Italy Fin Min Padoan: banks should be permitted to sell their bad loans off at a reasonable pace; selling them too fast could erode banks' financial stability
Smartphone repairing startup Save gets picked up by Remade Group
The last time I wrote about Save, the French startup had just raised $16.7 million to prove that you could scale smartphone repair services. It’s been a roller coaster ride since then as the company had to claim insolvency. After this process, Remade Group is picking up Save’s business and employees.
While the startup managed to grow quite rapidly, it was hard to keep up with the pace. There were some logistics issues and some international expansion moves that didn’t work.
I’ve heard some crazy board meeting stories about Save. Nobody could agree on what to do. Some wanted to fire the management team, others wanted to fire board members, while the startup wanted to raise more money from a German investor. Eventually, everything fell through and Save ended up filing for insolvency.
It’s quite expensive to pay for 500 employees working across 137 shops (most of them in French malls). Save had to fire part of the team, focus on the most profitable areas of the company and optimize everything.
Third-party companies could then bid to… save Save. Usually, the court looks at all the offers and chooses the best one for employees and the future of the company.
Remade Group is a French company that sells refurbished smartphones. According to Save CEO Damien Morin, Remade Group is paying back the debts and the brand Save will still operate. You’ll still be able to find Save shops in your favorite malls. And Save employees will still have a job.
Save grew too quickly and couldn’t keep up with its insane growth rate. Maybe the startup could have grown a bit more slowly. But when you raise $16.7 million, the stakes suddenly becomes much bigger as everybody expects a big exit from you.
It’s easy to look back and retrospectively find out what went wrong. So I’m not going to blame Save for their ambitious goals.
Tidal Owner Jay Z Has Removed All of His Albums From Apple Music
Shawn Carter, known professionally as rapper Jay Z, appears to have removed his entire solo album collection from Apple Music overnight. Now, when searching for "Jay Z" on Apple Music, only songs in which he collaborated with other artists are available to stream on the service in the United States and elsewhere.
Jay Z has removed select albums from Apple Music in the past, but this is the first time he has pulled his entire catalog of albums from the service, including Reasonable Doubt, The Blueprint, and The Black Album. Only some of his collaborations with Kanye West, Linkin Park, R. Kelly, and Rihanna remain.
Jay Z co-owns Tidal, a rival streaming music service, so his decision to remove his discography from Apple Music could be for competitive reasons. Kanye West, another stakeholder in Tidal, also implied that there might be some animosity between Apple and Jay Z in a series of tweets last year.
Jay Z's albums appear to have been removed from Spotify recently as well, so his decision might be unrelated to any potential feud with Apple. Spotify on Twitter today said it can "confirm that some of Jay Z's catalogue has been removed at the request of the artist," but it did not provide a specific reason.
Jay Z's albums are still available for purchase on iTunes, and to stream on smaller services such as Google Play Music, at least for the time being. By contrast, Jay Z's wife Beyoncé still offers a large number of her songs and albums on Apple Music, including her recently added single "Die With You."
Tidal's other stakeholders, including Kanye West, Rihanna, Nicki Minaj, Daft Punk, Jack White, Madonna, Arcade Fire, Alicia Keys, Usher, and Calvin Harris, also continue to offer many of their songs and albums on Apple Music.
Tidal costs $9.99 per month, the same price as Apple Music, while a premium tier with high-fidelity sound is available for $19.99 per month. Tidal said it had over 3 million subscribers in March 2016, but recent reports have claimed it may have been falsely inflating the number of paying customers it had.
Apple Music had over 20 million subscribers as of last December, while Spotify recently announced it surpassed 50 million paying customers.
Sprint acquired a 33 percent stake in Tidal in January, and at the time it said it would give its customers "unlimited access to exclusive artist content not available anywhere else." Under the deal, artists partnering with Tidal will create music that will only be available to the carrier's customers.
It's unclear at this point if Sprint's stake in Tidal has anything to do with Jay Z's music being removed from Apple Music or Spotify.
Apple and Jay Z's music label Roc Nation did not immediately respond to requests for comment. Universal Music Group deferred comment to Roc Nation.
Uber faces another setback after ban in Italy
Group’s on-demand limo services face halt after judge’s ruling in competition case
Uber has been banned in Italy by a judge after local taxi groups brought a lawsuit against the embattled car-booking service.
