March 9, 2018

The major stock market averages gapped up at the open (Dow +267 pts; SPX +1%) after an encouraging jobs report. The cyclicals are alive and well today—materials, energy, industrials, tech and financials are all up over 1%. Utilities and telecom sectors are in the red. The VIX Index is back down around 15.5. Commodities are broadly higher, except gold. WTI crude oil is back up over $61/barrel. Bonds are trading mostly lower. The yields on the 5- and 10-year Treasury bonds are back up to 2.67% and 2.91%. 

It’s a bit odd that Treasury yields surged today even as the jobs report showed wage inflation in the US is not screaming higher. The Bureau of Labor Statistics’ monthly Employment Situation Report was pretty positive. The economy generated 313,000 new jobs in February compared with economists’ consensus forecast of just 205,000. In addition, January payrolls were revised upward. The unemployment rate held steady at 4.1% and the under-employment rate held at 8.2%. The labor force participation rate actually improved to 63%. That’s the highest rate we’ve seen in four years. And finally, the average workweek improved to 34.5 hours. Labor trends remain extremely positive. 

The critical number in the jobs report is wage inflation. Remember, the higher than expected 2.9% growth in wages in January helped spark the stock market correction. Well, that number was just revised down to 2.8%, and February’s wage growth came in at just 2.6%. So fears of exploding inflation were premature; the Fed certainly will not be alarmed.  

President Trump yesterday announced details on his import tariffs proclamation. Tariffs are scheduled to take effect for imported steel and aluminum in 15 days. The president will have “flexibility” in terms of implementation, which we take to mean that the process will be more deliberate rather than rash. Mexico and Canada are exempted from tariffs. Other countries can apply for similar exemptions. So this is clearly an invitation to negotiate, and it allays investor fears that 1) tariffs would take effect immediately, and 2) they would hit our allies just as hard as they would hit China.  

Don’t miss the fact that we just got good news on three important issues: tariffs, inflation & jobs, and North Korea tensions. 

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