April 5, 2017

Stocks gapped up at the open (Dow +115 pts; SPX +.5%; Nasdaq +.36%). Ten of eleven major market sectors are in the green, led by the cyclicals (tech, industrials, consumer discretion). The VIX Index is back down to 11.2 after having traded up to 13 a couple of weeks ago. By the way, the VIX (which measures fear among traders) for almost five months. The dollar is flat today and commodities are mostly higher. WTI crude oil is trading up to $51.20/barrel. Bonds initially sold off but are now moving higher on the day. The 5- and 10-year Treasury yields are currently at 1.88% and 2.36%, respectively. Remember, lower bond yields in this market environment imply lower economic growth expectations. So ideally, we’ll want to see yields float gradually upward in the coming months.  

Payroll processor ADP says the US economy generated 263,000 new jobs in March. That’s significantly higher than economists anticipated. Gains ran across the board, from construction to manufacturing to business services; and from small to large size businesses. Immediately after the release, stocks began to rise as did bond yields. We’ll get the official Bureau of Labor Statistics payroll figures on Friday. 

ISM’s non-manufacturing index—which measure business activity in the service sector—fell to 55.2 in March vs. 57.6 in the prior month. The drop in the pace of growth was unexpected. The employment component of the index declined, suggesting a temporary pause in hiring. New business orders also fell to 58.9 from 61.2 in the prior month. Of course, we need to keep this in perspective and to that end I’ll point out to things. First, the February reading was the highest in a year-and-a-half. Second, March’s 55 reading is still above its 2016 average, and is perfectly acceptable because it still indicates that businesses are expanding. Recall the on Monday ISM released its manufacturing index, which dipped a bit to 57.2. 

The Federal Reserve Bank of Atlanta’s gross domestic product (GDP) forecast for the first quarter of 2017 is just 1.2%. That’s down from 2.5% at the end of February. And CNBC’s Rapid Update survey calls for 1.3% economic growth. GDP is an equation that includes consumer spending, business & government investment, and international trade. And so far in the first quarter, consumer spending has moderated a bit (especially on autos), businesses have spent less on building inventories, and our trade deficit has risen (i.e. more imports than exports). Investors aren’t, however, all that concerned because first quarter GDP has been very weak in each of the last few years. So it’s almost as if some new seasonality (or aberration) is showing up in the data.

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