Stocks rise in the aftermath of Friday’s payrolls report and comments made by William Dudley of the Fed. The S&P and the Dow both rise 0.66% to 2,080 and 17,880 respectively. Treasury yields rise with the 10 year gaining 7 bp to 1.92%, reversing Friday’s movement. The dollar index gains following Friday’s losses, with the euro falling to $1.09 against the dollar. Friday’s labor report that only 129,000 jobs were added in March, compared to analysts expectations of 240,000. This is the biggest gap between expected payrolls and the actual data since 2009. As a result stocks and the dollar both opened downwards, however were reversed by dovish comments by William Dudley. In addition the positive atmosphere in markets may also be attributable to the ISM non-manufacturing index, which held firm at 56.5 in line with expectations despite Friday’s weak data.
Analysts expect S&P 500 earnings to fall in the future. 1Q earnings are expected to be a 5.8% decline from the previous quarter, and afterwards profit will drop 4.2% and 1% in 2Q and 3Q respectively. These losses are largely attributed to falling oil prices and the stronger dollar. Analysts expect that profit in the energy sector fell 63% in 1Q which represents a significant portion of the total for the S&P 500. In addition the 25% appreciation in the dollar since last summer will also have a negative impact on earnings. For example, United Technologies expects foreign exchange conditions to cut profit by about $100M. Many analysts expect that the full benefit of the fall in oil prices and the subsequent increase to consumer spending will not be present in this quarter’s earnings.
Following Friday’s weak economic data, William Dudley of the Fed assures markets that the interest rate trajectory will be shallow once the lift off does occur. In addition, he believes that Friday’s data can be largely blamed on seasonal or temporary factors. A report from members of the Fed staff concluded that this most recent winter was 20-25% worse than the average of the previous five winters, which Dudley believes adversely affected hiring. Dudley is a voting member of the Fed, and he lies on the dovish end of the spectrum. Following his comments and Friday’s developments, the market for Fed Funds Futures reflects a 27% chance of an interest rate hike in September, which is down from 34% before Friday’s data. Dudley asserts that the United States is posed for stronger economic growth in the future. He backs these assertions with claims that household deleveraging is coming to a halt. After the financial crisis, households went through significant efforts to pay down their debt. Now that this trend is slowing, Dudley expects consumer spending to pick up which should support growth going forward.