The Labor Department released its monthly jobs numbers today, which showed the U.S. gained 255,000 jobs last month, exceeding all economist forecasts. June’s already strong job growth number was revised up to 292,000 (from 287,000). Wages also climbed 0.3%, showing the U.S. labor market is strong and may sustain consumer spending into the second half of the year. The jobless rate held steady at 4.9% as roughly the same number of people entered the labor market as found jobs.
As we have seen for some time now, the conversation following jobs data switched very quickly from the strength of the U.S. economy to the Fed’s next rate hike. The rate of hiring we have seen over the last two months is more than enough to reduce the jobless rate over time and should also reduce labor-market slack. These are a goal of Federal Reserve officials who’ve kept interest rates low to spur growth. When the Fed left rates unchanged at its meeting last week, this month’s strong job creation leaves the possibility that rates could rise after the next meeting in September, though that is still considered an outside chance at this point.
Eurozone Economy Still Growing Despite Brexit:
The U.K.’s decision to leave the European Union (EU) hasn’t translated to slowed economic growth in the Eurozone, according to a survey of purchasing managers. In fact, the Purchasing Manager’s Index (PMI) rose to 53.2 in July, up from 53.1 in June. As a reminder, PMI is a measure of private sector activity and a reading above 50 indicates expansion while a reading below 50 indicates a decline in activity. Also in the survey was that hiring has been strong and is expected to continue to be so. Businesses tend to dial back on hiring when they foresee trouble ahead, but the rate of hiring seen in the last few months is the highest is has been in over five years.
The U.K., however, posted a sharp decline in activity, which led The Bank of England (BOE) to announce that they cut their main lending rate for the first time since 2009 to a record low of 0.25%. The BOE also reinstated their bond buying program. The central bank stated that they will do whatever it takes to stabilize the economy after Britain’s vote to leave the European Union. The bank expects the economy to stagnate over the next year as the outlook has weakened since the vote, and some business surveys suggest that they believe that Britain could be facing a recession. Growth expectations for 2017 were downgraded from 2.3%to 0.8%, and the outlook for 2018 was reduced to 1.8%.
The goal is that the actions taken by the central bank will boost confidence and reduce uncertainty while the Brexit process unfolds. The timeframe for this is expected to be two years, and the overall impact on both Britain and the EU is still widely unknown.
Consumer Spending Rises:
Consumer spending continues to be the main driver of the U.S. economy as nearly 70% of GDP comes from consumers, and that level of spending rose sharply in the second quarter. Purchases climbed more than expected in June, and exceeded a gain in income levels, suggesting households dipped into savings for purchases for durable goods and services such as tourism, healthcare, and personal care. The trend suggests that momentum is going to continue into the second half of the year fueled by a strengthening labor market.
Investors continue to put their record levels of cash into equities despite the short term media noise and concerns over the upcoming election. July was one of the best months ever for ETF inflows as over $50 billion went into the low cost investment vehicles. U.S. equities saw the largest inflows for the month, while Eurozone based ETFs experienced a net outflow for the month due to Brexit uncertainty. Investors also added to fixed income positions, as expectations for another rate hike this year dissipated. The next leg of the rally can be fueled by additional investors moving out of cash into equities and other investments in search of yield.
We believe as confidence strengthens that we will continue to see improvement in the overall sentiment of the economy.
Earnings Season Update:
As the earnings season winds down, we are getting a pretty clear picture that earnings are coming out better than expected. As of this morning 86% of companies in the S&P 500 have reported their most recent earnings for the quarter. Of those companies, 69% reported earnings above the mean estimate while 54% have exceeded revenue estimates. The five-year-average for EPS beats is 67%, while the average for revenue beats is 55%.
Currently, this quarter has seen a year-over-year earnings decline of -3.5%. This is much better than original expected (-5.5%). Currently, energy and materials are the two main sectors responsible for the earnings decline. In fact, if the energy sector would be excluded from this reading, the S&P 500 would currently be sitting at 0.3% year-over-year growth, but the 82% decline in energy sector earnings certainly brings that overall reading down. Besides energy and materials, four other sectors are also posting earnings declines, albeit much smaller than energy. Four sectors posted gains, with consumer discretionary as the leader with a 10.7% gain. Analysts are predicting revenue growth to return this quarter and for EPS growth to return in the fourth quarter of this year. Currently, we are sitting at a -0.3% decline in earnings for the full calendar year of 2016. However, as most companies tend to under-promise and over-deliver, we would expect that we will actually see growth for 2016.
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