February 1, 2017

The major market averages gapped up at the open but quickly turned around. The Dow is up 22 pts and the SPX is flat. Banks and semiconductors are leading the way, each up nearly 1%. Utilities, on the other hand, are giving back yesterday’s gains. The VIX Index is collapsing back down under 12 and that’s giving the market room to rise. Remember, the moment the VIX begins to rise toward 14-16 short-term traders will be selling. The dollar is up today (maybe due to better than expected economic data) and yet commodities are higher as well. WTI crude oil is trading up over $53/barrel. Bonds are selling off, reversing yesterday’s gains. The 5-year and 10-year Treasury yields are back up to 1.97% and 2.50%. In some respects, capital markets have been without trend over the last month. A Trump Rally built on hope must now give way to other more concrete factors like earnings season and economic data. 

Apple (AAPL) reported better than expected quarterly results. Revenue grew 3% y/y, returning to positive growth for the first time since the fourth quarter of 2015. The company sold 78 million iPhones vs. 77 million expected. Also, the iPhone average selling price climbed to $695, the highest ever. Mac computers fared well with higher than expected sales volumes and Mac revenue rose 7%. Services revenue rose to $7.2bil vs. $6.9bil expected, and investors will certainly cheer that. There was some bad news. iPad volumes fell short of expectations. And revenue from greater China fell 12%. Finally, management reduced current quarter revenue guidance below current Wall Street expectations. But management’s forward guidance is usually conservative. The stock is up 5% this morning.

ISM’s Manufacturing Index—which measures business activity—climbed to 56.0 in January vs. 54.5 in December. That’s not only better than expected but it’s the highest reading since the end of 2014. Manufacturing activity in the US has been accelerating for five straight months. The index’s forward-looking new orders component edged up to 60.4 and that is a very strong reading. Prices paid, which measures wholesale inflation, also spiked. And manufacturing firms also indicated they are hiring.  

Payroll processor ADP estimates the US economy added 246,000 private sector jobs in January, and that’s far higher than economists were anticipating. This report also corroborates the ISM report of more hiring in the manufacturing sector. Job growth in recent months has been in a range of 150,000 to 170,000, so either this is an outlier or the job market just picked up. Mark Zandi of Moody’s Analytics says the labor market is very tight, but this 246,000 is probably artificially high due to seasonality and weather factors. 

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