The Market Today

2s10s Inverts; ADP Projects 455k Private Payrolls Added


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

ADP Report Shows 455k Jobs Added in Private Sector: The economy added 455k private sector payrolls in March according to the ADP employment report, near expectations for a 450k gain.  The goods-producing sector gained 79k, 3k above its 12-month average.  However, the service sector gained 377k jobs, 121 below its 12-month average.  By company size, smaller companies continued to lead the pace of job recovery and creation.  Companies with 1,000 employees or fewer employee 875k more workers today than prior to the pandemic.  Companies with more than 1,000 employees still have 111k jobs to recover.  The report bodes favorably for Friday’s BLS employment report, although the noise between the two reports, including the significant changes to their seasonal adjustment methodologies over the last two months, makes any predictive indication less convincing for now.

4Q GDP Revised from 7.0% to 6.9%, Inventories Face Higher Hurdle Going Forward: 4Q GDP was revised for the final time with growth cut from +7.0% QoQ SAAR to +6.9%.  The details were fairly notable with personal consumption revised down from +3.1% to +2.5%, a relatively large revision for the category.  However, inventories were revised up by $22 billion bringing its contribution to GDP up from +4.9% to +5.3%.  Excluding the inventory turnaround, the economy would have only expanded 1.6% in 4Q.  Going forward, this will give inventories an even larger hurdle to clear to be a positive factor in the GDP reports.  The Atlanta Fed’s GDPNow tracker for 1Q is currently at 0.9%.

Mortgage Rates Continue to Skyrocket: Mortgage applications fell 6.8% for the week ending March 25 as mortgage rates continue to shoot up.  The average 30-year mortgage rate rose another 30 bps to 4.80%.  They are now 195 bps above their pandemic low, up 147 bps this year alone, and within 36 bps of their high from the previous rate cycle.  Surprisingly, purchase applications rose 0.6% during the week but refi apps plunged another 14.9%.

Fed Communications: Richmond Fed Bank President Barkin (not voter) is scheduled to speak at 8:15 a.m. CT.  Kansas City Bank President George (voter) is scheduled to speak at 12:00 noon.


OTHER ECONOMIC NEWS

Job Market Remained Hot in February: Job openings were relatively steady in February at 11.266 million, a second monthly decline but still the third-highest level in records that began at the end of 2000. Towering over the 6.27 million workers that reported as unemployed that month, the 1.80 openings-per-unemployed-worker ratio represented the second all-time tightest reading behind last December. Reinforcing the upbeat message from the openings data, layoffs declined and quits rose, both back to near record-tight levels, and hires were the second strongest of the pandemic. While dated by the prolonged war in Ukraine and the curve-flattening yield surge in March, the data confirm that the labor market remained extremely tight in February.

Labor Market Keeps Consumers Confident for Now But Clouds Are Forming on the Horizon: The Conference Board’s Consumer Confidence Index improved in March after February’s reading was revised lower, coming in close to expectations at 107.2. While the March reading represented the second weakest reading since February 2021, it remains more buoyant than the University of Michigan’s index which last week was revised down to its second-weakest reading since 2009. The tight labor market, reflected in February’s JOLTS report discussed above, helps explain the divergence between the two measures as the Conference Board survey is more directly tied to developments in the labor market. In this respect, the Conference Board’s current assessment index rose to its third-highest level of the pandemic as the labor market differential, a measure of how easy consumers believe it is to find employment, jumped to a new record in data that stretches back to the 1960s. However, growing uncertainties clearly had an impact as the expectations index fell to its lowest level since 2014. The number of consumers expecting more jobs to be available six months from now fell to the lowest level since March 2020. Similar to the non-employment details from the University of Michigan survey, consumers’ 1-year ahead inflation expectations moved up to a record high in data kept since 1987 and the outlook for income growth slipped to a 14-month low.

