Watching If Oil Can Hold $50 As Payrolls Data Straight Ahead

Parts of the country seem to be enjoying extended summer weather, and the market is acting in some ways like an extended summer market: Quiet and a little slow. All the indices barely eked out gains on Wednesday to continue their winning streak ahead of Friday’s payrolls report and the start of earnings season

The S&P 500 Index (SPX) begins the day on its longest winning streak since May. All the major indices remain at record highs, but there wasn’t a lot of conviction in pre-market trading. While U.S. trading was generally quiet in the pre-dawn hours, European and Asian markets mostly rose. Friday’s September payrolls data loom large, with analysts expecting jobs growth of less than 100,000 in part due to last month’s hurricane damage. 

Fed speakers and factory orders take the stage Thursday, but what might be the most exciting feature of the session is seeing if crude oil can hold the $50 a barrel level. Crude slipped under that mark late Wednesday for the first time in several weeks, and fell to $49.85 early Thursday. It’s mostly a technical game, but oil has shown pretty good resilience in staying above $50 lately. It’s bent but it hasn’t broken.

Major indices haven’t been bending much, overcoming early weakness on Wednesday to post new record highs once again. Firm economic data over the last week or so, along with continued hopes for some sort of tax reform out of Washington, seem to be underpinning stocks. A major bank said in a report yesterday that chances of tax reform are 65%, and some investors hope that lower corporate taxes could give stocks a lift even if earnings aren’t as jubilant as they’ve been the last few quarters (see below).

In just a week, the market will be pondering Q3 earnings from the big banks. The financial sector took a step back on Wednesday but has had a good last month, rising more than 5%. Still, some Wall Street analysts expect weaker Q3 year-over-year earnings from financials, which had generally robust Q1 and Q2 earnings.

The dollar index moved lower Wednesday, but remains up a little over 1% for the last month. While it’s possible that the greenback has put in some near-term lows, it’s still down nearly 9% year-to-date, raising the possibility that some U.S. multinationals might get a tailwind in their Q3 earnings.

Bonds remain near their recent lows, but haven’t put in much follow-through after 10-year yields clawed back above the 2.3% mark last week. That puts yields in about the middle of this year’s range between roughly 2% and 2.6%, and remarks by Fed Chair Janet Yellen on Wednesday didn’t move the needle much. She didn’t discuss interest rates or the economy in her brief talk.

Fed speakers are out in abundance today. The leadoff man is Federal Reserve Governor Jerome Powell, who’s scheduled to discuss treasury markets at a New York event at 9:10 a.m. ET. That’s followed by San Francisco Fed President John Williams at 9:15 a.m., Philadelphia Fed President Patrick Harker at 9:30 a.m., and Kansas City Fed President Esther George bats cleanup at 4:30 p.m. 

Back on Wall Street, utilities, real estate, consumer discretionary, and healthcare led the gains Wednesday, with six of 11 sectors closing higher. Financials brought up the rear.

While stocks moved higher Wednesday, crude oil slipped below $50 a barrel to post its lowest settlement since Sept. 13. The question is whether this marks a blip or if oil is going to spend a longer period below $50. Falling oil prices tend to hurt the energy sector — which stumbled a tad on Wednesday — but can sometimes give other sectors a boost by reducing input costs. Time will tell, but the pattern for roughly the last six months is oil breaking through $50 and then slowly slipping back below that level.

FIGURE 1: AUTUMN STRENGTH FOR FINANCIALS, INFO TECH The stock market’s had a good month, and both the financial sector and info tech (purple line) have played important parts. These two sectors are likely to be closely watched as earnings begin next week. Data Source: Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Wage Watch

We pointed out yesterday that Wall Street analysts expect relatively weak job growth of just 75,000 in September, according to projections compiled by Briefing.com ahead of tomorrow morning’s payrolls report. The other thing to watch, though, is wages. Hourly earnings in August rose 0.1%, which was below Wall Street’s estimates, and analysts expect wages to climb 0.2% in September. As of August, year-over-year wage growth stood at 2.5%, which means wages are outpacing inflation but not by too much. If wages move up more quickly than the estimated 0.2% tomorrow, keep an eye on the bond market, because investors might start dialing in higher expectations for a possible Fed rate hike.

We Interrupt This Program

The markets quieted down for a few minutes at around 11 a.m. Wednesday when Secretary of State Rex Tillerson made a brief statement to all the networks. While the statement turned out to be just a chance for Tillerson to address some rumors flying around in the media, it’s worth noting that geopolitical issues continue to buzz, even if they aren’t as front and center as they were a month or two ago. People are paying close attention to Washington as the North Korean situation remains top of mind, along with President Trump’s coming visit to China. Trump is scheduled to go to China, Vietnam, South Korea, Japan, and the Philippines from Nov. 3-14, and that trip could have a lot of national security and economic ramifications, so stay tuned.

Remember this About Earnings: Remember this About Earnings

With earnings starting next week, it’s important to keep any analyst estimates for Q3 earnings growth in the proper perspective. Over the last few quarters, early estimates have tended to be too low. While past isn’t precedent, it’s always a possibility that analysts might be conservative. S&P Global’s aggregate estimate is for earnings growth of just 5% in Q3 for S&P 500 companies, but actual EPS exceeded initial estimates in each of the last 22 quarters and have done so by an average of 3.6 percentage points. “Therefore, Q3 EPS growth may come in closer to a 9% gain, which should assist in validating elevated valuations,” research firm CFRA said in a note to investors this week.