5 percent, the NYSE Arca Natural Gas Index slumped by 2 percent and the NYSE Arca Oil & Gas Index fell by 1.3 percent.
With no rebound in this highly correlated commodity sector I have to assume that the equity market is being held up artificially to paint a better first quarter and heading into a questionable earnings season. It will not take much time for equities and oil prices to get in sync again. This intervention on behalf of equities won’t last.
Looking Ahead
The economic calendar for coming week is relatively quiet, but traders are likely to keep an eye on reports on the trade deficit, service sector activity, and factory orders.
The Federal Reserve is also due to release the minutes of its latest monetary policy meeting, which could shed some light on the outlook for interest rates.
But, in truth, the market is just gearing up for the Q1 earnings season – straight ahead during the month of April.
Disclosure: None.