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Dow smashes through 25,000

By David Morrison  |  04/01/2018 16:07

Stock index round-up

Global equities continue to surge. US stock indices rose sharply in pre-market trade and the Dow broke above the 25,000 mark on yesterday’s open. This marks the index’s fastest 1,000-point increase in history as it broke above 24,000 little over a month ago. The ongoing upside stock market momentum got a further boost after the release of the ADP Employment Change report. This showed job gains of 250,000 in December – well above the 191,000 expected. This has led to speculation that we’ll see another strong Non-Farm Payroll number later today (see below). The consensus forecast is for a monthly gain of 190,000 – somewhat lower than November’s better-than-expected reading of 228,000.
Yesterday the US majors ended at fresh all-time highs and this helped to lift Asian Pacific indices overnight. The Japanese Nikkei ended at a fresh 26-year high while the Shanghai Composite and Hang Seng indices built on their solid gains from Thursday’s session. European markets have also been infected with the bullish bug and were all trading in positive territory in early trade this morning. They got some additional impetus yesterday from a benign set of Services PMIs from across the Euro zone.

FOMC minutes

The minutes from the Fed’s December monetary policy meeting were released on Wednesday evening. The key takeaway was that the committee expects Trump’s proposed tax reforms to boost business and consumer spending. The minutes showed that the tax proposals (which had yet to be passed by Congress at the time of the Fed meeting) helped persuade the FOMC to raise its 2018 GDP growth forecast to 2.5% from 2.1%. However, some members continued to worry that inflation will remain below the central bank’s 2% target for some time yet. The minutes also showed that some FOMC members would like to tighten monetary policy at a faster rate this year than that indicated by December’s Summary of Economic Projections. The news saw the dollar rally and gold pull back while the probability of March rate hike rose to 73% from 66%. However, these moves were quickly reversed and the dollar was soon back under downside pressure. The greenback is a touch firmer this morning as traders have trimmed their short-side exposure ahead of this afternoon’s Non-Farm Payroll release.

Non-Farm Payroll look-ahead

The consensus expectation is for December Non-Farm Payrolls to rise by 190,000. This would represent a steep drop from the prior month’s reading of 228,000 but that number itself was higher than anticipated. A reading of 190,000 would see the 6-month average hover just below 170,000. This would represent a solid performance given that, at 4.1%, the Unemployment Rate stands at its lowest level in 17 years and effectively marks full employment in the US. Yesterday’s ADP report has gone a long way to suggest that Non-Farms could come in considerably better-than-expected. The ADP data release (which is a measure of private payrolls) rose by 250,000 in December – well above the 191,000 anticipated. While the ADP number is a poor predictor of Non-Farms, it has proved effective in signalling the overall direction of travel. Consequently, some analysts have begun to push up their Non-Farm forecasts with the unofficial “whisper” now approaching 200,000.

If payrolls were to come in around here then we should expect further stock market gains, even as the stronger data raises the likelihood of a faster rate of monetary tightening from the Fed than is currently factored in. Anything below 170,000 would be viewed as disappointing and could be dollar-negative, although it’s unlikely to have much of an adverse effect on equities in the current bullish climate. But as always, the devil is in the detail. Traders will also be looking out for revisions to prior months’ data and reacting accordingly. On top of this, Average Hourly Earnings will also come under close scrutiny. These are expected to rise 0.3% from the previous month but have undershot forecasts for two months running now. This is a particular concern for the Fed as this lack of wage pressure makes it harder for the US central bank to hit its 2% inflation target. It also suggests that consumers will continue to be cautious when it comes to future spending. While that’s a perfectly sensible decision as far as individual households are concerned, it won’t help to boost overall economic activity. 

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