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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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The Week In Review

9/2/16

 The stock market ended the week on a modestly higher note as an inconclusive reading of the Employment Situation Report for August left fed funds rate hike expectations up in the air. The S&P 500 (+0.4%) finished in-line with the Nasdaq Composite (+0.4%) and the Dow Jones Industrial Average (+0.4%). The three indices ended the week higher between 0.5% and 0.6%.

Today's session began on a higher note as weaker-than-expected headline figures from the August employment report spurred buying interest in the broader market. The report indicated that 151,000 nonfarm payrolls were added in August (Briefing.com consensus 180,000) while the July number was revised to 275,000 (from 255,000). Separately, average hourly earnings came in cooler-than-expected, rising 0.1% (Briefing.com consensus 0.2%). The implied probability of an interest rate hike at the September Fed meeting fell to 18.0% shortly after the release of the report.

Participants walked back the knee-jerk reaction throughout the session, eyeing the longer-term trend in labor market data. The monthly nonfarm reading missed consensus estimates, but job growth has still averaged 232,000 over the past three months. Separately, remarks from the likes of Bill Gross and Richmond Fed President (a non-FOMC voter) Jeffrey Lacker worked to keep the possibility of a rate hike in play. The implied probability for a rate hike at the September meeting rebounded to 21.0% by the end of the session, slipping from the prior session estimate of 24.0%.

The S&P 500 (+0.4%) settled off its best level of the day, testing technical support near the 2173/2176 price level. All ten sectors ended in the green with materials (+0.8%), energy (+0.8%), and utilities (+1.2%) leading the pack. Conversely, countercyclical health care (+0.1%) and telecom services (+0.1%) finished with the slimmest gains. Other focal points impacting today's trade included a rebound in crude oil and sector leadership from heavily-weighted financials (+0.5%).

The economically-sensitive financial sector (+0.5%) ended ahead of the benchmark index, extending this week's gain to 2.0%. Money center banks rebounded in the space as investors responded to a steepening yield curve and a reversal in rate hike expectations. JPMorgan Chase (JPM 67.49, +0.28) and Citigroup (C 47.51, +0.15) finished higher by 0.4% apiece.

The Dow Jones Transportation Average (+0.4%) ended in-line with the broader market as shipping names and airlines outperformed. The U.S. Global Jets ETF (JETS 22.75, +0.27) ended higher by 1.4% as investors mulled August operational results from Delta Air Lines (DAL 37.17, +0.35) and Alaska Air (ALK 68.21, +0.95). The broader transportation index ended the week higher by 1.6%.

In the consumer discretionary sector (+0.2%), lululemon athletica (LULU 68.57, -8.09) weighed on the retail sub-group, sinking 10.6%. The name reported in-line quarterly results, but issued full-year guidance that was a bit light relative to expectations. Separately, Gap (GPS 23.92, -0.63) ended lower by 2.6% after reporting that same-store sales fell 3.0% in August. This compares to last August's decline of 2.0%.

The heavily-weighted health care sector (+0.1%) finished near its flat line as biotechnology underperformed. The iShares Nasdaq Biotechnology ETF (IBB 280.61,- 0.83) was under pressure after Democratic Presidential nominee Hillary Clinton unveiled plans to combat "unjustified price hikes" in the pharmaceutical industry. The plan includes making alternative medications available and fining drug makers for excessive price increases for long-standing treatments.

Treasuries ended on a lower note with the long end of the curve demonstrating relative weakness. The yield on the 2-yr note ended higher by one basis point (0.79%) while the yield on the 10-yr note settled higher by three basis points (1.60%).

Today's participation was below the recent average as fewer than 782 million shares changed hands on the NYSE floor.

Today's economic data included the Employment Situation Report for August, the Trade Balance for July, and Factory Orders for July:

The August employment report showed a deceleration in the labor market from recent months.

Nonfarm payrolls increased by 151,000 (Briefing.com consensus 180,000). Over the past three months, job gains have averaged 232,000 per month.

July nonfarm payrolls revised to 275,000 from 255,000

Private sector payrolls increased by 126,000 (Briefing.com consensus 175,000)

July private sector payrolls revised to 225,000 from 217,000

Unemployment rate was 4.9% (Briefing.com consensus 4.8%) versus 4.9% in July

Persons unemployed for 27 weeks or more accounted for 26.1% of the unemployed versus 26.6% in July

August average hourly earnings were up 0.1% (Briefing.com consensus 0.2%) after being up 0.3% in July

Over the last 12 months, average hourly earnings have risen 2.4% versus 2.6% for the 12-month period ending in July

The average workweek was 34.3 hours (Briefing.com consensus 34.5) versus 34.4 hours in July

The labor force participation rate was 62.8% versus 62.8% in July

The July Trade Balance Report showed a narrowing in the trade deficit to $39.5 billion (Briefing.com consensus -$43.0 billion) from a downwardly revised $44.7 billion deficit (from -$44.5 billion) for June.

Net exports will provide a positive contribution to third quarter GDP as the real trade deficit of $58.3 billion for July was 4.3% less than the second quarter average.

New orders for manufactured goods increased 1.9% in July (Briefing.com consensus +2.0%) following a downwardly revised 1.8% decline (from -1.5%) for June. Excluding transportation, orders were up 0.2% after a 0.4% increase for June.

Transportation equipment orders (and particularly nondefense aircraft and parts orders ) drove much of the strength in July factory orders.

For further details on these economic releases, be sure to visit Briefing.com's Economic Calendar page.

Bond and equity markets will be closed on Monday in observance of Labor Day. Tuesday's economic data will be limited to ISM Services for August (Briefing.com consensus 54.7), which will cross the wires at 10:00 ET.

 

Russell 2000: +10.0% YTD

S&P 500: +6.7% YTD

Dow Jones: +6.1% YTD

Nasdaq Composite: +4.8% YTD

Week in Review: Stocks Climb Ahead of Labor Day

 

The stock market saw another week of limited movement, but managed to erase the bulk of last week's loss nonetheless. The S&P 500 added 0.5% thanks to a Friday rally, which took root after the release of a disappointing Employment Situation report for August.

According to the report, only 151,000 nonfarm payrolls were added, which was short of the Briefing.com consensus estimate of 180,000. Furthermore, average hourly earnings edged up just 0.1% (Briefing.com consensus 0.2%), leaving the year-over-year growth rate at 2.4%, which was down from 2.6% in July. The dollar dipped after the release, but rebounded as the day wore on.

As for the fed funds futures market, the initial reaction to the report saw a dip in near-term rate hike expectations, but only a portion of that move held. The implied likelihood of a hike in September ticked down to 21.0% from 24.0% while the probability of a December hike improved to 54.2% from 53.6% on Thursday.

In sum, the Employment Situation report was not weak enough to convince investors that a September rate hike is out of the question. The Treasury market agreed with that assessment, leading to some steepening in the yield curve on Friday as the long end underperformed.

With Labor Day around the corner, the upcoming weeks are expected to feature increased volume as market participants return from vacations.