Italy is the latest large European market to attempt to force Uber out, after it lost legal fights in Germany and Denmark. The ruling comes as the European Court of Justice considers whether Uber and other so-called sharing economy companies should be regulated as a transport company or a digital service.
The case in Italy was filed in December by taxi associations which claimed Uber’s service constituted unfair competition to their operations.
Uber, which is fighting regulators around the world as well as struggling with several crises at home in San Francisco, has 10 days to comply with the ruling.
“We are shocked by the Italian court’s decision and will appeal,” Uber said. “Thousands of professional, licensed drivers use the Uber app to make money and provide reliable transportation at the push of a button for Italians.”
The ban applies to Uber’s on-demand limo services such as Black but not its Eats food delivery, which operates in several Italian cities.*
The competition complaint arose because Uber’s drivers do not have to return to a central garage or hub after each fare, unlike traditional regulated car services. The same issue has disrupted Uber’s services in Germany over the past year.
Earlier this year Uber’s global challenges extended to Taiwan, where it has faced a crackdown over its refusal to register as a traditional taxi service, with the accompanying safety and insurance standards. Uber pulled out of Taiwan in February after fines mounted up against its drivers, totalling millions of dollars.
“Unfortunately, the government has moved further and further away from embracing innovation and setting the stage for a 21st century transportation policy,” Uber said in a blog post at the time. “We hope that pressing pause will reset the conversation and inspire President Tsai [Ing-wen] to take action.”
As well as battling regulators abroad, Uber is fighting litigation from Alphabet’s Waymo unit, which accused a former employee of stealing its self-driving technology. Travis Kalanick, Uber chief executive, has also been grappling with allegations of widespread sexism in its San Francisco headquarters. After its president of ride-sharing abruptly quit last month, the company has been searching for a new chief operating officer to support Mr Kalanick.
Turkey May Enjoy a Relief Rally
Regardless of who wins, next week’s constitutional referendum will bring clarity for investors.
Turkish citizens are about to cast a yes or no vote on 18 proposed constitutional amendments that could give President Recep Tayyip Erdogan more control over the legislative and judicial branches of government as well as the economy.
Surprisingly, whether the Sunday, April 16, vote backs the president or not, the Turkish equity market could rally.
That’s mostly because it will end a prolonged period of uncertainty about the outcome. And even if Erdogan gains more control, few dramatic immediate changes are expected. Presidential and parliamentary elections are slated for 2019, when the effects of a yes vote could be more widely felt. A no vote is likely to mean the status quo will remain, as Erdogan regroups.
Bank of America Merrill Lynch strategists recently turned more positive on Turkish stocks, recommending an overweight position because they trade at a 10% discount to historical valuation despite attractive prospects for earnings growth. Emerging markets generally are trading in line with historical value measures. The analysts note that with foreign investors on the sidelines, “reductions in uncertainty may trigger relief rallies” in Turkish assets.
The iShares MSCI Turkey exchange-traded fund (ticker: TUR) is down 17% over the past 12 months, though it’s gained about 9% this year. The yield on a 10-year Turkish bond is 10.7%. Inflation, which had been running at an 8% annual clip, is rising. Most of the country’s turmoil has been reflected in the Turkish lira, which has dropped 23% against the U.S. dollar in the past 12 months. Regardless of the referendum vote, it is expected to remain volatile.
ERDOGAN’S PROPOSALS would create a more powerful executive branch and grant him the power to hire or fire his own vice president and ministers. The prime minister’s role would be abolished. The president would be party leader, appoint half of the most senior judges, and gain more control over an expanded parliament. According to some sources, the president’s larger role might also encourage him to try to more directly influence central bank policies.
“The asterisk here is President Erdogan, if he wins, could become more unpredictable on the economic side,” says Henri Barkey, a former State Department official and current director of the Middle East program at the Woodrow Wilson Center, a nonpartisan think tank in Washington. Barkey, who was born in Turkey and was accused by Ankara of organizing last summer’s failed coup attempt (which he denies), says, “The Turkish economy’s main engine of growth has been construction, and it can only take you so far. You still need to bolster manufacturing and exports. Will those suffer? I can’t tell yet.”
