Market Analysis

Beyond the Numbers

Interest Rate Worries May Weigh On Wall Street
2/1/2018 9:01 AM

The major U.S. index futures are pointing to a lower opening on Thursday, with stocks likely to move back to the downside following the modest rebound seen in the previous session.

The futures saw further downside following the release of a report from the Labor Department showing a sharp jump in labor costs in the fourth quarter.

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. Economists had expected costs to climb by 0.8 percent.

The data may raise concerns about the outlook for interest rates after the Federal Reserve predicted inflation would move up this year and stabilize around its 2 percent objective over the medium term.

Stocks fluctuated over the course of the trading session on Wednesday after failing to sustain an early move to the upside. The major averages bounced back and forth across the unchanged line before closing modestly higher.

The major averages finished the session in positive territory after closing lower for two straight days. The Dow rose 72.50 points or 0.3 percent to 26,149.39, the Nasdaq inched up 9.00 points or 0.1 percent to 7,411.48 and the S&P 500 crept up 1.38 points or 0.1 percent to 2,823.81.

The modestly higher close on Wall Street came after the Federal Reserve announced its widely expected decision to leave interest rates unchanged.

The Fed's accompanying statement was seen as slightly more hawkish, reinforcing expectations the central bank will raise rates at its next meeting in March.

In the statement, the Fed said data received since its last meeting in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate.

The central bank reiterated that it expects economic conditions to evolve in a manner that will warrant further gradual increases in the federal funds rate.

"Janet Yellen's final policy meeting as Fed Chair pretty much summed up her entire tenure; policy was left accommodative but there were hints it will be tightened gradually in the future," said Michael Pearce, Senior U.S. Economist at Capital Economics.

He added, "The slightly more hawkish language in the statement is enough to confirm expectations of a March hike and adds weight to our view that the Fed will raise rates four times this year."

On the U.S. economic front, payroll processor ADP released a report showing stronger than expected private sector job growth in the month of January.

ADP said employment in the private sector spiked by 234,000 jobs in January after surging up by a revised 242,000 jobs in December.

Economists had expected an increase of about 185,000 jobs compared to the jump of 250,000 jobs originally reported for the previous month.

A separate report from the National Association of Realtors showed pending home sales increased for the third consecutive month in December.

NAR said its pending home sales index climbed by 0.5 percent to 110.1 in December after rising by 0.3 percent to an upwardly revised 109.6 in November. Economists had expected the index to increase by 0.4 percent.

Software stocks turned in some of the market's best performances on the day, resulting in a 1.6 percent advance by the Dow Jones Software Index.

Video game publisher Electronic Arts (EA) posted a standout gain after reporting weaker than expected fiscal third quarter results but providing upbeat guidance for the current quarter.

Considerable strength was also visible among commercial real estate stocks, as reflected by the 1.8 percent gain posted by the Morgan Stanley REIT Index. The index rebounded after ending the previous session at its lowest closing level in over a year.

Gold and utilities stocks also moved notably higher on the day, while pharmaceutical, biotechnology, and trucking stocks showed significant moves to the downside.

Eli Lilly (LLY) helped to lead the pharmaceutical sector lower even though the drug maker reported better than expected fourth quarter results.

Commodity, Currency Markets

Crude oil futures are advancing $0.60 to $65.33 a barrel after rising $0.23 to $64.73 a barrel on Wednesday. An ounce of gold is trading at $1,342.50, down $0.70 compared to the previous session’s close of $1,343.10. On Wednesday, gold climbed $3.10.

On the currency front, the U.S. dollar is trading at 109.40 yen compared to the 109.19 yen it fetched at the close of New York trading on Wednesday. Against the euro, the dollar is valued at $1.2453 compared to yesterday’s $1.2414.


Asian stocks ended mixed on Thursday after the U.S. Federal Reserve left its key rate unchanged, as widely expected, but set the stage for a rate hike at its next meeting in March. China Caixin manufacturing data matched expectations, helping limit losses across the region.

The manufacturing sector in China continued to expand in January at a steady pace, the latest survey from Caixin showed with a PMI score of 51.5. That was in line with expectations and unchanged from the December reading.

China's Shanghai Composite Index slumped 34.59 points or 1 percent to end at 3,446.24, while Hong Kong's Hang Seng Index slid 245.18 points or 0.8 percent to 32,642.09.

Meanwhile, Japanese shares snapped a six-day losing streak as the yen weakened against the dollar and a survey showed Japan's manufacturing sector expanded at a faster rate in January. The Nikkei 225 Index jumped 387.82 points or 1.7 percent to finish at 23,486.11, while the broader Topix Index soared 1.8 percent to 1,870.44.

