After cutting interest rates this past Wednesday, for a third time in 2019, the Fed has signaled it will now pause until, or unless, inflation dictates otherwise. Still, there remains an argument, promulgated by high levels of corporate indebtedness, that in order to keep markets booming, the Fed may have no choice but to continue cutting rates.
That may sound bad for the economy longer term, but it's been a boon for stocks. American equities finished higher to end the trading week, extending a rally, after the Nonfarm Payrolls release surprised on Friday, and trade war risk was eased by news that the U.S. and China are moving closer to signing a phase one agreement.
According to Friday's release, the U.S. economy added 128,000 jobs in October, well above the consensus estimate. This was also stronger than the 100,000 jobs needed to support new entrants into the workforce each month. U.S. job creation was able to sidestep any negative impacts from the General Motors (NYSE:GM) worker strike and the loss of temporary U.S. census jobs.
The unemployment rate rose, but only slightly, to 3.6% from 3.5% the previous month, a half-century low, as more workers were lured into the labor market. Average hourly earnings grew by 3% from a year ago, besting consumer price inflation over the same period.
Despite all the good economic news, however, the International Monetary Fund (IMF) has been warning that the U.S. could be running out of ammunition, suggesting that perhaps sooner rather than later its economy will go bust.
SPX Underperfoms; Russell Outperforms
The S&P 500 Index climbed on Friday, +0.97%, to finish higher for a fourth straight week. However, the benchmark underperformed the other major U.S. indices to close out the trading week.
Defensive sectors, Utilities, -0.25%, Real Estate, -0.25% and Consumer Staples, -0.02%, all fell. Energy, +2.28%, jumped on expectations of higher demand, the result of renewed trade optimism, as did tariff sensitive Industrials, +2.18%. For the week, the SPX advanced +1.47%, with the Health Care sector in the lead, +3.05%, and trade-sensitive sectors Technology, +2.11%, and Industrials, +2.06%, also advancing.
From a technical perspective, the price closed above a broadening pattern since January 2018, which tends to develop at market tops and denotes a lack of leadership. If the price blows out the pattern, we would be forced to reverse our standing bearish posture.
The Dow Jones Industrial Average climbed Friday as well, +1.11%, to close 0.04% below its July 15 record. The 30-component index gained 1.44% for week, finishing higher for a third straight week. Technically, the mega cap index developed a broadening pattern as well. Unlike the S&P, it is nearing the underside of its top, thus still remains within it.
The NASDAQ Composite advanced +1.13% on Friday, hitting a new record. It gained 1.76% for the week, marking a fifth week in a row of advances, for a total gain of 5.63%. The NASDAQ mirrored the Dow’s technical picture with a broadening pattern of its own.
However, it was the small cap Russell 2000 that outperformed Friday, jumping +1.9%, to the highest level since May 6. It gained 1.91 percent for the week, for its fourth consecutive weekly climb.
The Dollar Index fell to its lowest point since July 18 on Friday, posting a new low within a downtrend.
Week Ahead
All times listed are DST
Monday
3:55: Germany – Manufacturing PMI: seen to edge higher to 41.9 in October from 41.7 a month previous.
4:30: UK – Construction PMI: expected to rise to 44.0 from 43.4 MoM.
22:30: Australia – RBA Interest Rate Decision: consensus sees the bank leaving rates at 0.75%.
Tuesday
4:30: UK – Services PMI: likely to have climbed to 49.7 during October, from 49.5.
10:00: U.S. – ISM Non-Manufacturing PMI: likely to have moved higher, to 53.4 in October from 52.6.
Wednesday
10:30: U.S. – Crude Oil Inventories: expected to drop to 0.494M from 5.720M.
Thursday
7:00: UK – BoE Interest Rate Decision: projected to remain at 0.75%.
Friday
8:30: Canada – Employment Change (Oct.): probably dropped to 20.0K from 53.7K.