Wall Street futures lower ahead of jobs report

The US stock markets have bounced back strongly this week after the recent falls, though Wall Street futures point to a weaker open today (which is subject to change as the key US jobs report will come out prior to the open). The reversal was partially due to growing speculation that the European Central Bank will expand its stimulus programme to include purchases of sovereign debt, potentially as early as in the January 22 meeting. This came after the Eurozone fell into deflation last month, undoubtedly due to crude oil’s recent plummet. According to Bloomberg, the ECB staff presented various options regarding asset purchases at the January 7 meeting. These included among other things the option to buy up to €500 billion worth of only top-rated triple-A debt or rated as low as BBB-, but not junk. Though Bloomberg said nothing has been decided yet, the market has reacted somewhat negatively to the news. Perhaps this is because of the fact that the ECB is still not sure about the format of QE; thus it may not announce anything new on January 22 after all.

In the US, the FOMC’s last meeting minutes revealed a rather vague message. On the one hand, policymakers acknowledged the strength in US data and hinted that it may raise interest rates even if inflation remained below its 2% target, provided that the “participants would want to be reasonably confident that inflation will move back toward 2 percent over time.” But on the other hand, it raised concerns about overseas growth, which poses “an important source of downside risks to domestic real activity and employment.” Given that the economic activity outside of the US has deteriorated and oil prices have fallen further since the FOMC’s last meeting, the risk therefore is that the Fed may delay its rate hiking cycle. Interestingly, as we pointed out earlier in the week, there will be a more dovish flock of voters at the FOMC this year. So, low interest rates may remain in place for some time yet. This combined with the fact that the central banks in Europe and Japan remain in a dovish mode, should help to boost global stocks this year.

But in the short term the stock market’s direction may be determined by today’s US December jobs report and the fourth quarter reporting season, which unofficially gets underway on Monday when Alcoa publishes its results. We have had a decent set of labour market indicators for December, which points to another strong headline nonfarm payrolls number. The consensus expectation is for a reading of 240 thousand NFP jobs created last month versus 321 thousand in November. A number somewhat larger than this should help to keep the rally going for US stocks while anything below 200 thousand may raise a few concerns. On the earnings front, US corporate results were surprisingly good last year despite the impact of the cold winter in Q1, with results in Q3 being by far the best. According to research from FactSet, the telecoms, financials, material and healthcare sectors did particularly well in the third quarter while consumer discretionary was the only sector which reported a year-over-year decline in earnings. Compared to a year earlier, the overall S&P 500 earnings growth rate was a healthy 8% while the revenue growth was 4% in Q3. Some 77% of the S&P companies managed to beat profit expectations, making this the best quarterly performance since the second quarter of 2010 when 79% of the companies beat earnings estimates. The important question now is: were the US companies able to repeat this performance in Q4? In theory we should see another strong quarter given the underlying strength in the US economy. But in practice it may not be that straight forward particularly given that the S&P 500 companies are international corporations which rely heavily on the economic performance of the global economy rather than just the US. What’s more, the strength in the dollar could have impacted US exports. Clothing retailers and automakers could be among the worst hit, particularly in Europe where the euro and pound have weakened considerably in Q4. If the upcoming earnings results in the first couple of weeks are not that great, investors may react by reducing their overall equities exposure which may result in a sharp correction for the S&P 500.