Market Update

• Global shares steady ahead of U.S. jobs report, oil jumps. U.S. equities look to stem recent declines after major indexes posted a second day of losses on Wednesday and ahead of tomorrow’s jobs report. Strength in the WTI crude oil patch (prices moved above $45/barrel in early trading) is also helping lift stocks. This comes as European markets move modestly higher in midday trading, though the U.K.’s FTSE 100 is notably lower following a report showing services sector activity fell to multiyear lows in April. Asian indexes finished mixed in a relatively quiet session. Meanwhile, COMEX gold is up after three days of losses, 10-year Treasury yields are little changed, and the dollar continues to strengthen.

Macro View

• Spike in layoff announcements in the energy sector in April and year to date. There were 65,141 announced job cuts in April 2016, up from 48,207 in March and roughly in-line with the announced layoffs a year ago in April 2015 (61,582). Energy layoffs continue to be the big story, accounting for up to one-quarter (~20,000 per month) of all layoffs year to date in 2016. To put that in context, energy jobs only account for 1-2% of overall employment in the U.S. In the past 12 months, there were 646,000 announced layoffs economy-wide, roughly 100,000 higher than the levels seen in 2012-14, which, taken at face value, suggests some weakening in labor market trends. But 110,000 of the 646,000 announced layoffs in the past 12 months came in the energy sector. Although energy prices have stabilized and moved higher in recent months, we continue to expect more layoffs in the energy sector in the coming weeks and months. Outside of energy, the layoff data are consistent with a solid labor market.

• New claims for unemployment rose 14,000 to 274,000 in the week ending April 30; four-week average at 258,000, but early Easter/spring break continues to distort the data. The initial claims data are notoriously difficult to seasonally adjust, especially around moveable holidays like Easter, and that appears to be the case over the past six weeks or so. Looking through the distortions, claims in the mid-250,000s remain near historically low levels and are close to the lows seen last summer and fall, which were the lowest in 42 years (1973). Claims are down 4,000 from their level 26 weeks ago. In the past, claims need to rise more than 75,000 over a six-month (26-week) period to indicate recession, so clearly there is no recession signal from claims. The level of claims continues to point to a solid labor market.

• April Employment Report due out tomorrow. The U.S.Bureau of Labor Statistics (BLS) will release the April Employment Situation Report tomorrow at 8:30 a.m. ET. The consensus is looking for a 200,000 net increase in jobs in April, an unemployment rate of 4.9%, and a 2.4% year-over-year increase in wages. Markets are likely looking for this report to thread the needle: strong enough to show that global growth fears are overdone but not strong enough to elicit a response from the Fed.

• Earnings season update. With about 70% of the S&P 500having reported, Q1 earnings growth is tracking to a 5.4% year-over-year decline (Thomson consensus). This is nearly 2% better than when earnings season began, thanks to a 74% earnings beat rate (better than the four-quarter average of 68%). Excluding energy, growth would be a bit higher (0-1%); excluding currency, we estimate, would lift earnings another 1% or so. Consumer discretionary, industrials, healthcare, and materials have produced sizable earnings upside surprises, while energy and financials have missed by most.

• Guidance not great but not bad. Estimates for S&P 500 earnings growth the rest of the year have fallen about 1.4% since April 1 (better than recent averages of a larger decline), and were helped by the reversal of the U.S. dollar and commodity prices. We have not seen anything this earnings season that reduces our optimism for a second half earnings acceleration on a pickup in economic growth, reversal of the twin drags (oil, dollar), and continued resilient profit margins from companies outside the commodity-producing sectors.

• Earnings in Europe are falling sharply. STOXX 600earnings are expected to drop 18% year over year (Thomson consensus), which is due to more than just energy. Performance in financials and consumer earnings has also been disappointing. Until earnings stabilize in the region, we believe it will be difficult for European stocks to produce a sustained period of outperformance and we remain cautious tactically on developed foreign.

• Supply disruptions lifting crude. Oil prices are back above $45 per barrel this morning despite an above-forecast inventory build reported on Wednesday. The more than 3% rally is being driven by violence in Libya and wildfires in the oil sands region of Canada, which have impacted hundreds of thousands of barrels of daily production. After relatively disruption-free production in recent months, the news in Libya reminds us that production is uncertain (Iran also may struggle reaching its targeted production). Reports that the production freeze talks among global producers have ended may push prices a bit in the other direction. We expect a volatile but modestly upward path for oil prices over the next six to nine months.

Monitoring the Week Ahead

Thursday:

• Bullard (Hawk)

Friday:

• Employment Report (Apr)

Saturday

• Employment Report (Apr)

Click Here for our detailed Weekly Economic Calendar

 

Important Disclosures

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

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