Perspective: Morning Commentary, 02/05/2016

Friday, February 05, 2016

February 5 – The Department of Labor reports that the economy created just 151,000 jobs in January. December’s job gains were slashed by 30,000 to 262,000, while November’s were boosted by 28,000 to 280,000. Gains in January were led by retail trade, food services and drinking places, health care and manufacturing. The unemployment rate slipped to 4.9% in January, down from 5.0% previously. The average work week rose slightly to 34.6 hours per week, up from 34.5 hours previously.

The labor participation rate remained near its lowest level in nearly four decades at 62.7%. That means fewer workers paying the bill to carry the load. A bright spot in this report that was being closely watched by Wall Street was wages, which climbed 0.5% in January, beating expectations of 0.3% and improved from stagnant wages the previous month. Wages are up 2.5% year-on-year.

The jobs report follows bearish data released Thursday showing declining factory orders and productivity. Factory orders sank 2.9% in December, after falling a downwardly-adjusted 0.7% the previous month. Orders for durable goods fell 5.0% during the month, while the first estimate for non-durable goods orders fell 0.8% indicating a decline in demand for petroleum and coal. The report showed a sharp decline in orders for mining and oilfield equipment, as well as computers and communications equipment.

Productivity also took a hit, with data showing that it dropped 3.0% in the fourth quarter. Worker hours rose by 3.3%, but overall output remained flat during the quarter, resulting in the lower productivity rating. Year-on-year data is a bit more encouraging, showing a gain of 0.3% in productivity. One way to interpret the data is that our nation is moving toward full employment, but without the investment in technology, etc. to increase productivity that would be indicative of a healthy economy.

Wall Street will now be watching for where the dollar closes the week. Coming into this morning’s report it was down roughly 2.4% on the week, putting it on pace for the largest weekly losses since 2009. Future direction of the dollar hinges on many things, including factors overseas that impact competing currencies. Yet, one of the key components to the dollar’s value is expected to be expectations regarding future Fed action. Most voting members of the Federal Open Market Committee, the group that sets monetary policy, serve on a rotation basis. This year’s voting members include a couple more hawkish individuals who appear to be pushing for “normalizing rates,” while the markets have largely been betting that the data will prevent them from doing so.

China’s Shanghai Composite Index closed 0.6% lower overnight, with weekly gains near 1%. China will essentially be shut down from a market’s standpoint next week for its week-long Lunar New Year holiday. An estimated 332 million people will be traveling during the holiday period, boosting spending in China’s sluggish economy. Meanwhile, China’s central bank pumped 330 billion yuan ($50 billion) into the economy leading up to the holiday, bringing year-to-day injections to 1.6 trillion yuan, or more than four times the previous year’s pace.

Money flow turned negative for the broader commodity sector following this morning’s monthly jobs report as the dollar rallied, although we’ll need to see how we close the day. The markets are still somewhat conflicted on how to interpret this morning’s data, which contained both encouraging and disappointing factors. The bottom line is that Wall Street still lacks confidence in the U.S. economy and it is doing better than are our major competing economies overseas, with Europe likely to expand stimulus in March. As such, the commodities continue to face modest headwinds on rallies, although bottom-picking efforts will likely continue at these low levels. No weather threat of note exists to help the Ags stand out from the crowd at this point.

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