 "Dynamic Capital")
Private sector job growth severely beat estimates, sending the dollar higher against its international counterparts as the stronger the economy is (with job growth being a leading indicator), the more likely the US Federal Reserve is to continue raising the federal funds interest rate. US stock markets, which some analysts are beginning to suspect are oversold, are remaining relatively flat (though mostly in positive territory) today, with index futures showing more upside than downside. After four days of consecutive losses, the STOXX 600 (a widely used European stock index) saw a modest gain of 0.1%, led by Adidas – which grew a record 7.5% after its new CEO announced that the organization beat already high promises of increased sales and profit targets.
The ADP National Employment report showed that private payrolls surpassed expectations by nearly 50% last month logging 298k, versus the predicted gains of 190k. Payroll gains in January were also revised upwards from 246k to 261k. The rush of good news coming out this week, means it is all the more likely the Fed will continue raising interest rates after its meeting next week. Traders are estimating an 88.6% chance the Fed will raise interest rates by 25 basis points at its meeting on March 15th, up from 81.9% before those numbers were released. Investors are not overly concerned about the rise in interest rates negatively affecting the stock market, since they have been depressed for a long time, and the economy appears to be in a strong position to handle it. Raising it by 25 basis points would bring it to 0.75% overall, which is still very low, and cheap money, considering a historical perspective.
Caterpillar and Merck & Co dragged down the DJI while the S&P500 saw modest gains. The dollar reached its highest level over the past five days, and the euro hit a five-day low after disappointing European payroll data ahead of a European Central Bank meeting on Thursday where investors are unsure of what the outcome will be. Despite increasing pressure from inflation, some are hypothesizing the ECB will not be tightening its monetary policy in the near future as they try to encourage growth. The greenback strengthened about 2.5% against a basket of major currencies over the past five weeks, and is on track to continue gaining strength.
Oil again dropped, falling below $56 per barrel after reports from the sector indicated a large rise in US inventories so many believe demand for the new oil is on the way down. The strong reports in private sector job growth pushed up US Treasury yields, putting them at their highest levels since mid-December – indicating investors’ long term confidence in the US economy.