TradeTheNews.com Weekly Market Update: Robust Labor Report Fuels Fed Liftoff Expectations
Fri, 06 Nov 2015 16:08 PM EST
US equities eked out their sixth week of gains as the October jobs report
outperformed and earnings season entered the home stretch. After the anemic Q3
GDP report and September's weak job growth, there were real concerns the Fed
would not be able to deliver an initial rate hike this year. The October jobs
report dispelled the notion. In Europe, there were real concerns about the very
weak September German industrial production report, while in China PMI numbers
remained pretty poor. By Friday the US Dollar Index reached a new 7-month high,
and the benchmark 10-year yield backed up 18 basis points to surpass 2.3% for
the first time since July. For the week, the DJIA gained 1.4%, the S&P500
gained 1% and the Nasdaq advanced 1.8%.
A month ago, the September US jobs report was a big bust, with the low headline
nonfarm number and significant revision lower to the August payrolls figure
raising real questions about the state of the US economy, not to mention the
viability of Fed pledges for a 2015 rate liftoff. Friday's October jobs report
reversed sentiment about the US jobs market. The nonfarm figure absolutely
crushed expectations (+271K v 185Ke) and pulled the three-month nonfarm average
to +187K, which is just modestly below the +206K average for the year to date.
The annualized unemployment rate fell to 5.0% (the lowest level since May 2008)
from 5.1% in September, while underemployment dropped below 10% for the first
time since 2008. Meanwhile, the civilian labor force participation rate remains
stuck at 62.4%.
The case for a December Fed rate hike looks pretty strong after the October
jobs report. Fed fund futures had been gradually creeping up heading into the
data, and in the aftermath of the NFP report the contract showed traders
believe there is a 70% chance of a 25 basis point hike at the December FOMC
meeting. In speeches this week, Chair Yellen said December was a live meeting
and Vice Chair Fischer more or less dismissed the argument that inflation was
too low to begin raising rates. Moderate FOMC voter Lockhart made the case for
rate hikes, while hawk Bullard started talking about the debate that would
surround the second round of rate hikes. Even the dove Evans all but made the
case for a hike in a CNBC interview after the jobs data, saying conditions
"could be ripe" for a rate increase and that he goes into each
meeting with an open mind.
Bank of England rate hike expectations are headed in the opposite direction. UK
treasury yields tumbled after the BoE signaled in its quarterly inflation
report that it would delay raising interest rates due to a more cautious
outlook on inflation and growth. Analysts suggested that the details of the
inflation report mean the BoE had delayed rate hikes by as much as 10 to 12
months, to late 2016. The minutes for the previous BoE policy meeting came out
at the same time, and confirmed that McCafferty was the only MPC member to vote
for a rise in interest rates. The 10-year benchmark gilt yield lost as much as
five bps to trade 1.967% on Thursday, however the yield was back up as high as
2.049% on Friday after the jobs report.
PMI data out of China last weekend showed little improvement, with two key
measures seeing their eighth month of contraction. The official October
manufacturing PMI missed expectations for breakeven, remaining on par with last
month at 49.8, while the official Services PMI hit a three-year low of 53.1.
The SME-oriented Caixin final September manufacturing PMI remained in
contraction as well, although it continues to creep a bit closer to growth.
China Premier Li again stepped away from the 7% GDP target, mentioning at least
twice that the potential for 6.5% annual GDP growth through 2020 would help
China accomplish its economic agenda.
After dropping to around $42 last week, front-month WTI crude futures marched
higher to retake the $48 handle on Tuesday and Wednesday. The strength couldn't
last after both the API and DoE crude inventories turned in another week of
sizable builds. Then an unnamed OPEC official was said to have commented there would
be no deal to cut the cartel's production at the meeting in December, assuming
non-OPEC countries do not move to cut their own production. Finally, on Friday
President Obama said the government would reject the Keystone XL pipeline,
citing a preference for clean energy efforts and projecting the pipeline would
not have generated much economic growth. WTI closed out the week around $44.30
and Brent ended up back around $47.
Valeant's shares fell below the lows seen in October when details of the Philidor
pricing scandal were leaked out. VRX plummeted 16% on Thursday and dipped below
$80 a share for the first time in more than two years after the WSJ chronicled
investor Bill Ackman's response to the fallout over the last few weeks. The WSJ
piece suggested Ackman wavered in his support of Valeant CEO Pearson, though he
later issued a statement in support of Pearson, as did the Valeant board. The
biotech wreckage spread to other names as they released new data this week.
Bluebird Bio shares tanked after analysts were unimpressed with new abstracts
for its experimental sickle cell disease treatment, and Incyte shares were
tripped up on Friday upon release of some early stage cancer data that might
indicate limited uses for a new cancer drug under development.
Tech darlings Facebook and Tesla surged after their third-quarter earnings
reports, and Facebook shares moved to a new all-time high above $110/share.
Facebook's top- and bottom-line results exceeded targets, while both monthly
and daily active users rose by double digits. A horde of analysts upgraded
price targets on the name and made very positive comments. Shares of Tesla
sustained double digit percentage gains after earnings, even though top- and
bottom-line results merely met expectations. Investors were heartened by
projected Q4 deliveries at a better than expected at 17-19K, although the
company slightly narrowed its FY deliveries guidance to 50-52K. On its call,
the firm said it aspired to be cash flow positive by the first quarter of 2016.
Regarding the new Model X, Tesla said it would achieve steady state production
capacity during the first quarter of 2016.
Media names were under pressure after reporting third-quarter results. Time
Warner saw strong earnings, while 21st Century Fox missed revenue targets. CBS
did quite well, and Disney saw revenue growth across its main business lines.
However, it was Time Warner that upset the space, offering a surprise initial
FY16 earnings forecast on the company's conference call that was well below
expectations. Multiple analysts cut their outlooks on Time Warner, and shares
of the name lost around 9% on the week.
The two successor companies of Hewlett-Packard began trading on Monday morning.
Shares of HP, Inc. are trading under the old HPQ ticker, while Hewlett Packard
Enterprise is trading under ticker HPE on the NYSE. HP, Inc. will focus on
personal computers and printers, while Hewlett Packard Enterprise will sell
commercial computers systems, software and tech services.
In M&A news, Visa reached a deal to acquire former subsidiary Visa Europe
for €16.5 billion ($18.2 billion) in cash and stock, with the potential for an
additional payment of up to €4.7 billion. Shire said it would buy Dyax for
about $5.9 billion, or $37.30/share, representing a 35.5% premium to Dyax's
closing stock price on Friday. Dyax shareholders may also get an additional
contingent value right worth $4.00/share if Dyax's DX-2930 drug is approved.
AstraZenica snapped up ZS Pharma for $90/share in cash, for a total deal valued
around $2.7 billion. Youku Tudou, the so-called YouTube of China, agreed to be
acquired by Alibaba for $27.60/ADS in an all cash deal valuing the firm around
$4.4 billion. Alibaba already owned one-fifth of the firm.