Market Perspective for February 1, 2016

The Bank of Japan’s interest rate cut fueled Friday’s rally and equity markets gained ground in late trading on Monday.  Last week’s better-than-expected Chicago Purchasing Managers’ survey and encouraging earning reports bode well for the equity markets over the coming days.

There are several economic reports due out this week. Personal income, consumer spending and core inflation for December were released on Monday morning. Personal income climbed 0.3 percent faster than expectations. Consumer spending and core inflation were flat. The two manufacturing surveys were published as well.  The Markit PMI was 52.4 and continues to reflect an expanding manufacturing sector, while the ISM survey indicated contraction at 48.2, despite its improvement over analysts’ expectations.  The two surveys use similar data, but utilize different weightings. This week’s core inflation number is the core PCE (personal consumption expenditures), calculated by the Bureau of Economic Analysts, which also calculates GDP estimates. Core PCE is up 0.6 percent over the past 12 months, accelerating from an annual 0.2 percent rate in September. In January, the Bureau of Labor Statistics, reported 2.1 percent core inflation in December. The Fed wants to see the core PCE rise to match the BLS number which appears to be slowly happening despite very low oil prices.

January’s motor vehicle sales will be released on Tuesday. Analysts predict a 17.2 million annual sales rate. The ISM non-manufacturing index will be reported on Wednesday and is anticipated to be 55.2, down 0.1 from the previous month, but still clearly expanding. Initial weekly jobless claims will release before Thursday’s bell, as will productivity and unit labor costs for the fourth quarter. The Fed closely monitors unit labor costs for nascent signs of wage growth. The number is forecast to show a 4.5 percent increase in labor costs, well above the 1.8 percent growth in the prior quarter. Thursday will also deliver December factory orders, which are forecast to drop 3.0 percent and will factor into the fourth quarter GDP revision due at the end of February. The January employment report will be out on Friday. Economists are looking for 5.0 percent employment, but if the economy is doing well the number should rise due to discouraged workers, who are currently not counted as unemployed, returning to the labor market. The trade deficit for December will also be out on Friday. GDP growth rises when the trade deficit falls, and vice versa, so this number could impact the GDP revision if it has deviated from the forecast $43.5 billion deficit.

Earnings season continues with several potentially market-moving reports scheduled for this week. On Monday, tech giant Alphabet (GOOGL) reported earnings per share of $8.67 on revenues of $21.33 billion, exceeding expectations of $8.10 per share and spurring late day and after-hours purchasing. Exxon Mobil (XOM) is set to report earnings Tuesday. Analyst consensus is for EPS of $0.64 and top line revenues of $51.36 billion. Tuesday before the bell, leading drug manufacturer Pfizer (PFE) is expected to post EPS of $0.52 and revenues of $13.57 billion. Merck (MRK), expected to report quarterly results before the bell Wednesday. Consensus estimates are for EPS of $.091 and revenues of $10.36 billion. Other firms reporting this week include Yahoo (YHOO) Chipotle (CMG), General Motors (GM), Dow Chemical (DOW), Gilead Sciences (GILD), Yum Brands (YUM), Clorox (CLX), athenahealth (ATHN) and Boston Scientific (BSX).

The Bank of England and the Reserve Bank of Australia meet this week. Investors will be looking to see if these central banks will react to the dovish stance of the Bank of Japan and the European Central Bank. The U.S. Dollar Index comes into the week where it has spent the past three months, bouncing between 98 and 99.

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