No game changers
U.S. November payrolls were no game changer – and that is exactly what U.S. stocks needed to throw off their late-2017 funk.
The confirmed normalisation of the jobs market following September’s storm disruption, a ‘goldilocks’ Employment Situation Summary that won’t turn the greenback’s slow rebound up a gear, were positives for U.S equities. The headline jump of 228,000 new jobs beat expectations, but increasingly market-sensitive earnings growth threatened to cast a cloud. The Dollar Index lost almost a point before recouping back to just a few ticks off the day’s highs. It was tracking a downward revision to average hourly earnings growth for the month before. Treasury yields also ticked lower.
Anaemic wage growth, like halting inflation, is a key kink in the U.S.’s economic rebound. It can embolden mild FOMC doubters to notch their ‘dot plot’ forecasts lower, consequently shaving the gradient of the Fed’s putative rate path, as well as softening market projections. Indeed interest rate expectations were trimmed in the wake of the November jobs data. The implied probability of a rise according to the CME Group’s FedWatch Tool had already been easing since marking 96.7% in the week to 1st December. It fell further from 94.1% on Thursday, to stand at 90.2% at last check. Even so, it would be difficult to find anyone who fancies the odds of a 25 basis point rate rise not happening next week. With investors over the theoretical threat from higher borrowing costs, hike number three remaining on track is part of the reassuring economic backdrop.
Good timing in Washington
The jobs data join fortuitously-timed news from Capitol Hill plus signs of irrepressible economic growth in China to give U.S. indices a firmer end to a week that threatened to become their first losing one in four. This rebound in sentiment could now segue into a well-established pattern of stock buying in the closing weeks of the year. Broad expectations on Wall St. that the U.S.-led global economic expansion will continue in 2018, albeit more moderately than in the last few years, are likely to draw world shares higher too. In the shorter term, such projections will keep a floor under stock markets when mass angst returns. Such flare-ups are likely to become more frequent. Data suggests stock rallies and positive economic cycles are turning more fractious as they age.
Growth factored back in
We continue to view such outbreaks within the growth/value continuum, using the ratio between iShares’ appropriately named ETFs as a model. In the near term, failure of the spread to break back above its neatest trend line drawn from last December can be expected to coincide with a relapse of technology orientated and other ‘low-yielding’, high-beta shares. The ratio does look on track to reinstate its path above the trend line though, backed by this week’s upswing in sentiment, AKA momentum, as measured by the Relative Strength Index.
Figure 1 – ratio of iShares S&P 500 Growth ETF to iShares S&P 500 Value ETF (daily intervals)
Source: Thomson Reuters and City Index
The watch should then move on to the chief contributor to the growth end of the market, the Nasdaq 100. Only once the market clears the region of two sharp rejections this week (easily spotted on the chart below) will prospects of the index matching and exceeding late November records improve. Indicators are supportive. Moving average convergence divergence (see sub-chart) is recoiling out of negative values, the direction of the underlying trend (blue 200-day moving average)is inarguable and the index is positioned positively in relation to a finer shorter-term measure of trend, its 21-day exponential moving average (red dotted line).
Source: Thomson Reuters and City Index
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