How likely is a yes vote? The government gives itself a narrow edge. Other polls put the contest in a dead heat, says Saruhan Hatipoglu, a native of Turkey who is CEO of BERI, a political-risk-analysis firm in Friday Harbor, Wash.
Local passions are running high. Erdogan has maintained a state of emergency since the attempted coup, has lashed out against alleged conspirators, and has railed against European leaders. Human Rights Watch last week estimated that 160 Turkish media outlets and publishers have been shuttered, 100,0000 civil servants have been dismissed or suspended, and 47,000 people await trial.
Amid all this and new turmoil in neighboring Syria, the country’s annual gross-domestic-product growth could slow to 2.5% this year, especially if inflation rises. Any relief rally may not last long as economic and political realities regain sway.
A Very Weird Week for Banks
Bank stocks have suffered with the death of the Trump trade. But that doesn’t mean it’s time to bail on the group.
Bank stocks have suffered with the death of the Trump trade. But that doesn’t mean it’s time to bail on the group.
Heading into 2017, banks were on a run. The SPDR S&P Bank exchange-traded fund (KBE) had surged 33% following the presidential election on hopes of faster growth, lower taxes, less onerous regulation, and higher interest rates. But after peaking on March 1, bank stocks have been in free-fall, with the SPDR S&P Bank ETF (KBE) dropping 9% since then. And after last week—which featured disappointing payrolls data, renewed talk of splitting up big banks, and an admission that tax reform could take a while—the narrative that has been in place since the election might as well be dead.
To which we say: good riddance. Narratives are good for novels but lousy for stock-picking. And with bank earnings beginning this week— JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC), and PNC Financial Services Group (PNC) are all scheduled to report on Thursday—banks have a chance to show that there’s more to their resurgence than just a Trump bump.
Don’t get me wrong: The bank story took a big hit last week. It started with JPMorgan CEO Jamie Dimon releasing a shareholder letter claiming that the big U.S. banks were no longer too big to fail, and that they needed more freedom—and fewer capital constraints—to make loans. That argument, however, was quickly shot down by Minneapolis Fed President Neel Kashkari, who argued that banks like JPMorgan could still leave taxpayers holding the bag in a crisis.
As if that weren’t enough, Gary Cohn, director of the White House National Economic Council, said he was open to a return of Glass-Steagall, which would force banks to split their investment- and consumer-banking divisions—a statement that was quickly met with the introduction of a bipartisan bill in the Senate to do just that. To make matters worse, March payrolls data fell well short of forecasts, suggesting little acceleration in U.S. economic activity. Last week the SPDR S&P Bank ETF fell 1.4% to $42.38.
While the Dimon-Kashkari smackdown got the market’s attention, Fed Governor Daniel Tarullo—a big proponent of Dodd-Frank—gave a farewell speech endorsing substantial changes to the regulations, including to the annual stress tests that drive the banks crazy. A new Glass-Steagall law would require bipartisan action in Congress, something that appears unlikely in the current political climate, KBW analyst Brian Gardner wrote in a note to clients last week. “We continue to believe that a return of some form of Glass-Steagall remains more of a headline risk rather than a real policy risk,” he said.
Then there are those earnings. CFRA strategist Lindsey Bell notes that banks are expected to grow earnings by 14.3% during the first quarter, down from 15.8% at the start of the year. That drop, however, is much smaller than the drop in the S&P 500’s earnings-growth forecast to 9.7% from 13.4%, which means that investor expectations could still be too high.
“We remain cautious on the potential for large beats this reporting season,” Bell says. Yet the weaker bank stocks look, the less likely investors will be looking for big beats. Already, Credit Suisse analyst Susan Roth Katzke expects earnings for the large-cap banks she covers to grow by just 11% in the first quarter, a more manageable number.
Rather than focusing on earnings, investors should look to what banks say about capital returns, which could be the big driver of profits in the months ahead. That’s especially true of Citigroup.
KBW analyst Brian Kleinhanzl argues that Citi could see its net payout percentage jump to 95.8% in 2017, from 75.3% in 2016, and will “benefit the most from returning excess capital.” He also notes that Citi trades at just 9.8 times his 2018 earnings estimate and at 0.9 times tangible book value, well below the median price/earnings ratio of the eight bank stocks he covers, which trade at 11.4 times 2018 earnings.
