Market snapshot: jobs, rates and bank stocks

Wall Street has lost some of its fizz since an early New Year rally. Our head of markets explains why, and also looks at drivers of UK stock prices, including the high street banks.

The initial exuberance of the New Year was soon replaced by a more wary outlook, as the impact of earlier-than-expected rate hikes were being priced in.

The non-farm payrolls figure was much lighter than expected, coming in at 199,000 jobs added versus a consensus of 400,000, suggesting a lack of available workers. That being said, over the course of last year around 6.5 million jobs were added, and unemployment now stands at 3.9%. This would tend to play into the Federal Reserve’s more recent view that full employment may already have been reached, which in turn could lead to wage pressure.

This additional inflationary factor points to the Fed sticking to a course of monetary tightening, which now seems likely to lead to an initial rate hike in March. Further clues will come later this week as the latest inflation reading is due, as well as a retail sales figure which could indicate that consumer spending and growth is being crimped. The likelihood of deflated sentiment arising from a burst of new Coronavirus cases alongside a more inflationary environment would further inform the central bank’s current thinking.

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In the meantime, US Treasury yields continue to rise, boosting the shares of the likes of the banks, which kick off the fourth quarter earnings season at the end of the week with updates from JP Morgan (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC).

Expectations are high for the season as a whole, with earnings expected to round off the year in profitable fashion. Of equal importance, however, will be the guidance and outlook comments accompanying the numbers, as investors continue to grapple with the current state of the nation.

The rotation away from growth stocks also remains in evidence, with the technology-laden Nasdaq suffering another difficult day and standing down by 4.5% after the first week of new year trading. The other indices also dipped into negative territory for the week, with the Dow Jones losing 0.3% and the S&P500 1.9%.

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Meanwhile, the UK’s premier index is cautiously bucking the trend in the early part of the year, having so far added 1.3%. Perhaps less impacted by rate hike timing concerns as evidenced in the US, the index is rather being bolstered by the nature of its constituents.

An initial 5% hike in the oil price has lifted the majors, with Shell (LSE:RDSB) regaining its place as the largest FTSE100 company by capitalisation. 

The banks are also being boosted on the possibility of a rising interest rate environment. Equally, the sector has more recently come into vogue on valuation grounds, with investors considering the banks to be sitting on relatively cheap valuations, and with the currently preferred picks being Barclays (LSE:BARC) and Lloyds Banking Group (LSE:LLOY). Further colour may also arise from the US banks later in the week on a read across basis.

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