Low Payroll Growth And High Global Tension Raises Concerns Ahead of Earnings

Leaving aside concerns about international relations, attention this coming week could remain on Friday’s anemic jobs report as investors try to figure out what happened. Earnings season also steps into the spotlight, with several big banks reporting this Thursday.

One thing seems very clear from the payrolls report, which showed total job growth of just 98,000: The retail sector is under pressure, losing 30,000 jobs for the second consecutive month. Retail stores are trying to figure out the proper balance between brick-and-mortar and online sales, and so far it’s been a struggle. Taking the retail number out, it's not quite as bad a jobs report as it might seem at first glance. The mining sector, for example, saw 11,000 new jobs in March. Perhaps that’s a sign that mining bottomed out last fall and may be benefiting from the new administration’s coal-friendly policies.

That said, the overall report wasn’t particularly good. It’s possible some of the powerful job growth in January and February simply ate into demand for new workers in March. Also, weather around some heavily populated parts of the country was snowy and cold during the month, which sometimes depresses hiring. Perhaps the April report might show some sort of recovery if the weather starts to be more spring-like.

One rather surprising takeaway from the report was the very light gain in construction jobs, a category that had been growing well. However, thinking this through, one of the reasons that this might have happened is many of these workers were hired in the previous two months, as unseasonably warm weather in much of the country helped in those surprising gains. The housing market seems to be chugging along nicely, and the ADP private sector jobs numbers for March showed big gains in construction employment.

Another takeaway that got less notice amid concern about the jobs number was wage growth, which was decent at 0.2%, but slightly below Wall Street analysts’ consensus expectations for 0.3%. Wages in February got upwardly revised to 0.3%. Over the last 12 months, wages are up 2.7%, which is very close to the 2.8% rise they registered year-over-year in February. Either way, wage growth appears to be in somewhat of a sweet spot. It’s slightly above inflation but perhaps not heated enough to make the Fed overly worried. And growth in wages tends to indicate demand for workers, potentially a good sign for the overall economy.

Looking ahead to the coming week, earnings season starts with a bang as the banks begin reporting. The big day is Thursday, when Citigroup Inc C, Wells Fargo & Co WFC, and JPMorgan Chase & Co. JPM all report before the open. Next Friday is a holiday and the markets are closed, but the bank earnings parade continues the following Tuesday with Bank of America Corp BAC and Goldman Sachs Group Inc GS. In Q4, many banks reported strong earnings after a surge of trading following the November election. Wall Street analysts also expect strong Q1 earnings results from the financial sector, possibly led by the investment banking and brokerage areas. A boost in IPOs and mergers and acquisitions during the quarter might have helped the investment banking side, said CFRA, a research firm.

There’s also data ahead, though a lot of it comes out when the markets are closed on Friday. That’s the day March retail sales and the March consumer price index (CPI) are due. Earlier in the week we’ll get a look at the February Job Openings and Labor Turnover Survey (JOLTS), as well as the March producer price index (PPI). With the markets closed Friday, the following Monday could be the session when there’s a reaction, if any, to the retail sales and CPI numbers.

Geopolitics seemed to be weighing on the markets a bit late last week, especially after the U.S. strikes on Syria. Concerns about the situation there and around the meeting between President Trump and Chinese President Xi might have made the market’s initial reaction to the jobs report a little worse than it otherwise could have been. Markets don’t like uncertainty, and there seems to be a lot of it around lately.

Tax Policy Details Lacking

All of the international news doesn’t mean fiscal and monetary policy left the room. There was a lot of debate among financial talking heads late last week about whether the big sell off Wednesday had more to do with hawkish Fed minutes or word from Speaker Paul Ryan that tax reform might take even longer than health care. It may be a little of both. Ryan didn’t provide much more insight on tax policy in his weekly press conference Thursday. There’s also still some buzz around what looks like a more hawkish Fed, based on the March meeting minutes. Fed funds futures project about a 50% chance of three rate hikes this year in addition to the one in March, with one possible by June and another by December.

Suspense Still Builds Around Infrastructure

There’s also talk about President Trump’s infrastructure ideas, as the president told The New York Times he could see borrowing money at low rates to pay for a $1 trillion program. Many sectors would potentially benefit from a major infrastructure program, but details haven’t been too evident yet. Some analysts expressed doubt that Trump could get such a big increase in borrowing past conservatives in Congress.

Earnings Forecast Lowered

With earnings starting this coming week, it’s time to once again check forecasts for Q1 and full-year S&P 500 earnings growth. Last week, CFRA lowered its projection for full-year earnings growth to 10.6%, down from 11.2% at the start of the year. The firm sees 9.7% earnings growth in Q1, followed by 8.5% in Q2. Biggest Q1 sector gains could come in financials, info tech, and materials. The S&P 500 Index (SPX) still has a price-to-earnings ratio above 18 compared with projected 2017 earnings, and that’s a little high from a historic perspective. But if earnings grow by double digits in 2017, that could inspire more confidence among investors that current price levels might be somewhat justified.