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I am interpreting January’s labor report positively. Yes, non-farm and private sector job creation did disappoint and there was also a downward revision in the prior month’s data but I think the strong growth in average hourly pay, hours worked and increase in the labor participation rate (LPR) is very significant.
Commenting about hourly earnings, earnings rose more than estimated after climbing in the year to December by the most since July 2009. It is becoming apparent the much awaited pickup in wage growth is starting to manifest itself. Additionally the average workweek rose more than expected. Both variables are instrumental in determining future employment gains.
As noted above, payroll growth did disappoint but there was an unexpected hiring gain in the manufacturing sector, the greatest gain since August 2013. More importantly the LPR rose to 62.7% from 62.6%. The headline unemployment rate of 4.9% was the lowest since February 2008.
Friday I commented there were three components I needed to observe in an attempt to discern whether or not the economic headwinds are abating. Gains in non-farm and private sector payrolls did nominally disappoint but this disappointment can partially be explained away by seasonal distortions.
Wage growth was considerably greater than I thought and is viewed as macroeconomically positive.
The labor participation rate (LPR) was in line with a level I thought as positive albeit the unemployment rate did fall not increase as I had hoped, the result of more workers re-entering the workforce.
The initial reaction to the data was mixed and contradictory. Equity futures fell as the data disappointed. Treasures fell and the dollar rallied, trimming some of the dollar’s largest losses since 2009 as the data could violate current Fed policy thinking of several rate hikes in 2016.
I think it is significant the market is only suggesting a 10% chance of Fed action in 2016.
As stated above, the initial reaction to the data was mixed but selling accelerated, especially in the must own momentum names, as the odds of Fed action increased. The NASDAQ plunged 3.25% versus a 1.3% decline for the Dow. Many times I have commented “if everyone owns a company, who is left to buy when selling commences? No One.”
This appears to be the case. Last year the market was the most bifurcated in history with a 55% difference between the performance of the large growth momentum names and the S & P 500 value names.

What I find significant are Bloomberg’s closing market remarks stating for the week stocks declined in inverse proportion to valuation with a group of about 100 companies with the highest PE ratios declined about 9% while the smaller companies with the lowest PE gained 1.8%
Wow! Several times I have compared 2015-16 to that of 2000-02 where the “typical issue” outperforms the indices/largest issues. Perhaps this comparison will prove to be prophetic.
What will happen this week? FRB Chair Yellen testifies Wednesday to Congress about monetary and economic policy. Will her interpretation be similar to these comments?
Last night the foreign markets were mixed. London was down 2.10%, Paris down 2.80% and Frankfurt down 2.87%. China was closed for their New Year, Japan was up 1.10%and Hang Sang up 0.55%.
The Dow should open sharply lower. According to CNBC, the fear today is greater than that in January 2009 but I ask are conditions really that horrific? Generally speaking earnings have not been that bad neither has the data. The 10-year is up 10/32 to yield 1.80%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.