3/9/18 – Strong Jobs & Weakened Tariffs Push Market Higher

Stocks rode a strong jobs report and a partial rollback of the steel and aluminum tariffs to a great week. The Dow gained 3.3% while the S&P 500 increased 3.5%. While these strong weeks are nice, the volatility continues. This was the 4th week out of the last five that saw the Dow increase/decrease by more than 3%. For comparison, prior to this stretch the Dow went 59 straight weeks without a move greater than 3%. The Dow remains almost 5% below its all-time high while the S&P 500 is 3% below its all-time high.

The February jobs report showed the US economy added 313k net new jobs last month, significantly above the consensus expectation of 200k new jobs. Skilled labor positions, including construction and manufacturing, saw its best three-month period since 1984. The labor force participation rate increased to 63% while the unemployment rate declined to 4.0%. Wage growth was relatively modest at a 2.6% annualized rate. Interestingly, this was taken as a positive by many investors as a sign that inflation pressures remain contained. One of the issues that sparked the sell-off in late January was concerns about rising inflation and interest rates. This report, while only one data point, provided comfort that we aren’t looking at raising inflation for the moment. Along those lines, we also saw a large increase in the labor force from people returning to work who were no longer counted as unemployed. I’ve talked about the shadow labor supply in the past and it is this supply that has held wages in check even as the economy continues to add jobs. Read More

Tariffs on steel and aluminum sparked fears of a trade war last week. Like most market participants, I was hopeful that the blanket tariffs discussed wouldn’t actually come to pass. One of things we’ve seen with Trump is him making large, absolute statements to generate headlines, then dialing back into a more modest approach when final announcements are made. Importantly in this tariff debate, Canada and Mexico have been excluded from the tariffs. Canada and Mexico are the 1st and 3rd largest exporters of steel to the US. Coupled with US production this means the amount of steel actually subject to the tariff is a small portion of the total US consumption of steel. Treasury Secretary Steven Mnuchin has hinted that even more countries might be excepted in the future as well. That’s a big plus in my opinion. Read More

Oil increased 1.2% this week to close at $62.09/barrel. The yield on the 10-yr Treasury moved higher to 2.90%. The average rate on a 30-yr fixed rate mortgage moved higher again to 4.46% from 4.43% a week ago. Mortgage rates have now increased every week in 2018.

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