Stocks gapped down at the open after a disappointing jobs report (see below). The Dow is currently off 148 pts and the SPX is down .77%. The Nasdaq has now been down for five straight sessions. The worst-performing groups include energy (-2.4%), transports (-1%), and healthcare (-.8%). In fact, transports have been down 11 consecutive sessions. Asian markets started the downshift last night. After a massive recovery rally this year, the Shanghai Composite Index fell 4% in the overnight session. As I’ve mentioned, all of this is to expected. We need some consolidation after a sharp rally in stocks. Commodities are also in the red today, led by oil. WTI crude collapsed back to $55/barrel today for no good reason. Bonds are mixed in early trading. Junk bonds are down about .3% today. Long-term Treasuries are up slightly. The 10-year Treasury yield has fallen back to the bottom of its six-week trading range at 2.64%.

John Williams, President of the New York Fed Bank, says interest rates are at an appropriate (i.e. “neutral”) level. GDP growth will likely slow to 2% this year as global growth slows, fiscal stimulus is a thing of the past, and financial conditions have become less accommodative. On the other hand, the economy is still in good shape in terms of low unemployment, sustainable growth, and tame inflation. By the way, the Fed’s official 2019 forecast is a more encouraging 2.5% GDP growth. Either way, those growth targets will be heavily weighted to the second half of the year. Economists expect first quarter economic growth to slow to just .5%.

The all-important Employment Situation Report shocked traders into selling first and asking questions later. According to the report, only 20,000 new jobs were created in the US last month. Economists were calling for roughly 160,000 jobs. Strangely, though, January payrolls—initially estimated at 304,000—were upwardly revised to 311,000. We don’t usually see such high month-to-month volatility in payrolls, and some economists are questioning the veracity of the data. CNBC reports that “government data has been inconsistent since the government shutdown…” The unemployment rate fell to 3.8% (19-year low) and the under-employment rate plunged to 7.3% (18-year low). So not surprisingly, wage growth is picking up. Average hourly earnings accelerated 3.4% from year-ago levels. That’s the fastest pace of wage growth in about 10 years. So the bottom line is that the labor market is very tight, suggesting the economy isn’t close to recession. Of course, such strength could encourage the Federal Reserve to resume interest rate hikes later on this year.

US housing starts—new construction projects—accelerated unexpectedly in January. The pace of new home construction really fell off during the last half of 2018, but if this report is to be believed, it is quickly recovering. At the same time, building permits improved more than expected. Housing has been weaker over the last 6-8 months due to falling affordability and stock market volatility. But with a very strong labor market it’s hard to believe we’ll see a big correction in home prices. My sense is that we’re settling down to a slightly lower level of activity, which is healthy. But here again, I’m not sure the data can be trusted. This report is pretty stale owing to the government shutdown.

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