S&P 500

S&P 500 Closes At Record High Despite A Plunge In Total Nonfarm Payrolls Growth

Ed Wijaranakula, Ph.D.
Fri May 5, 2017

The S&P 500 gained another 0.63% for the week, to close on Friday at an all-time high of 2,399.29, led by Information technology ($SPT) and Financials ($SPF), up 1.36% and 1.20%, respectively. The worst performing sectors for the week were Telecommunication services ($SPTS) and Energy ($SPEN), down 1.17% and 0.70%, respectively. The Information technology sector continued to lead the S&P 500 to the upside, while the widening yield spread between the 10-year and 2-year U.S. Treasury Notes boosted the Financials sector.

The Institute for Supply Management, or ISM, said on Monday that its manufacturing index came in at 54.8% in April, compared to the 56.5% forecast of economists. The weaker-than-expected ISM manufacturing survey, as well as imports and exports data, prompted the Federal Reserve Bank of New York to trim their second-quarter 2017 U.S. GDP forecast to 1.8% from the previous 2.3%. The Fed decided to leave interest rates unchanged but issued a hawkish statement following the FOMC meeting on Wednesday, when they called the advance estimate first-quarter 2017 U.S. GDP at 0.69%, a temporary weakness in the economy and signaled that a quarter percentage point hike is coming.

The U.S. Department of Labor said on Friday that total nonfarm payrolls, or NFP, increased by 211,000 in April to a total of 146.06 million, compared to economists’ expectations for 190,000 jobs added. The NFP change for February and March were revised to 232,000 vs 197,000 estimate and 79,000 vs 185,000 estimate. The 3-month average change in NFP stands at 174,000, compared to the 190,667 estimate.

The compounded annual growth rate for NFP for the second-quarter 2017 plunged to 0.94%, compared to 1.54% during the first-quarter 2017. There will be two more data points so the number could improve. The Labor Department said the average hourly earnings of all employees on private nonfarm payrolls increased by $0.07 per hour on a month-over-month basis to $26.19 per hour in April and by $0.65 per hour year-on-year.

The U.S. unemployment rate ticked down to 4.4%, while the civilian labor force participation rate dropped 0.1 percentage point to 62.9%, meaning 162,000 more Americans are not in the labor force, compared to March, according to Employment Situation Summary Table A-1: Household data, seasonally adjusted. There are 94.375 million Americans not in labor force in April. The number of people who are not in the labor force but currently want a job, decreased slightly to 5.71 million in April from 5.78 million registered in March. 

The spot gold price closed down another 3.26% for the week, at $1,226.90 per ounce on Friday, following a World Gold Council report on Wednesday saying that central banks' net purchases dropped to 76.3 tonnes in the first-quarter 2017, a 27% decline from the 104.1 tonnes during the same period last year. The lower rate of gold purchases is likely to continue throughout 2017.

The U.S. dollar index, or DXY, was down another 0.37% for the week, closing at 98.53 on Friday, while the Japanese yen depreciated 1.13% against the U.S. dollar at 112.70 yen. The U.S. dollar continues trading under the 200-day SMA as the currency market may be cautious ahead of the French elections on Sunday. The yield of 10-year U.S. Treasury Notes was up 3.06% this week, to close on Friday at 2.36%, while the yield of the 2-year Notes jumped 3.13% for the week, to close on Friday at 1.32%. The yield spread between the 10-year and 2-year U.S. Treasury Notes widened 2.97% to 1.04 percentage points.

The WTI crude spot price tumbled 6.30% for the week, closing at $46.22 per barrel on Friday, while the Brent crude spot price lost 4.78% to close at $49.45 per barrel. The benchmarks went through a flash crash intraday Friday as they traded as low as $43.76 and $46.64 per barrel, respectively, before bouncing back after Saudi Arabia's OPEC Governor Adeeb Al-Aama told Reuters that OPEC and non-OPEC members were close to an agreement for a six-month extension of a production cut of 1.8 million barrels a day, or bpd, which began on January 1 and was supposed to end on June 30. 

According to Reuters, managed futures firms, also known in U.S. financial regulatory terms as Commodity Trading Advisors, or CTAs, which manage about $340 billion in assets, were selling crude oil futures contracts this week following multiple signs of a trend change across all commodities including iron ore, gold and copper prices. The WTI crude price bounced off the $44.32 level, or 50% Fibonnaci retracement, but the downtrend persists as the symmetrical triangle chart pattern is broken and a descending channel has now emerged. The next technical support is at the $40 level, or 38.2% Fibonnaci retracement.

The EIA monthly reports for U.S. crude oil imports and exports, released last Friday, showed that the U.S. crude oil imports in February declined 0.3% year-on-year to 7.89 million barrels per day, or bpd, while exports skyrocketed 198.3% to 1.12 million bpd. Since the beginning of this year, U.S. crude oil exports have risen 0.67 million bpd, compared to the OPEC and non-OPEC combined output cut of 1.8 million bpd. 

From our viewpoint, U.S. crude oil exports could fill the OPEC supply gap in less than 6 months if the trend continues. According to the EIA, U.S. net imports shrunk over 10% year-on-year in February to 6.77 million bpd, while the U.S. net consumption of crude oil dropped about 8% year-on-year to 17.74 million bpd. The data suggests that U.S. demand for crude oil may have been shrinking since the beginning of the year.

The Crude Oil Volatility Index, or OVX, traded on the Chicago Board Options Exchange, or CBOE, surged 4.04% on Friday to an intraday high of 36.07, but pulled back to close at 33.83, just below the 200-day SMA. A breakout could send the OVX back to retest the trendline resistance at about 42, meaning more selling for crude oil. The index has been trading under the 200-day SMA since April 2016. The OVX is a crude oil derivative which measures the market’s expectation of 30-day volatility of the United States Oil Fund ETF (NYSE:USO), primarily the near month WTI crude oil futures contracts traded on the NYMEX. In short, high OVX readings usually mean traders see significant risks that crude oil price futures will move sharply lower.

The EIA weekly U.S. oil inventory report on Wednesday showed that domestic crude supplies declined by 930,000 barrels to 527.77 million barrels, excluding the Strategic Petroleum Reserve, in the week ending April 28, compared to the S&P Global Platts forecast for a stockpile decline of 2.25 million barrels. The American Petroleum Institute, or API, inventory data on Tuesday showed a U.S. crude inventory draw of 4.2 million barrels. 

Separately, the EIA said the weekly U.S. crude oil production increased another 28,000 bpd, for the week ending April 28, to 9.29 million bpd. U.S. crude oil output increased 127,000 bpd to an average of 9.26 million bpd in April, compared to a March average of 9.13 million bpd. Output has fallen just 3.53% from the peak level of 9.60 million bpd in June 2015. Houston-based oilfield services company Baker Hughes Inc. said on Friday that the U.S. oil rig count rose another 6 to 703, compared to 316, when the rig count hit the low on June 6, 2016.

S&P 500 Summary: +7.17% YTD as of 05/05/17 
Barclay Hedge Fund Index: +3.72% YTD 

Outperforming Sectors: Information technology +16.47 YTD, Consumer discretionary +10.76% YTD, Healthcare +10.12% YTD, and Materials +7.47% YTD. 

Underperforming Sectors: Industrials +6.73% YTD, Consumer staples +6.63% YTD, Utilities +6.29% YTD, Real Estate +2.97% YTD, Financials +2.31% YTD, Telecommunication services –10.28% YTD, and Energy –10.65% YTD.


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