Markets stalled in the first full week of 2014, with major indices ending on a mixed note. For the week, the S&P 500 gained 0.6%, the Dow lost 0.2%, and the Nasdaq rose 1.03%. 
Friday’s December Employment Situation report showed that job growth slowed significantly in December, adding just 74,000 new jobs. This was well below consensus estimates, which expected a number in the neighborhood of 200,000 new jobs. At odds with the dismal jobs data, the household survey showed a very large drop in unemployment, causing the headline unemployment number to fall to 6.7%, very close to the Fed’s goal of 6.5%.
Markets reacted nervously to the unexpectedly negative data, which is completely out of line with the generally positive labor trends of the past weeks and months. One way for unemployment to drop even as job growth declines is for people to quit searching for jobs, thus dropping out of the labor force. In December, the labor force participation rate dropped to its lowest in more than three decades. However, labor force participation jumped in November, so it’s possible that the December data is a statistical outlier. Divergences between the two surveys do occasionally happen and economists usually wait a month or so for revisions to be made that straighten out the data.
Bottom line: we’re getting very close to the Fed’s threshold rate of 6.5% unemployment, but the overall labor market is still weak. Given this weakness, the Fed will probably need to clarify its tapering plans and give guidance about how critical that 6.5% floor really is.
Looking ahead, earnings season will be kicking off this week. First up are several major financial firms; like JPMorgan Chase [JPM], Wells Fargo [WFC], Bank of America [BAC], Citigroup [C], and investors, will be taking a hard look to get a sense of how fourth quarter earnings season will go. If earnings continue their positive trend, investors could see further upside; if earnings disappoint, investors may decide to take some more profits off the table and wait for better news.
Tuesday: Retail Sales, Import and Export Prices, Business Inventories
Wednesday: Producer Price Index, Empire State Mfg. Survey, EIA Petroleum Status Report, Beige Book
Thursday: Consumer Price Index, Jobless Claims, Treasury International Capital, Philadelphia Fed Survey, Housing Market Index, Ben Bernanke Speaks 11:10 AM ET
Friday: Housing Starts, Industrial Production, Consumer Sentiment
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
Yellen confirmed as next Fed chair. The Senate voted to confirm current Federal Reserve vice chairman Janet Yellen as the next Fed chairman. She will replace current chairman Ben Bernanke when his term ends at the end of January. A major focus of her tenure will be the unwinding of the central bank’s unprecedented quantitative easing programs.
Wholesale inventories grew in November. Business inventories increased 0.5% in November, following a 1.3% increase in October. Inventory growth has been strong over the last few months, suggesting firms have confidence in consumer demand and that restocking could contribute significantly to Q4 economic growth.
China exports slow. Chinese exports declined more than expected in December, though the drop may be due to changes in how exports are calculated. Regulators clamped down on speculative trading activities disguised as export deals. Economists are optimistic that a brighter 2014 will cause export activity to pick up in the world’s second largest economy.
Retailers cut forecasts. A disappointing holiday season led to several retailers cutting 2014 earnings forecasts. Despite aggressive actions to lure shoppers, a shortened shopping season, unseasonably cold weather, and anemic spending combined to hit retailer revenues hard.
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