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Strong Jobs Report Helps Stocks, Hurts Bonds

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Employment growth has been solid and that increases the odds that the Federal Reserve will start to tighten in June. That’s the take-away from the Friday jobs report – easily the most influential of monthly economic indicators.

U.S. nonfarm payrolls grew by +257,000 jobs in January. And job creation was far stronger in prior months than previously estimated, with revised estimates of new jobs in November and December upped an additional +147,000. November (at +423,000) marked the strongest month of private-sector hiring since 1997.

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While the unemployment rate actually rose to 5.7%, that simply reflected the fact that the labor force grew as more Americans searched for jobs. That is interpreted as good news and a sign of growing confidence among job seekers.

The S&P 500 ended at 2055, up 3.1% for the week. Stocks are flat year to date. In comparison, the Euro Stoxx 50 Index is up 8.0% YTD in euros but only 1.0% in dollars owing to the depreciation in the euro vis a vis the dollar. That is true for a lot of foreign markets.

APCM’s Brandy Niclai notes that 64% of S&P 500 companies have reported and Q4 earnings are up 4.5% YOY.  Ex-energy earnings are up 7.2% YOY.  These numbers have gradually gotten better over the past few weeks.

Stocks were also bolstered by signs that oil may be bottoming. WTI oil closed at $51.69 up from $48.24 last Friday and is up 15% from its late January lows.

Note that gas prices are now $2.05 in the Lower 48, but gasoline futures prices are suggesting $2.28 in six weeks.

Bonds sold off sharply with 10 year Treasury yields up 30 bp over the week to 1.96%. It’s still down 20 bp from the beginning of the year.

JP Morgan reports that roughly $3.6 billion of government bonds around the world are trading at negative yields or about 16% of supply. The three countries with the greatest amount of negative yields are Germany, France and Japan. The ECB is about to start buying more of these expensive bonds. Is this the Greater Fool theory?

EC economists raised their official forecasts for the Eurozone to 1.3% this year and 1.9% next from previous estimates of 1.1% and 1.7%, respectively. They say falling oil prices and the weaker euro will give the Eurozone economy a boost this year.

European leaders are warning that a standoff between Greece and the European Central Bank must end or credit will no longer flow to Greek banks. The new left wing Syriza government insists on ending privatization and other previous measures agreed upon in exchange for a rescue from the EU, the ECB and the IMF. But debt forgiveness will not be considered, German Chancellor Angela Merkel says. It’s getting ugly.

The Spanish economy grew 1.4% last year compared with 2013, the first annual expansion in seven years.

The OECD said inflation for its 34 members dropped to 1.1%, a five-year low, in December from 1.5% in November.

Brookings reports on a recent academic paper that finds that when unemployment benefits expire, employment grows significantly because individuals then look harder for jobs.  Specifically, the paper suggests that about 61% of U.S employment growth in 2014 can be explained by the December 2013 cut in the duration of unemployment benefits. Is this a surprise? Isn’t it common sense?

The President’s budget is out, calling for $3.99 trillion in spending for 2016 financed partly by increased taxes resulting in revenues rising by 16.7% in two years. Even White House officials say the budget is “aspirational” and has little chance of approval. One wonders what the point is. Ah, politics.

We’re number two! We’re number two! We didn’t do anything mind you; all the credit goes to France, which doubled its surtax on corporate income. That lifted France to a marginal effective tax rate on capital investment of 36%. The U.S. gained by doing nothing, so its tax remained at 35.3%, the second highest in the world.

The Tax Foundation points out that the G-7 nations have on average reduced their corporate tax rates by 4.4 % since 2005, and the G-20 by 3.1 % to 26.2% on average.

At AEDC’s outlook lunch on Thursday Bill Popp described the Anchorage economy as likely to “tread water” next year.  Oil prices and state budget decisions are the wildcards. He noted that “flat” is good in the current environment and expects flat employment growth – private sector +400 jobs and -400 jobs for the government sector. Click here for the economic outlook and the  Live – Work – Play – rankings.

Have a great weekend everyone.

Jeff Pantages, CFA®
Chief Investment Officer

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