Energy and financial stocks could lead equities higher into year-end: trader

By Peter Kenny, chief market strategist for Global Markets Advisory Group and owner of KennysCommentary.com

Themes:

  • Banks closed today for Columbus Day, US equity markets open
  • FOMC Minutes – Wednesday, PPI-FD – Thursday, CPI – Friday highlight a light weekly economic calendar
  • Q3 earnings season heats up this week with a focus on banks/financials
  • September’s Employment Report (-33K) comes in well below forecasts reflecting impact of a very active and destructive hurricane season
  • Markets shrug off September’s massive monthly Employment Report miss
  • Trumps’ tax reform effort and Fed Chair conversations dominate Washington DC and Wall St.
  • Will bank stocks tack on further gains this earnings season after a massive run up in share prices in September?

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10-year Treasury Note yield (CBOE) (^TYX) 2.36%
WTI Crude Oil (Nymex) (CL=F) $49.64/bbl
Volatility S&P 500 (^VIX) 9.94
Gold (Comex) (GC=F) $1,284.00/t. oz.
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US labor market continues to tighten

Without question, the most significant economic data released last week was the September employment report. The initial figures for the month reflected a drawdown of 33K net employment positions nationally. Bloomberg consensus was calling for a gain of 100K with the high estimate calling for a gain of 240K for the month. Clearly, most estimates included in the consensus estimate were wildly optimistic. Additionally, the estimates did not accurately reflect the impact of the hurricanes on economies directly affected. It is noteworthy that as a result of the natural disasters that have hit the United States this hurricane season, this employment report was the first in seven years to reflect contraction.

As dramatically disappointing as September’s topline employment figures were, markets shrugged them off as an anomaly. The widely-shared outlook is that the drawdown in employment figures for September does not represent a shift in trend, that it will be a short-lived anomaly, and that ultimately it will lead to above-trend employment gains as we head into Q4 and Q1 of 2018. Not only did equity markets shrug off the September employment report results by closing nearly unchanged/mixed, but also volatility as measured by both the VIX (^VIX, VXX) and US treasury yields as measured by the 10-year (^TNX, TLT) barely registered a move. Broadly speaking, as counterintuitive as it sounds, September’s employment report miss actually reinforced investor expectations for a move on rates by the FOMC in December.

A deeper dive into the report suggests that hurricane effects aside, the US employment picture is continuing to tighten. August’s employment figures were revised higher to 169K from 156K. The official unemployment rate in September dipped to 4.2% from August’s 4.4%. August’s manufacturing payrolls were also revised higher from a solid gain of 36K to 41K. The labor force participation rate ticked higher from August as well from 62.9 to 63.1 in September. Average Hourly Earnings M/M rose to 0.5% from 0.2%. On a Y/Y basis, wages rose to 2.9%. The only vertical in the report that did not move was the average hourly workweek, which remained constant at 34.4 hours.

This week’s economic calendar is relatively sparse. Banks are closed today in honor of Columbus Day, though markets are open. There are three releases that will likely capture much of the attention away from earnings. On Wednesday we receive the previous FOMC meeting’s minutes. Given the fact that we heard 13 talks by Federal Reserve officials last week and that another eight are scheduled for this week, there is not a great deal of mystery surrounding the Fed’s outlook on the economy or monetary policy as we head into Q4. On Thursday the PPI-FD inflation data is released. For August, it was a disappointing 0.2% M/M—especially given the rally we saw in energy prices. Bloomberg consensus is calling for an uptick to 0.4% in September. If that increase does materialize, it would further fortify calls for a move by the Fed in Q4. The Y/Y change in PPD-FD in August was 2.4%. On Friday we receive the CPI for September, arguably the most important data release of the week for those keeping a close eye on rates and Fed targets. Bloomberg consensus is calling for a solid 0.6%, an increase from August’s 0.4%. The Y/Y change is expected to rise to 2.3% as well.

Earnings season: Financial and energy sectors in focus

Earnings season technically got underway last week with 17 of the S&P 500 (^GSPC, SPY) constituent companies reporting. If the companies that reported are any indication of what to expect in the coming weeks, equity markets should find support at these record levels. Those companies that reported last week posted an aggregate earnings acceleration of 5.6% over the past year on revenues that rose 5.2%. According to Zach’s Research, “Total Q3 earnings for the S&P 500 index are expected to be up +3.2% from the same period last year on +5% higher revenues. This would follow double-digit earnings growth in each of the preceding two quarters.” This earnings season, large-cap tech (XLK) is expected to underperform the broadly constructive earnings and revenue narrative. On the opposite side of the curve, financials (XLF) and banks (KBE) are expected to outpace the broader market. The question for those focused on the all-important energy sector (XLE) is rather rudimentary: Will energy, specifically oil (CL=F), maintain its trend higher given the positive price action we saw at quarter end? In that event, energy could well return to a leading sector for a strong year-end finish. Resurgent strength in the financial and energy sectors would augur well for a continued and incremental march higher into record territory for US equity market indices in coming weeks.

Economic calendar (all times Eastern):

Monday

Columbus Day

Banks closed, markets open

No economic releases scheduled

Tuesday

6:00 AM NFIB Small Business Optimism Index

8:55 AM Redbook

Neel Kashkari,  10:00 AM

Rob Kaplan,  8:00 PM

Wednesday

7:00 AM MBA Mortgage Applications

10:00 AM JOLTS

2:00 PM FOMC Minutes

Charles Evans,  7:15 AM

Thursday

8:30 AM Weekly Jobless Claims

8:30 AM PPI-FD

9:45 AM Bloomberg Consumer Comfort

11:00 AM EIA Petroleum Status Report

Jerome Powell,  10:30 AM

Raphael Bostic,  9:15 PM

Friday

8:30 AM Consumer Price Index

8:30 AM Retail Sales

10:00 AM Business Inventories

10:00 AM Consumer Sentiment

1:00 PM Baker-Hughes Rig Count

Eric Rosengren,  8:30 AM

Charles Evans,  10:25 AM

Robert Kaplan,  11:30 AM

Jerome Powell,  1:00 PM

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