The upshot, according to Kleinhanzl: “We believe investors face little risk while waiting for higher returns.”
Trader Extra “Stocks Shrug Off Company News, Falling 0.3% on Week”
The Charms of Bayer and Novo Nordisk
Both European companies offer strong cash flow, good dividend yields, and promising prospects.
Recent pressure on European stocks and the corresponding postelection Trump Bump on the other side of the Atlantic have created a valuation gap between the two markets that gives U.S. investors a useful price advantage.
It’s one that Sean O’Hara, president of Pacer ETF Distributors, has been keen to exploit.
As a manager of exchange-traded funds, O’Hara isn’t an active stockpicker. Instead his Pacer Global Cash Cows Dividend ETF (ticker: GCOW) selects stocks from a FTSE-developed large-cap index with a rules-based strategy: “We screen for free-cash-flow yield first and then dividend yield,” he says.
The companies that come out on top make it into his portfolio. Roughly two-thirds of the fund’s stocks are from developed markets outside the U.S. Apart from offering good returns, their price/earnings ratios are significantly lower than U.S. investors would pay for exposure to similar companies at home.
“Our general view is that Europe and some other areas outside the U.S. look relatively inexpensive and you get typically a higher dividend yield, so the stocks we choose have good, solid fundamentals,” O’Hara says. It provides U.S. investors with an alternative to the sometimes stretched valuations at home, where O’Hara estimates P/Es currently average 22; many stocks in Europe trade around 15.
One example is the health-care sector, which offers strong prospects as the number of people around the world with access to medical care accelerates, O’Hara says. The Global Cash Cows ETF includes German pharmaceutical giant Bayer (BAYN.Germany) and Danish insulin maker Novo Nordisk (NVO.Denmark).
“The free-cash-flow yield on Bayer is over 5% and on Novo over 7%, so they generate an enormous amount of cash, while their dividend yields are 2.6% and 3.3%, respectively, higher than the benchmark averages,” O’Hara says. Bayer’s P/E is under 14; Novo Nordisk’s, 15.7.
Bayer is seeking regulatory approvals to complete its $57 billion acquisition of U.S. seed maker Monsanto (MON) by the end of this year. The combination of the two companies would create the world’s largest supplier of seeds and pesticides by sales. Still, that comes at a price.
The German company had to sweeten its original offer for Monsanto and ended up paying a roughly 40% premium. Interim financing costs for the deal took a toll on its net profit, which in the fourth quarter fell by just over 26%, to453 million euros ($483.53 million) from the total a year earlier. However, sales over the period were up 4.7%, to €11.82 billion. On the plus side, the shares have performed well lately. At around €109 they have climbed 8.6% over one year and 5.8% in the past three months.
Bryan, Garnier analyst Eric Le Berrigaud has Bayer at Neutral with a fair value of €112, giving it upside of about 5% from its current level. “New Bayer [including Monsanto] could offer an interesting profile since transformation should also come from the pharmaceuticals division, where Xarelto [an anticoagulant] and the pipeline are able to add sizable opportunities of new business not fully factored into future numbers yet.”
Novo Nordisk reported solid earnings for last year, but its downbeat outlook for 2017 unsettled investors. While net profit was up 9% at 37.93 billion Danish kroner ($5.44 billion) on sales growth of 4% to DKK111.78 billion, in what recently arrived CEO Lars Fruergaard Jørgensen described as a “challenging year,” the company’s forecasts were disappointing.
The pharmaceutical producer reckons operating profit in kroner this year will be in the range of minus 2% to plus 4%, as the company battles tough conditions in its important U.S. insulin market. Pressure will come from stiff price competition there, especially for basal insulin and growth hormones. The loss of exclusivity for hormone-replacement therapy and growing competition among diabetes and biopharmaceutical treatments also could take a toll.
At a recent DKK251.20, Novo Nordisk stock is well below its 52-week high of DKK384.80, and down 31% over the past 12 months. In spite of that it has retraced the 7.3% decline it suffered on the day its results were announced. It’s now roughly 9% higher than it was then.
UBS analyst Michael Leuchten rates Novo Nordisk a Buy, with a DKK350 price target, a whopping 42% increase from current levels. He says it would be wrong to believe tougher pricing for Novo Nordisk in the U.S. equates to the nonsustainability of its return on invested capital margin.
