Non Farm Payrolls Strong Enough to Keep Stocks Supported
Global stock markets had a strong close to the week, with the Dow Jones overcoming the closely-watched 14,000 level for the first time in more than 5 years. Optimism in these markets is being driving by the consistent strength in corporate earnings but macro data has been stable as well, and this is giving investors a reason to push stock values to new highs for the year. The S&P 500 closed positively for the 5th consecutive week, and with trading volumes more than 10% their three month averages, the validity of these rallies is gaining support.
The big event for the week was clearly the US Non Farm Payrolls report, and the market reaction to these numbers took some spread betters by surprise. This week’s release showed that the US economy added 157,000 jobs for the month, which is lower than what was seen the previous month and below the market expectation of 165,000. This result was something of a surprise, given that Wednesday’s ADP employment figures (which measure private jobs additions) were very strong and showed a rise of 192,000 jobs for the month.
ADP Numbers Fail to Generate Accurate NFP Forecast
The ADP data and the Non Farm Payrolls tend to have a high positive correlation (both tend to rise or fall in unison), so the weaker Non Farm Payrolls number was more of a surprise for spread betters. In addition to this, the US Unemployment actually rose to 7.9% (where 7.8% was expected), and the knee jerk market reaction was to sell immediately after the numbers. This move quickly reversed, however, as the overall NFP figure was still strong enough to keep up with population increases, indicating that Federal Reserve stimulus measures are creating progress.
In addition to this, the Payrolls data for the previous month was revised higher to show an addition of 192,000 jobs (where 168,000 was the number released last month). This was enough to keep investors focused on the positives but next week this will depend on continued corporate earnings strength, as the macro economic calendar is lighter. Key reports to watch next week will come from Disney, Time Warner, News Corp., and Linkedin. It should also be remembered that spread betting markets are vulnerable to downside corrections given the strength of the moves that we have seen in recent weeks. This potential downside move could be the case even if we see positive earnings from next week’s reports, as investors are likely to try to lock in some gains at these elevated levels.
The S&P 500 has now made a clear break and close above the 1500 level, confirming that the bullish uptrend will not be diverted by psychological levels. Longer term, this suggests a retest of the 2007 highs near 1580 but with shorter term indicators heavily overbought, the prudent move is to wait for a test of support in the 1470 region before taking spread betting positions long again. A downside break of 1470 could propel prices another 30 points lower.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.