Exporters Honda Motor, Toyota Motor and Sony climbed 1-3 percent. Oil company Inpex Corp advanced 2.7 percent and Japan Petroleum rallied 3.8 percent. Fujifilm shares surged over 12 percent, a day after the company announced it is cutting 10,000 jobs globally at its joint venture with Xerox Corp.

Australian shares rose sharply, led by mining and energy stocks after data showed the country's manufacturing sector posted the 16th month of growth last month.

Export prices beat forecasts to rise 2.8 percent sequentially in the fourth quarter of 2017, while building approvals tumbled 20 percent in December, separate reports showed.

The benchmark S&P/ASX 200 Index climbed 52.40 points or 0.9 percent to 6,090.10 and the broader All Ordinaries Index ended up 52.30 points or 0.9 percent at 6,198.80.

Banks ANZ, Commonwealth and Westpac all rose over 1 percent after the Australian Prudential Regulation Authority (APRA) released a progress report on an inquiry into the Commonwealth Bank of Australia.

Mining heavyweights BHP Billiton and Rio Tinto also gained over 1 percent after copper rose 1 percent on Wednesday on dollar weakness. Energy majors Origin Energy, Santos, Oil Search and Woodside Petroleum gained between half a percent and 1.3 percent after crude oil prices advanced overnight.

Household appliances distributor GUD Holdings jumped 5.8 percent on optimism over its growth outlook.

On the other hand, Godfreys Group slumped nearly 17 percent after the vacuum cleaner retailer reported weak sales for the Christmas period.


European stocks are turned lower over the course of the session on Thursday after moving to the upside earlier in the day.

While the German DAX Index has slumped by 1.1 percent, the U.K.’s FTSE 100 Index is down by 0.4 percent and the French CAC 40 Index is down by 0.3 percent.

German software group Software AG has rallied after appointing Sanjay Brahmawar as its new CEO. Volkswagen has also moved higher after the automaker said it would stop testing its products on animals.

Nokia has jumped as it reported better than expected quarterly profits on the back of a one-off patent payment from China's biggest smartphone maker.

Dassault Systemes has also moved sharply high after the company posted double-digit growth in its new licenses revenue for the full year.

Meanwhile, British mobile operator Vodafone Group has moved to the downside after issuing a disappointing earnings update.

German automaker Daimler has also moved lower after revealing that its 2018 earnings growth would be dampened by spending on new technologies.

Insulin maker Novo Nordisk has fallen after its fourth quarter results fell short of expectations.

In economic news, U.K. house price inflation accelerated to its highest level in 10 months in January, defying expectations for a slowdown, results of a survey by the Nationwide Building Society showed.

The house price index rose 3.2 percent year-on-year after a 2.6 percent increase in December. Economists had expected 2.5 percent gain.

IHS Markit's January final manufacturing PMI for the eurozone came in at 59.6, matching the preliminary reading but below December's 60.6.

U.S. Economic Reports

A report released by the Labor Department unexpectedly showed a modest decrease in U.S. 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 compared to the 3.0 percent jump that had been reported for the previous quarter.

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 compared to the 0.2 percent dip that had been reported for the previous quarter.

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 from the 233,000 originally reported for the previous week.

At 10 am ET, the Institute for Supply Management is scheduled to release its report on manufacturing activity in the month of January.

The ISM’s purchasing managers index is expected to dip to 58.8 in January from 59.3 in December, although a reading above 50 would still indicate growth in the manufacturing sector.

The Commerce Department is also due to release its report on construction spending in the month of December at 10 am ET. Construction spending is expected to rise by 0.4 percent.

Stocks In Focus

Shares of PayPal (PYPL) are moving sharply lower in pre-market trading after the online payment company reported better than expected fourth quarter results but provided disappointing guidance for the current quarter.

Software giant Microsoft (MSFT) is also seeing pre-market weakness despite reporting fiscal second quarter results that beat analyst estimates. Results for the quarter included a $13.8 billion charge related to U.S. tax reform.

Shares of Alibaba (BABA) could also move to the downside after the China-based online retail giant reported fiscal third quarter earnings that missed expectations.

On the other hand, shares of Facebook (FB) are moving notably higher in pre-market trading after the social media giant reported better than expected fourth quarter results.

Chemical giant DowDuPont (DWDP) may also move to the upside after reporting fourth quarter results that beat forecasts and raising its estimate for cost savings from the Dow-DuPont merger.

Shares of eBay (EBAY) are likely to jump after the e-commerce giant reported fourth quarter results that matched analyst estimates and provided upbeat guidance for the current quarter.
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