“Coupled with improved operating-expense discipline and the expected future cost drivers, we think the company’s 5% five-year EBIT [earnings before interest and taxes] compound average growth-rate target is realistic, despite a toughening U.S. pricing environment,” Leuchten says.
Weekly Market Update: Markets Directionless Amid Conflicting Data and Geopolitical Maneuvers
Equities remained within a fairly narrow range throughout most of the week as markets focused on events in Syria, as well as President Trump's highly anticipated meeting with China President Xi and congressional attempts to enact some part of the White House agenda. US stock markets traded mostly sideways, and for the week the DJIA was about flat, the S&P500 slipped 0.3%, and the Nasdaq fell 0.6%.
Stronger than expected ADP employment data pushed the Dow back up near 20,900 on Wednesday, but stocks to close down on the day after Speaker Ryan admitted that Republican factions were not yet “on the same page” on tax reform, and the FOMC minutes showed the Fed aiming to start shrinking its balance sheet in late 2017. The forecast for NFP had been raised to 180k after strong ADP data, so Friday's 98K top-line reading was surprising, sending 10-year notes to a low of 2.27%. That reaction was wiped out as New York Fed President Dudley reinforced the idea that the Fed may pause its rate hike schedule at the outset of the balance sheet runoff. 10-year yields rose again to close the day at 2.37% as the reflation trade remained intact.
The ECB faced continued pressure from German officials, most notably the Bundesbank. ECB President Draghi made comments dismissing the need to reduce the size of its QE program, despite many calling for it. Germany in particular is seeing rising inflation, while for other EU countries CPI remains subdued. There is likely to be more pressure as the Fed continues to hike rates. India hiked its key Reverse Repo rate this week in an attempt to defend the economy from rising inflation and maintain the spread to US dollar assets.
In corporate news, Tesla started the week off by posting Q1 deliveries above analyst estimates, which boosted investor confidence in 50K deliveries for the first half and bolstered the automaker’s effort as it starts production of the Model 3. Hospital stocks were volatile most of the week, as GOP members of Congress held meetings to potentially revive its Obamacare repeal endeavor, but the exercise was largely fruitless and the repeal bill remains in congressional purgatory as legislators start a two week recess. On the M&A front, a report indicated Staples is in early stage talks for a potential sale to private equity, in a deal that could be worth $7B. Bakery chain Panera Bread was acquired by investor JAB Holding -- owner of Krispy Kreme, Keurig, and various coffee retailers -- for $315/share in cash, in a deal valued at $7.5B. The $43B Syngenta-ChemChina merger received FTC approval, though some divestitures of US assets would be required.
SUNDAY APR 2
TSLA Reports Q1 deliveries just over 25.0K (~13.5K Model S; ~11.6K Model X), +69% y/y; Production 25.4K (deliveries and production fresh record highs)
(HK) Macau Mar Gaming Rev MOP21.23B v MOP22.99B prior; y/y: 18.1% v +11%e
MONDAY APR 3
(DE) GERMANY MAR FINAL MANUFACTURING PMI: 58.3 V 58.3E (confirms its 28th month of expansion and highest since Apr 2011)
(UK) MAR PMI MANUFACTURING: 54.2 V 55.0E (8th month of expansion)
(EU) EURO ZONE FEB UNEMPLOYMENT RATE: 9.5% V 9.5%E (lowest level since 2009)
(US) MAR ISM MANUFACTURING: 57.2 V 57.2E; PRICES PAID: 70.5 V 66.0E (prices paid highest since May 2011)
(US) Atlanta Fed raises Q1 GDP to 1.2% from 0.9% on 3/31
(ZA) S&P cuts South Africa sovereign credit rating to junk status, cuts one notch to BB+ from BBB-; outlook Negative
