Friday May 5

Stocks rose after the April non-farm payrolls report. The S&P 500 rose 0.4% to 2,399 and the Dow Jones rose 0.3% to 21,006. Over the course of the week the S&P 500 and the Dow Jones rose 0.6% and 0.3% respectively. The KBW Bank index fell 0.3% and the DJ Utility Average rose 0.6%. Economic data today showed that nonfarm payrolls rose 211k in April compared to estimates which called for a 185k gain. The unemployment rate unexpectedly fell from 4.6% to 4.4% to show that the labor market continues to tighten. Average hourly earnings was underwhelming compared to the rest of the report. Monthly it rose 0.3% in line with expectations but yearly only rose 2.5% which was 0.2% lower than expected. Regardless the report does support the narrative that weak growth in the prior month and quarter was transitory. It was also a busy day as far as Fedspeak is concerned. Stanley Fischer spoke against the idea of having the Fed follow a rules-based approach to setting monetary policy. James Bullard said that the Fed should look to reduce the size of the balance sheet in the second half of this year. Eric Rosengren also seemed to support the idea of reducing reinvestments sooner rather than later. Following the release of the April NFP number the probability of a rate hike in June rose to 80% according to CME group calculations. In spite of the NFP number the rates and currency markets were little changed. The two year Treasury yield didn’t move and finished the week at 1.31%. The ten year Treasury yield was also unchanged at 2.35%. Over the course of the week the two and ten year Treasury yields were 5 and 7bp higher respectively. The dollar was for the most part lower on the day. USD fell 0.1% against EUR to $1.0999 ahead of the French election over the weekend. USD rose 0.2% against JPY to Y112.72. USD fell 0.4% against GBP to $1.2981. Oil prices rebounded after a harsh selloff this week on oversupply concerns. WTI rose 2.1% to $46.47 and Brent rose 2.3% to $49.47.

One investor is making some splashes in the volatility market buy going heavily long volatility. That investors is even being referred to as “50 cent” for purchasing call options on the VIX with a strike level of 20 for a cost of $0.50. So far this year the mystery trader has spent $120mm in premium and $88mm of that has expired worthless. While it could be more than one investor making these trades traders on the other end that the systematic buying of the same contract at the same premium suggests that is one buyer on the other end. Some analysts have pointed to Jonathan Ruffer which is a $20bn investment fund headquartered in London. The VIX has risen higher than twenty just three times since the start of last year and this week it touched below 10 and is currently at the lowest level since early 2007. The position put on by the mystery investor is sizeable and amounts to 8.5% of open interest in listed VIX call options. However this number may not be representative of the total size of this market since a lot takes place OTC.  While this could be an effective way for the mystery trader to hedge or speculate, the position could get expensive over time as options expire worthless. The options the mystery buyer is purchasing are European which means they can only be exercised at expiration, however they can still be sold beforehand for a profit if it becomes closer to in the money. The positions that the mystery buyer has accumulated have strike levels between 19 and 20 but are most heavily concentrated around the 20-21 level.

Corporate earnings for the first quarter put in a strong performance. Overall revenues in Q1 2017 rose 7.1% from the prior year compared to a 1.7% decline at the same time last year. Overall earnings rose 13.9% compared to a decline of 5% at the same time last year. In sectors such as financials, materials, technology, health care, and consumer staples earnings growth outpaced revenue growth as companies continue to cut costs and keep expenses low. They tightened their belts in tough conditions a few years ago and are still reluctant to increase spending or capital expenditures which explains why bottom line growth is outpacing top line growth. In industrials, real estate, consumer discretionary, and utilities sectors revenue growth outpaced earnings growth. One sector that continues to see lingering issues in Telecom as companies engage in price wars as the cost of wireless plans continues to fall. The best industry performer was the energy sector. Revenues increased 31.3% while earnings growth was a staggering 647.2% from the prior year. For the most part companies are keeping their costs low using a zero-based approach for capex and capital spending. That means that instead of starting off each quarter with the same amount of expenses as last year and building off of that they start at zero and justify each expense. While companies are doing well capital expenditures are still low. Research from WSJ showed that capex rose just 1.5% in the first quarter. Some companies are also choosing to return money to shareholders instead of invest back into the business. At some companies returns to shareholders through dividends and share buybacks exceeds capital expenditures. As productivity growth lags and wages climb it may start making more sense for capex to pick up.

Economists anticipate that a 4.4% unemployment rate will lead to increases in wage gains. In theory a 4.4% unemployment rate means that employees should be able to demand higher wages or else find employment elsewhere. However in spite of that dynamic wage growth continues to underwhelm. However if wages do rise that won’t be good news for corporations since wages are an expense for them. That would have negative consequences for corporate earnings if revenue doesn’t adjust accordingly.

Friday May 5

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