January Employment Report

The jobs report yesterday had some surprises. The "headline" employment number rose by around 190,000, below expectations. But prior month totals were revised upwards. You should always view revisions to prior data when judging newly released data -- on anything.
To read a story about this click here. Look briefly at the overall report as well.

There is more to the employment report than just employment. It also contains data on the unemployment rate, hours worked, and the average hourly wage. It was these that triggered the ultimate reaction by the stock and bond markets. Average hourly earnings rose a greater-than-expected 0.4% for the month and 3.3 percent for the year. Along with the disappointing productivity number on Thursday, this further reinforced inflation fears. As a result, there was an initial rise in bond interest rates (remember this from class -- the inflation premium in interest rates increased, pushing up nominal rates). The stock market also reacted badly. Why? Two things. First, higher interest rates are bad for stocks. We will see in class this coming week that this entails a substitution of interest-earning assets for stocks, and it lowers the present discounted value of expected profits. Second, the acceleration of inflationary expectations means that the Fed will not be finished raising interest rates very soon as had been thought. In fact, the belief that the Fed was almost done raising rates is what led the Dow-Jones Industrial Average over the 11,000 mark earlier this year.


From a technical analysis point of view (read Stikki Stock Charts if it ever gets here), this means that the resistance encountered by the Dow-Jones average at 11,000 held, and that it will likely hold for a while. A similar argument pertains to both the NASDAQ and the S&P 500 (those doing this as your forecast paper topic should start to follow this). The pressing question from a technical point of view is therefore, where is support for each of these markets. For the S&P 500, prior resistance at 1,275 had been exceeded (i.e., a breakout occurred). And, as typically occurs, priror resistance became support during the breakout. Now, unfortunately, things have reversed once again -- 1,275 is once again resistance. Support (for now) is at 1,250.

In the blog entry above this one, I have provided a graph of the S&P 500 and the recent breakdown from a triangle formation. Not a very flattering picture. Why? Besides the obvious declines, I have added information about the RSI (I will distribute the handout for this soon). The bad news is that the RSI is not yet in oversold territory (RSI <30), so this decline might have a ways to go yet.