(US) Senate Democrats now have 41 votes against cloture, sufficient to filibuster nomination of Neil Gorsuch to the Supreme Court - press
(AU) AUSTRALIA FEB TRADE BALANCE (A$): +3.6B V +1.9BE (4TH CONSECUTIVE SURPLUS)
TUESDAY APR 4
(AU) RESERVE BANK OF AUSTRALIA (RBA) LEAVES CASH RATE TARGET UNCHANGED AT 1.50% (AS EXPECTED)
SPLS Reportedly in early stage talks with private equity over potential sale of the company; could be valued at $7B - press
(US) FEB FINAL DURABLE GOODS ORDERS: 1.8% V 1.7%E; DURABLES EX-TRANSPORTATION : 0.5% V 0.4% PRELIM
(US) Atlanta Fed maintains Q1 GDP at 1.2%, unchanged from 4/3
(US) Richmond Fed President Lacker to resign effective today over improper disclosure of confidential FOMC information, earlier than planned - press
SYT FTC approves $43B merger with ChemChina; to require divestiture of US asset as a condition for merger approval
PNRA JAB Holding reportedly in advanced talks to acquire Panera - press
WEDNESDAY APR 5
PNRA Confirms to be acquired by investor JAB for $315/shr in cash valued at $7.5B; Q1 SSS +5.3%
(PL) POLAND CENTRAL BANK (NBP) LEAVES BASE RATE UNCHANGED AT 1.50%; AS EXPECTED
(US) MAR ADP EMPLOYMENT CHANGE: +263K V +185KE
(US) MAR FINAL MARKIT SERVICES PMI: 52.8 V 53.1E (lowest since Sept)
(US) GOP leaders and conservative factions reportedly likely to take break on healthcare talks - Axios
(US) House Speaker Ryan: House, Senate and White House are not yet on the same page regarding tax reform
(US) FOMC MINUTES FROM MARCH 15 MEETING: MOST PARTICIPANTS SEE CHANGE TO BALANCE SHEET POLICY LATER THIS YEAR
(US) Association of American Railroads weekly rail traffic report for week ending April 1st: 527.7K carloads and intermodal units, +7.2% y/y (12th straight week of gains)
BBBY Reports Q4 $1.84 v $1.77e, R$3.53B v $3.50Be; Raises dividend 20% to $0.15/shr (indicated yield 1.6%)
2202.HK Reports Mar contracted sales CNY63.6B v CNY33.6B y/y
(HK) HONG KONG MAR COMPOSITE PMI: 49.9 V 49.6 PRIOR; 3rd straight contraction
(CN) CHINA MAR CAIXIN PMI SERVICES: 52.2 V 52.6 PRIOR (6-month low and 3rd straight sequential decline)
THURSDAY APR 6
(IN) INDIA CENTRAL BANK (RBI) LEAVES REPURCHASE RATE UNCHANGED AT 6.25%; AS EXPECTED; narrow rate corridor
(CZ) CZECH CENTRAL BANK (CNB) REMOVES FX FLOOR (allows the currency to float to stronger levels) - Extraordinary monetary policy meeting
(US) INITIAL JOBLESS CLAIMS: 234K V 250KE; CONTINUING CLAIMS: 2.03M V 2.03ME
(US) Senate Republicans pass "nuclear option" rule change that will allow for approval of Gorsuch Supreme Court nomination on a majority vote basis (as expected)
(CN) US Sec of State Tillerson: Has no doubt Syria is responsible for chemical attack this week; the chemical weapons attack requires a serious response
(PE) PERU CENTRAL BANK (BRCP) LEAVES REFERENCE RATE UNCHANGED AT 4.25%; AS EXPECTED
005930.KR Reports prelim Q1 Op profit KRW9.9T v KRW9.2Te, Rev KRW50T v KRW49.5Te
(SY) US LAUNCHED CRUISE MISSILES AGAINST AIRFIELD TARGETS IN SYRIA
FRIDAY APR 7
(CN) CHINA MAR FOREIGN RESERVES: $3.009T V $3.011TE (2nd straight month of increase)
(UK) FEB INDUSTRIAL PRODUCTION M/M: -0.7% V +0.2%E; Y/Y: 2.8% V 3.7%E
(GR) Eurogroup Chief Dijsselbloem: making significant progress on Greece; have an agreement on main Greek policy elements
(US) MAR UNEMPLOYMENT RATE: 4.5% V 4.7%E (lowest since April 2007)
(CA) CANADA MAR NET CHANGE IN EMPLOYMENT: +19.4K V +5.7KE; UNEMPLOYMENT RATE: 6.7% V 6.7%E
(US) MAR AVERAGE HOURLY EARNINGS M/M: 0.2% V 0.2%E; Y/Y: 2.7% V 2.7%E; AVERAGE WEEKLY HOURS: 34.3 V 34.4E
(US) MAR CHANGE IN NONFARM PAYROLLS: +98K V +180KE (lowest since May 2016)
Closing Market Summary: Range-Bound Week Ends on Flat NoteThere was a lot to talk about on Friday, but the market was not sure what to make of it all, as stocks slipped out of the gate, but spent the day in a slow climb to end little changed. The S&P 500 shed 0.1%, ending the week lower by 0.3%.
