Strong Dollar Limits Foreign Demand, Weakens U.S. Stocks

The major U.S. stock indexes finished lower last week, bringing an end to the series of consecutive weekly gains that began the week-ending December 26. The weakness in the benchmark S&P 500 Index was driven by five straight daily session losses. Contributing to the weakness was slowing global growth, mixed domestic news and dovish central banks. For the first time in weeks, U.S.-China trade deal news was absent from the headlines.

Last week, the benchmark S&P 500 Index settled at 2743.07, down 2.2%. The blue chip Dow Jones Industrial Average closed at 25450.24, down 2.2% and the tech-based NASDAQ Composite finished at 7408.14, down 2.5%.

At the forefront last week were several world central banks that eased their stances towards rate hikes or took new measures to boost their economies.

The European Central Bank (ECB) said it would hold rates steady throughout 2019, which means traders should expect a rate hike until 2020. It also announced additional stimulus funding to banks. The Bank of Canada acknowledged it had underestimated the depth of the slowdown, while borrowing a page from the U.S. Federal Reserve by hinting it will be patient with future rate hikes. The Chinese government also jumped on the stimulus bank wagon with its plans to cut taxes, increase loans to small businesses, and boost infrastructure investment in an effort to promote growth.

The action by the central banks drove the U.S. Dollar higher, which led to a slowdown in foreign demand for U.S. equities.

On the domestic front, U.S. equity markets were supported by better-than-expected results on ISM Non-Manufacturing PMI (59.7 versus 57.4), New Home Sales (621K versus 597K), IBD/TIPP Economic Optimism (55.7 versus 51.2), Consumer Credit (17.0B versus 16.4B), Building Permits (1.35M versus 1.29M), Housing Starts (1.23M versus 1.19M), Average Hourly Earnings (0.4% versus 0.3%) and the Unemployment Rate (3.8% versus 3.9%).

Reaction to U.S. Jobs Report Positive

The major U.S. stock indexes were trending lower before the release of the U.S. Non-Farm Payrolls report. This contradicts some analysts who said the report caused an early in session sell-off. At 13:29 GMT, a minute before the jobs report was released, the March E-mini S&P 500 Index was trading 2736.75. This put the index down 13.25 points at the time.

At 14:29 GMT, about an hour after the release of the report and a minute before the cash market opening, the March E-mini S&P 500 Index was trading 2727.25, down 22.75 points. At 15:08 GMT, the index hit its low for the day at 2722.00, down 28.00.

On Friday, the index closed at 2747.00, down 3.00 or -0.11%. This is up 10.25 from the release of the report and 25 points higher than the low of the session.

In my opinion, the report was not bearish for equities so don’t believe the headlines. Stocks were weaker earlier in the session because China released bad trade balance numbers. This may have carried over into the U.S. opening with a little bit of over-reaction to the jobs report. The positive growth in wages and the drop in unemployment outweighed the plunge in the number of employees added to the payroll.