Risk Assets Climb After Payroll Data

Mostly Positive Employment Data

The headline for the Labor Department’s employment report for December was weaker than expected as 148,000 jobs were added on a seasonally adjusted basis (+190,000 e). However, the wage growth and unemployment data reported in the release helped to mitigate the market’s negative perception of the data.  Robust nonfarm payroll growth was recorded in construction (+30,000) and manufacturing (+25,000), helping to offset a 20,300 reduction in retail positions, which came as a surprise during the peak of the holiday season.  The unemployment rate held steady at a 17-year low of 4.1% while the average hourly earnings improved 0.3% compared to a month earlier (+2.5% YoY).  Other positives in the report included the underemployment rate (U-6) at 8.1% (near 11-year low) and a 62.7% labor force participation rate.

 

 

US Trade Gap Grows

Other key data released on the day included a report from the Commerce Department which presented a widening of the US trade deficit during November.  The overall trade gap expanded to its widest levels in the past six years, up 3.2% to $50.5 billion ($49.9 billion expected) for the month, as imports rose 2.5% to record highs while exports climbed 2.3%.  The largest increases in imports were observed in capital goods and consumer goods, as the trade gap with China widened to its highest levels in more than two years at $35.4 billion.  Also adding to November’s deficit was a rise in the cost of imported oil to an average of $50.10/barrel – a two and a half year high.

 

 

Harker with a Change of Heart

Earlier today Federal Reserve Bank of Philadelphia President Patrick Harker provided the American Economic Association with a more dovish outlook than he has historically communicated when addressing the topic of interest rate hikes in 2018.  As recently as November, Harker had echoed the majority of the FOMC in support of three hikes during 2018 to keep the economy from running too hot.  However in today’s speech, he openly expressed his view that “two rate increases are likely to be appropriate for 2018,” stating that “for right now, given that we’ve just moved in December and are continuing to watch the balance sheet normalization, I think we can take some time.”  Harker did acknowledge that there is “very little slack left” in the labor market, but also highlighted the potential risk of persistently low inflation.   

 

 

Market Recap

The equity markets continued their relentless charge higher.  All three major indices were up on the day, with the Dow climbing 0.90%, S&P +0.7% and NASDAQ closing 0.8% higher on the day.  10yr Treasury yields/swap rates sold off roughly 7bps on the week, closing near 2.47%. Crude oil futures were down 0.70% on the day, but ended the week up 1.7%, at $61.50, after closing last week near $60.40.  The strength in oil this week was largely a result of the continued decline of stockpiles here in the US and political turmoil in Iran.