Overnight, the U.S. Navy launched 59 Tomahawk missiles at the Shayrat base in Syria, which was reportedly the origin of a chemical attack that took place on Tuesday. Most U.S. allies spoke in favor of the strikes while Russia, China, and Iran voiced their displeasure with the action. The storyline is likely to continue into next week, considering Syrian fighter jets were taking off from the Shayrat base by the end of the day, according to the Syrian observatory for human rights.
The news of missile strikes weighed on equity futures, but a swift rebound took place in time for the release of the Employment Situation report for March. The report disappointed, showing the addition of just 98,000 nonfarm payrolls (consensus 180,000). However, the reaction in the market was muted.
The S&P 500 navigated a 13-point range, closing near the middle amid gains in five out of eleven sectors. Industrials (+0.1%) spent the day in the green thanks to broad strength among defense contractors like General Dynamics (GD 188.04, +1.74), Lockheed Martin (LMT 270.24, +3.13), and Raytheon (RTN 152.96, +2.21). The three names advanced between 0.9% and 1.5% while the broader sector slipped from its high due to losses in transport stocks. The Dow Jones Transportation Average shed 0.3%, ending the week lower by 0.1%.
Looking past industrials, the remaining gains were confined to countercyclical sectors. Consumer staples (+0.3%), real estate (+0.2%), and telecom services (+0.2%) displayed strength throughout the day while health care (+0.2%) found buying interest in afternoon action.
On the downside, the energy sector (-0.4%) was among the laggards even though crude oil jumped 1.0% to $52.25/bbl. Another cyclical group—financials (-0.3%)—also struggled to keep pace with the market as flattening in the yield curve weighed on bank stocks. The financial sector lost 1.0% for the week, narrowing its 2017 gain to 1.1%.
Treasuries spiked to highs immediately after the release of the jobs report, but reversed in short order and continued sliding into the close. The 2-yr yield (1.27%) and the 10-yr yield (2.37%) jumped three basis points apiece while the long bond resisted the pressure. The 30-yr yield increased one basis point to 3.00%.
Investor participation was a bit below average as 935 million shares changed hands at the NYSE floor.
Economic data included Employment Situation report, Wholesale Inventories, and Consumer Credit:
- March nonfarm payrolls increased by 98,000 (consensus 180,000) and March private sector payrolls increased by 89,000 (consensus 175,000)
- The key takeaway from the report is that it spoke to the ongoing disconnect between the hard data and the soft data and it will challenge -- or should challenge -- the stock market's economic growth assumptions
- The unemployment rate fell to 4.5% due to a higher change in workers being employed (+472,000) as the labor force participation rate held steady at 63.0%
- March average hourly earnings increased 0.2% consensus +0.3%) after increasing an upwardly revised 0.3% (from 0.2%) in February
- The average workweek in March was 34.3 hours (consensus 34.4), versus a downwardly revised 34.3 hours (from 34.4) in February
- Wholesale inventories increased 0.4% month-over-month in February, as expected, versus a 0.2% decline in January. Wholesale sales for February increased 0.6% on the heels of an upwardly revised 0.3 increase (from -0.1%) for January.
- The inventory-to-sales ratio was unchanged at 1.28 in February but down from 1.36 in the same period a year ago.
- Total outstanding consumer credit increased by $15.20 billion in February (consensus $14.00 billion) after increasing an upwardly revised $10.90 billion (from $8.80 billion) in January.
Investors will not receive any economic data on Monday.
- Nasdaq Composite +9.2% YTD
- S&P 500 +5.2% YTD
- Dow Jones Industrial Average +4.5% YTD
- Russell 2000 +0.5% YTD
Russian warship has entered eastern Mediterranean heading toward 2 US Navy destroyers that launched airstrikes last night - Fox News