S&P 500

S&P 500 Jumped on Better-Than-Expected Seasonally Adjusted Nonfarm Payrolls, Decelerating U.S. Economy and Job Growth Could Derail Fed Rate Hikes

Witawat (Ed) Wijaranakula, Ph.D.
Fri Aug 05, 2016

The S&P 500 inched up 0.43% for the week, to close at 2,182.87 on Friday, along with crude oil prices, in tandem with other market moving economic events, including monetary policy decisions on interest rates by central banks. The index surged 0.86% on Friday after the U.S. Labor Department reported that nonfarm payrolls increased by seasonally adjusted 255,000 jobs last month, beating Wall Street economists' forecast of an 180,000 gain. If not seasonally adjusted, the nonfarm payrolls were 1.03 million jobs lost for July, according to Table B-1. The May figures were revised upward from 11,000 to 24,000, and the change for June was revised from 287,000 to 292,000.

The U.S. unemployment rate held at 4.9% in July, with total nonfarm payrolls standing at 144.448 million. If 200,000 jobs are added for August and September each, total nonfarm payrolls growth will be just 1.76% for the third-quarter 2016, the slowest since the second-quarter 2014. Slow growth could be due to lack of qualified workers, as the labor market approaches maximum employment. Nonetheless, with a labor force participation rate of only 62.8%, some 94.3 million Americans might still be looking for a job.

Both U.S. total nonfarm payrolls and economic growth are decelerating. The market got a big surprise after the U.S. Bureau of Economic Analysis released the second-quarter GDP (advance estimate) last Friday, showing a disappointing GDP of 1.2%. So far this year, the U.S. economy is growing at about a 1% annual rate, the worst first-half performance since 2011. GDP growth was revised down to a 0.8% pace in the first-quarter, from 1.1%. Growth also was revised downward for the fourth-quarter of 2015 to 0.9%, from 1.4%. The Federal Reserve bank of New York currently forecasts the third-quarter GDP at 2.6%. 

The probability of a 25 basis point rate hike at the next FOMC meeting on September 21 jumped 9 percentage points from 18.0% before the release of the nonfarm payrolls report, while the probability of a no rate hike dropped to 82.0% from 91.0%, according to data from the CME Group as of August 5. 

The best performing S&P 500 sectors for the week were Information technology, and Financials, up 1.63%, and 1.41%, respectively. The worst performing sectors for the week were Utilities and Telecommunication Services, down 2.68% and 1.82%, respectively.

There was good and bad news for the Japanese economy during the week. The good news was Japanese Prime Minister Shinzo Abe's cabinet approved a 13.5 trillion yen ($132 billion) government stimulus package on Tuesday that includes 7.5 trillion yen ($73 billion) in new spending to jump-start Japan’s sluggish economy. The Japanese yen surged 1.48% against the U.S. dollar as the market is skeptical whether the stimulus will work. The bad news was that most economists predict the stimulus will only modestly increase economic growth and could just pile up more debt without really boosting long-term growth.

Key monetary policy decisions were announced by central banks this week. The Reserve Bank of Australia (RBA) said on Tuesday that they cut its benchmark interest rate by 25 basis points to a record low of 1.50%, citing the global economy is continuing to grow at a lower-than-average pace, while business investment is declining significantly and inflation remains low.

As expected on Thursday, the Bank of England (BoE) cut interest rates for the first time since 2009, to 0.25% from 0.5%. The rates are now the lowest they have been in U.K. history. The BoE also said the bank is extending its asset-purchase facility to £435 billion from £375 billion to buy U.K. government bonds, which also includes a purchase of up to £10 billion of sterling-denominated corporate bonds, beginning in September. Skeptics believe that the BOE’s moves might not be enough to offset recessionary headwinds, however. Economists predict the U.K. economy will fall into recession in the second half of 2016, as uncertainty takes hold.

The U.S. Dollar index inched up 0.71% for the week, to close on Friday at 96.165. The yield of the 10-year U.S. Treasury Note continued to move higher, after hitting a record low of 1.37% on July 8, to close at 1.59% on Friday. The yield spread between the 10-year and 2-year U.S. Treasury Notes skyrocketed 10.13% for the week, to close at 0.87 percentage points. The Japanese government bond (JGB) and the German bund both continue to remain in negative territory, as the 10-year JGB yield was negative 0.088% at the close on Friday, while the 10-year German bund yield was negative 0.067%. 

The WTI crude oil spot price inched up just $0.20 per barrel for the week, to close on Friday at $41.80 per barrel, while the Brent crude price jumped 2.54% for the week to close at $44.42 per barrel, following a volatile week. State-owned Saudi Arabian Oil Co. said on Sunday that it would cut Arab Light by $1.10 a barrel in September, below Asia’s regional benchmark, as the oil battle with Iran heats up. 

Francisco Blanch, head of global commodity research at Bank of America Merrill Lynch, said on Bloomberg to buy this oil dip as he sees a rebound in oil prices by the end of the year. Global oil prices will average $57 a barrel in 2017, according to the median of at least 20 analyst estimates compiled by Bloomberg. 

Crude oil prices got a boost by the weekly report from the Energy Information Administration (EIA) showing a larger-than-expected decline in U.S. gasoline inventory and reduction in U.S. crude oil production. 

The EIA weekly U.S. oil inventory report on Wednesday showed an increase of 1.4 million barrels to 522.5 million barrels, excluding strategic inventories, in the week ending July 29, compared to S&P Global Platts analysts’ expectations for a drawdown of 1.9 million barrels. The American Petroleum Institute (API) inventory data on Tuesday showed a U.S. crude inventory draw of 1.3 million barrels for the week. 

There was a large decline last week in U.S. gasoline supplies of 3.3 million barrels, while distillate stockpiles, including jet fuel, diesel fuel and heating oil, increased by 1.2 million barrels, according to the EIA. Analysts were expecting a drawdown of 400,000 barrels of gasoline stocks and a decline of 500,000 barrels for distillates.

Separately, the EIA said the weekly U.S. crude oil production dropped by 55,000 barrels per day (bpd) for the week ending July 29, 2016, to 8.46 million bpd. Weekly U.S. crude oil output has fallen about 11.97% from the peak level of 9.61 million bpd during the week ending June 6, 2015. Houston-based oilfield services company Baker Hughes Inc. said on Friday that the U.S. oil rig count was up another 7 from the previous week, to 381, compared to 316, when the rig count hit the low on June 6, 2016. 

S&P 500 Summary: +6.80% YTD as of 08/05/16
Barclay Hedge Fund Index: +2.58% YTD 

Outperforming Sectors: Telecommunication services +19.64% YTD, Utilities +17.11% YTD, Energy +11.93% YTD, Materials +11.66% YTD, Industrials +9.13% YTD, Information technology +8.28% YTD, and Consumer staples +7.91% YTD.

Underperforming Sectors: Healthcare +4.35% YTD, Consumer discretionary +4.23% YTD, and Financials +0.50% YTD.


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