European indices are trading more than 1% higher on the first trading day of the week following the long Easter weekend, as investors respond for the first time to the US jobs report that was released on Friday. Once again we’re seeing negative economic reports getting the thumbs up from investors as they’re seen to support a delay in the timing of the first rate hike, which would be positive for equity markets.
US futures are currently taking no lead from Europe, pointing to a flat open shortly before the opening bell on Wall Street. Traders in the US had the opportunity to respond to the non-farm payrolls figure yesterday and appear to have ignored the improvement in wage growth, despite the Fed’s constant reminders that wage growth and inflation remains its primary concerns.
A good indication of future wage growth can come from the JOLTS job openings survey, which is due to be released today for February. One component in particular, quits, can be viewed as a good leading indicator for wage growth and therefore inflationary pressures. In times of low job security and openings, people are very reluctant to quit their job as they can’t be certain of getting a new one. At this stage of the cycle, there is little incentive for companies to raise wages because the number of people looking for work far exceeds openings.
If the latest JOLTS data shows job openings continuing to rise, as has been the trend of the last year in particular, the number of people quitting their job should also continue to rise. This would mean companies needing to pay their staff more in order to retain them and offer better incentives to people in order to convince them to join. In other words, with slack in the economy having been significantly reduced, the coming year should bring better wage growth and therefore inflationary pressures, something the Fed is banking on if interest rates are to rise.
We may see a little caution from US investors over the next 48 hours ahead of Alcoa’s first quarter earnings announcement. Alcoa unofficially kicks off the first quarter earnings season after the closing bell on Wednesday and investors are not feeling optimistic about it. Poor weather in first three months of the year combined with a stronger dollar and weak commodity prices are likely to hit companies earnings quite heavily.
Even the usual lowering of the bar may not be enough to get a positive reaction from investors. Quite often in recent years, we’ve seen the bar lowered to the point that efficiency driven earnings growth has been enough to keep investors happy but even that is unlikely to come this time around. The most important thing this season could be the outlook and how companies plan to cope with the strong US dollar in particular, and its impact on foreign earnings. The dollar is likely to get stronger again this year so this, unlike energy prices and weather problems, is unlikely to be a temporary problem.
The S&P is expected to open unchanged at 2,080, the Dow 12 points higher at 17,892 and the Nasdaq 3 points higher at 4,353.
For a look at all of today’s economic events, check out our economic calendar.