Insights

School, Football, and D.C. are Back

09/05/2014

This morning’s disappointing August U.S. labor report is inconsistent with recent strong U.S. economic data from manufacturing, construction spending, and auto sales. Many will dismiss the report as consistent with the seasonal weakness August historically presents. However, what cannot be dismissed is that dovish FOMC members have been supplied with economic data that supports their strategy for a very long, deliberate process to the first fed funds rate hike.

A look at the data:

  • August nonfarm payrolls rose 142,000, below July’s 212,000, and well below the 12-month average of 207,000 (Figure 1)
  • August private payrolls rose 134,000, below July’s 213,000
  • The unemployment rate fell to 6.1% from 6.2% in July
  • The labor force participation rate fell to 62.8% from July’s 62.9, the lowest level since 1978 (Figure 2)
  • Average hourly earnings rose 0.2% month on month and 2.1% year on year

Figure 1: Nonfarm Payrolls Prior 12 months – +207,000 Average
Figure 1: Nonfarm Payrolls Prior 12 months – +207,000 Average
Source: Bloomberg

Figure 2: U.S. Labor Force Participation Rate, 1964 to Present
Figure 2: U.S. Labor Force Participation Rate, 1964 to Present
Source: Bloomberg

Market Expectations

I do not expect today’s report to materially impact the overall direction of the S&P 500® Index (SPX). However, in recent weeks the financial and consumer discretionary sectors have attempted to become sector leaders versus their 2014 positions as sector laggards. I expect this morning’s report will slow the near-term positive momentum for both sectors.

Additionally, keep an eye on the value of the U.S. dollar (Figure 3), which is at the top of my list for internal indicators to watch. I am concerned that the recent rise in the U.S. dollar could become problematic for multinationals if the rate of the recent advance continues.

SPX 2014 Sector Rankings

  1. Healthcare                     +15%            
  2. Utilities                          +13%
  3. Technology                    +12%
  4. Materials                        +9%
  5. Energy                           +9%
  6. Financials                       +7%
  7. Consumer Staples           +5%
  8. Industrials                      +4%
  9. Consumer Discretionary   +3%

Figure 3: U.S. Dollar Index, July 2013 to Present
Figure 3: U.S. Dollar Index, July 2013 to Present
Source: Bloomberg 

Next Week’s Calendar

Keep an eye on Friday’s U.S. retail sales report, which will include back to school activity. Tuesday’s Apple product event is also something for investors to check in on. Other than that, geopolitics and U.S. politics will unfortunately take center stage.

The U.S. House and Senate return in full force and midterm election rhetoric will intensify. Inversions, the export-import bank, and the October 1 deadline for funding the government certainly will not provide any strong tailwinds for the capital markets. In fact, I would suggest that next week’s focus on D.C. and geopolitics will provide a negative slant for markets next week.

S&P 500 Index (SPX) Technical Formation

On Thursday, September 4, the SPX traded to an all-time high of 2011.17. With the multi-year absence of any correction greater than 8%, investors should always be alert for SPX point-of-reference levels to minimize risk. Currently, the most watched 50-day moving average rests at 1969.47, the 100-day at 1937.40, and the 200-day at 1882.99 (Figure 4). The August 7 intraday low of 1904.78 will be used as a major point of reference. Ahead of that level, any corrective activity would encounter important support at 1945.

Figure 4: S&P 500 Index (SPX) 2014
Figure 4: S&P 500 Index (SPX) 2014
Source: Bloomberg

Past performance is not a guarantee of future results.

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