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Beyond the Numbers

Upbeat Jobs Data May Add To Interest Rate Concerns
2/2/2018 9:00 AM

The major U.S. index futures are pointing to a lower opening on Friday, with stocks likely to come under pressure following the mixed performance seen in the previous session.

Concerns about higher interest rates may weigh on Wall Street after the Labor Department released a report showing stronger than expected job growth and a jump in wages.

“Given companies such as WalMart have credited Trump’s tax cuts as a way for them to afford higher worker pay we suspect we will see the wage numbers pick-up further,” said James Knightley, Chief International Economist at ING.

He added, “Consequently, it will need a big shock to prevent the Fed from hiking in March, but it could happen in the form of a damaging government shutdown should politicians fail to resolve their differences.”

Following the modest rebound seen on Wednesday, stocks showed a lack of direction over the course of the trading day on Thursday. The major averages spent much of the day bouncing back and forth across the unchanged line.

Eventually, the major averages ended the session mixed. While the Dow inched up 37.32 points or 0.1 percent to 26,186.71, the Nasdaq fell 25.62 points or 0.4 percent to 7,385.86 and the S&P 500 edged down 1.83 points or 0.1 percent to 2,821.98.

The choppy trading on Wall Street came as traders seemed reluctant to make significant moves ahead of the release of the closely watched monthly jobs report.

Earnings reports due after the close of trading from Google parent Alphabet (GOOGL), Amazon (AMZN) and Apple (AAPL) may also have kept traders on the sidelines.

On the U.S. economic front, a report released by the Labor Department unexpectedly showed a modest decrease in labor productivity in the fourth quarter, although the report also showed a sharp jump in labor costs.

The report said labor productivity edged down by 0.1 percent in the fourth quarter after surging up by a revised 2.7 percent in the third quarter. Economists had expected productivity to climb by 1.0 percent.

Meanwhile, the Labor Department said unit labor costs spiked by 2.0 percent in the fourth quarter after slipping by a revised 0.1 percent in the third quarter. Labor costs were expected to increase by 0.8 percent.

A separate report from the Labor Department showed a slight drop in first-time claims for U.S. unemployment benefits in the week ended January 27th.

The report said initial jobless claims edged down to 230,000, a decrease of 1,000 from the previous week's revised level of 231,000. Economists had expected jobless claims to rise to 238,000.

The Institute for Supply Management also released a report showing a modest slowdown in the pace of growth in manufacturing activity in the month of January.

The ISM said its purchasing managers index edged down to 59.1 in January from 59.3 in December, although a reading above 50 still indicates growth in the manufacturing sector. Economists had expected the index to dip to 58.8.

Commercial real estate stocks showed a significant move to the downside on the day, resulting in a 2.2 percent slump by the Morgan Stanley REIT Index. With the drop, the index ended the session at its lowest closing level in over a year.

The weakness in the commercial real estate sector likely reflected concerns about the impact of higher interest rates.

Considerable weakness also emerged among retail stocks, as reflected by the 1.7 percent loss posted by the Dow Jones Retail Index.

Alibaba (BABA) posted a steep loss after the China-based online retail giant reported fiscal third quarter earnings that missed expectations.

Utilities and chemical stocks also moved notably lower, while substantial strength was visible among oil service and brokerage stocks.

Commodity, Currency Markets

Crude oil futures are slipping $0.07 to $65.73 a barrel after jumping $1.07 to $65.80 a barrel on Thursday. Meanwhile, after rising $4.80 to $1,347.90 an ounce in the previous session, gold futures are sliding $5.30 to $1,342.60 an ounce.

On the currency front, the U.S. dollar is trading at 110.32 yen compared to the 109.40 yen it fetched at the close of New York trading on Thursday. Against the euro, the dollar is valued at $1.2452 compared to yesterday’s $1.2510.

Asia

Asian stocks finished on a mixed note on Friday as rising bond yields and mixed earnings from top U.S. companies helped induce some caution ahead of the closely watched U.S. monthly jobs report for January.

Chinese stocks reversed initial losses to end higher as investors looked ahead to the release of January trade and inflation numbers next week for further clues on the economic outlook.

The benchmark Shanghai Composite index rose 15.96 points or 0.5 percent to 3,462.96 but posted its worst weekly loss in 14 months. Hong Kong's Hang Seng Index edged down 40.31 points or 0.1 percent to 32,601.78.

Japanese shares fell, dragged down by banks after the Bank of Japan upped bond purchases as part of efforts to prevent bond yields from rising. The benchmark Nikkei 225 Index slumped 211.58 points or 0.90 percent to finish at 23,274.53, while the broader Topix Index closed 0.3 percent lower at 1,864.20.