Home Price Gains Accelerated to Start the Year: A couple of separate measures showed that home price gains accelerated to start 2022, reinforcing affordability concerns that have been further aggravated by the recent surge in mortgage rates. The FHFA House Price Index rose 1.6% MoM in January, faster than the expected 1.2% gain and 0.2% shy of the strongest all-time monthly gain of 1.8% from April and May of last year. The FHFA’s Purchase Only Index, unadjusted and compared with a year ago, accelerated for a third month to 18.3%. The index recorded its all-time fast pace of 19.4% last July. Separately, the S&P CoreLogic 20-City Home Price Index rose 1.79% MoM, firmer than the 1.5% gain expected. The January pace matched the strongest monthly pace of the pandemic and is the second strongest in records back to 2000. Compared with a year ago, the 20-City Index rose 19.1%, exceeding the 18.6% pace economists expected and the fifth strongest reading ever behind a cluster of reports from last summer.

Harker Forecasts 25-bp Moves, But “Very Open” to Moving Faster: Philadelphia Fed President Harker’s current forecast includes six additional 25-bp hikes this year. However, he said he is “very open to going faster.” “The bottom line is that generous fiscal policies, supply-chain disruptions and accommodative monetary policy have pushed inflation far higher than I – and my colleagues on the FOMC – are comfortable with,” he said. Harker, who has voted this year as an alternate FOMC member because of the vacancy at the Boston Fed, said the Fed needs to quickly return rates to a neutral setting, which he estimates is around 2.50%. “Given the level of uncertainty that we’re facing in this economy, I wouldn’t take a 50 basis point increase off the table for the next meeting. I’m not committing to that right now. But I wouldn’t take it off the table,” Harker explained.


TRADING ACTIVITY

Span Between 2-Year and 10-Year Treasury Yields Inverts Briefly for First Time Since 2019: Markets continued to trade volatilely on Monday as investors monitored headlines on multiple fronts. Reports that negotiators from Russia and Ukraine made progress in face-to-face talks Tuesday stoked risk sentiment ahead of U.S. trading. Russia reportedly agreed to “sharply cut military operations” near Kyiv and Ukraine was apparently open to relinquishing control of separatists regions on its eastern border. The headlines hurled European equities and sovereign yields to new session highs and pushed oil prices down more than 4% to new session lows. U.S. economic data subsequently showed a strong labor market kept current consumer confidence afloat but that rising inflation was dampening the outlook (more above). Those dynamics, essentially a reflection of the Fed’s dual mandate, led another official to publicly note an openness to a 50-bp hike in May if data warrant (more above). The Fed’s increasingly aggressive plans to tighten policy has pressured the yield curve higher and flatter this month at an unprecedented pace. Shorter yields climbed again for most of Tuesday while longer yields pulled back with oil and inflation expectations, leading to the first inversion of the spread between the 2-year and 10-year yields since September 2019, depending on who you ask. Bloomberg terminals showed the spread inverting at 12:32 p.m. CT to -0.0023%. CNBC, however, disputed the inversion reported by “some bond pricing sources,” claiming instead that it “narrowed perilously close to inversion…but did not technically invert.” For what it’s worth, Fintwit sided with Bloomberg. By the close, the spread had widened out marginally with the 2-year yield ending flat at 2.365% while the 10-year yield fell 6.4 bps to 2.394%. The final spread between the two of less than 3 bps was the lowest since September 2019. Despite the potential signaling of an economic slowdown, stocks rallied in the afternoon and closed near session highs. The S&P 500 gained 1.2% while the Dow rose 1.0% and the Nasdaq jumped 1.8%.

Just before ADP released its estimate of private payroll growth in March, U.S. equity index futures were modestly weaker and Treasury yields were mixed. Globally, markets reversed a portion of yesterday’s changes that were spurred in part by reports of progress in peace talks between Russia and Ukraine. A spokesperson for the Kremlin Wednesday described yesterday’s talks as “positive” but said there were “no breakthroughs.” Oil prices were up 2% and the Stoxx Europe 600 slipped 0.5% following Tuesday’s 1.7% gain. Futures tracking the Dow and S&P 500 were 0.3% weaker prior to the in-line payroll data while the Nasdaq pulled back 0.4%. The 2-year Treasury yield was 2.4 bps lower at 2.34% and the 10-year yield was unchanged at 2.39%, providing a bit of breathing room between the related spread and inversion. Shortly after 7:30 a.m. CT, the 2-year yield was 1.2 bps lower at 2.35% with the 10-year yield 0.4 bps higher at 2.40%.


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