Ho-Hum Week: No Friday Rally After October Job Gains

Wall Street’s reaction to a blowout October jobs report was less than enthusiastic and there’s one thing to blame: Worries over when the Federal Reserve will hike interest rates.

Here’s all the action you might have missed this week on the Street.

October Jobs and a Hint from Janet Yellen

The economic data calendar this week culminated with the all-important October jobs report. After the Federal Reserve opted not to raise interest rates at the conclusion of its September or October policy meetings, Wall Street has been anxiously awaiting any clues as to when central bankers might decide it’s the right time for liftoff.

They got their wish this week.

It all started when Janet Yellen, chairwoman of the Federal Reserve, went to Capitol Hill on Wednesday. While the hallowed halls of Congress aren’t exactly the usual place for the Fed to make headlines, Yellen grabbed attention during her testimony on bank regulation. In response to a question about the state of the economy, Yellen said the central bank hasn’t ruled out the possibility of a rate increase in December, and said that the Federal Open Market Committee will monitor any and all economic data reports between now and then.

The door that much of Wall Street had thought slammed shut after the September meeting is now very much open and a rate hike this year is still very much in play.

The October jobs report on Friday only helped add fuel to the December rate-hike fire. The Labor Department reported a blockbuster gain of 271,000 jobs for the month, which far outpaced expectations for a 180,000 pickup. Further, average hourly wages got a 0.4% bump, bigger than 0.2% expectations, and the unemployment rate declined to 5% from 5.1% in September.

But Wall Street didn’t react with much enthusiasm. After wobbling between gains and losses, the major averages traded along the flat line, closing the day relatively unchanged.

“I think the jobs report basically made a tightening in December, finally, before the end of this year, a done deal. A green go. The Fed needs a reason not to now, and tightening coming in the market is a headwind for the market,” Michael McGlone, head of U.S. research at ETF Securities said. “September was really weak, so that took December out. So now we have a situation where good news can be bad news for the stock market.

Facebook: Social King Climbs the Ranks

On Thursday, Facebook (NASDAQ:FB) became the sixth-largest company in the S&P 500 thanks to stellar third-quarter earnings. By Friday, though, the company dropped a couple of notches to the eighth-largest.

The social-media giant’s shares vaulted to a new record high during the Thursday session, giving it a market capitalization of more than $300 billion. For some context, that was bigger than companies including Amazon (NASDAQ:AMZN), General Electric (NYSE:GE), and Wells Fargo (NYSE:WFC).

Facebook beat on the headline numbers, but it was the ad revenue and potential that had investors really excited. For the third quarter, the company said mobile ads accounted for about 78% of its total ad revenue, up 66% from the same period the year prior. Monthly active users, meanwhile, were up 23% from the same time a year ago, while daily active mobile users jumped 27% year over year.

Analysts at Credit Suisse raised their 2016 and 2017 EPS estimates for the company, and upped its price target from $135 to $115, maintaining an outperform rating.

“Once again, the highlight was strength in Facebook’s mobile advertising business, but this time driven by contribution from Instagram, ramp of dynamic product ads, as well as continued strength in its existing app install and core mobile newsfeed ads,” those analysts said in a note.

Manufacturing and Services Data

Wall Street’s worries sparked on Monday over manufacturing data, but their potential spillover effects to the broader economy were quelled by Wednesday.

The Institute for Supply Management’s gauge of manufacturing activity in the U.S. fell to 50.1 in October from 50.2 in September. The reading was above economists’ expectations for a reading of 50 – which would have the gauge barely in expansion territory. Readings below 50 indicate contraction. Still, it was the lowest level since May 2013.

While some have worried the weakening global factory picture might leak into other areas of an otherwise growing U.S. economy, McGlone said there’s no reason to be concerned.

“We know we’re mostly a service economy. And data in the U.S. is great. It’s the global situation… it’s kind of hard to believe that that’s not going to impact us. Also the stronger dollar – there’s a direct correlation between stronger dollar and declining earnings or higher PEs, so that’s what we’re going to be fighting against,” he said.

Indeed, the ISM on Wednesday confirmed that.

The gauge of service-sector growth rose to 63 during October from 60 in September. The reading was also higher than the declined to 59.5 Wall Street had expected.

What to Watch Next Week

Investors can take a bit of a breather next week as the economic-data calendar isn’t as packed as it has been for the last several weeks – especially with the October jobs report out of the way.

Here’s what to watch:

  • Tuesday: Import, export price data
  • Wednesday: Bond market closed for Veterans Day
  • Thursday: Weekly jobless claims
  • Friday: Retail sales, producer prices, and consumer sentiment

McGlone said he’s got his eyes focused on the consumer data.

“Generally there’s a pretty high correlation between consumer sentiment and stock prices. So, retail sales I’m hoping will be better, they’ve been weak for awhile. I think they’re expected to be around 0.2%. It’s the year over year, it’s only running at 2.4%. Just to give you an example, a year ago, it was running at almost 4%. So we need to get that to pick up a little bit,” he said.