Banks Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group all ended down over 1 percent. Kyocera Corp plunged 6.6 percent after slashing its annual profit guidance.

Ricoh jumped 11.3 percent after the imaging and electronics company raised its full-year forecast. Likewise, Kobe Steel soared 5.8 percent after saying it expects to swing back into profit in fiscal 2017.

Meanwhile, Australian shares recovered from a weak start to end solidly higher as firmer iron ore and oil prices helped lift mining and energy stocks.

The benchmark S&P/ASX200 index rose 31.30 points or 0.5 percent to 6,121.40, while the broader All Ordinaries Index gained half a percent to finish at 6,229.80.

Energy majors Woodside Petroleum, Oil Search, Origin Energy and Santos climbed 2-4 percent after Goldman Sachs raised its three-month Brent crude forecast to $75 a barrel and its six-month forecast to $82.50 a barrel.

Miners BHP Billiton, Rio Tinto and Fortescue Metals Group rose between half a percent and 0.8 percent. James Hardie Industries soared 6.8 percent after the building materials supplier raised the low end of its full-year operating profit outlook.

Telecom giant Telstra Corp. added 0.8 percent after announcing it would incur an impairment charge of $273 million in its first-half results. Realty stocks fell broadly amid the ongoing sell-off in global bond markets on worries about rising interest rates.

Europe

European stocks have fallen for a fifth consecutive session on Friday as the U.S. government bond sell-off continued on optimism over global growth and rising expectations of inflation.

On a day of light economic news, survey results from IHS Markit revealed that British construction activity expanded at the slowest pace in four months in January.

While the U.K.’s FTSE 100 Index has fallen by 0.3 percent, the French CAC 40 Index and the German DAX Index are tumbling by 1.2 percent and 1.4 percent, respectively.

Deutsche Bank shares have fallen sharply after the German bank posted a net loss of 2.2 billion euros ($2.75 billion) in the fourth quarter of 2017, hurt by lower trading revenues and one-off charges.

Spanish bank Caixa Bank has also moved lower on disappointing quarterly results. British telecom giant BT Group has tumbled after reporting a drop in quarterly revenue and earnings.

On the other hand, oil industry engineer Wood Group has jumped after saying it would book a one-off cash credit for the 2017 calendar year as a result of recent U.S. tax changes.

Troubled doorstep lender Provident Financial has also rallied after naming a new CEO. Capita shares have rebounded on bargain hunting after tumbling to a 20-year low on Thursday.

U.S. Economic Reports

Employment in the U.S. jumped by more than anticipated in the month of January, according to a closely watched report released by the Labor Department.

The report said non-farm payroll employment surged up by 200,000 jobs in January after climbing by an upwardly revised 160,000 jobs in December.

Economists had expected employment to increase by about 180,000 jobs compared to the addition of 148,000 jobs originally reported for the previous month.

The Labor Department said the unemployment rate came in at 4.1 percent in January, unchanged from the three previous months and in line with economist estimates.

Meanwhile, the annual rate of growth in average hourly employee earnings accelerated to 2.9 percent in January from an upwardly revised 2.7 percent in December.

At 10 am ET, the University of Michigan is scheduled to release its revised report on consumer sentiment in the month of January.

The consumer sentiment index for January is expected to be upwardly revised to 95.0 from the preliminary reading of 94.4, which was down from 95.9 in December.

The Commerce Department is also due to release its report on factory orders in the month of December at 10 am ET. Factory orders are expected to jump by 1.5 percent.

At 1:30 pm ET, Dallas Federal Reserve President Robert Kaplan is scheduled to participate in a moderated Q&A at the Teacher Retirement System of Texas Annual Conference in Austin, Texas.

San Francisco Fed President John Williams is due to deliver the keynote address at a “Financial Women of San Francisco” event in San Francisco at 2:30 pm ET.

Stocks In Focus

Shares of Alphabet (GOOGL) are moving notably lower in pre-market trading after the parent of Google reported weaker than expected fourth quarter earnings.

Toymaker Mattel (MAT) is also likely to come under pressure after reporting an unexpected fourth quarter loss on disappointing sales.

Shares of Exxon Mobil (XOM) are also seeing pre-market weakness after the energy giant reported fourth quarter earnings that came in below analyst estimates.

On the other hand, shares of Amazon (AMZN) are moving sharply higher in premarket trading after the online retail giant fourth quarter results that exceeded expectations.

Tech giant Apple (AAPL) may also move to the upside after reporting fiscal first quarter results that beat expectations on both the top and bottom lines.

Shares of Viacom (VIAB) could also see early strength on news the media company is exploring a potential merger with CBS Corp. (CBS).
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