The Market Today
Another Good Jobs Report Follows Best January for S&P Since 1987
by Craig Dismuke, Dudley Carter
2019 Starts off Where 2018 Left off – Another Good Jobs Report: January’s nonfarm payroll report blew out expectations once again, showing total payrolls increased 304k during the month, although -70k in revisions to the previous two months’ data stole some of the report’s thunder. Private sector jobs grew 296k while government jobs grew 8k. The 3-month average for total payroll growth rose to 234k, the fastest pace since 2016. Primarily driven by a 52k gain in construction jobs, the goods producing sector added 72k jobs marking the 3rd largest increase since 2006. Because the Senate passed legislation approving the workers for backpay, the 800,000 furloughed federal workers should still be counted as employed in the establishment survey.
Also from the establishment survey, average hourly earnings rose a disappointing 0.11% MoM, although the December data were revised higher. As such, December’s YoY rate was revised up to 3.34% YoY (the fastest pace of the cycle) but January’s figures fell to 3.18%. Much of the weakness was due to the unusually large gains in construction sector payrolls at the same time that construction earnings dropped 0.7% MoM. As a key indicator of inflation pressure for Fed officials, this trend will warrant close attention in coming months, particularly if the recent strength begins to fade.
In the household report, the unemployment rate ticked up from 3.86% to 4.00% on revisions to the population data. After a -800k adjustment to the overall population data, the month over month data showed 151k more people in the population, 495k more people in the labor force, 237k more people employed, and 259k more people unemployed. Of those 259k unemployed, 175k were determined to be temporarily laid off. Many of those were likely federal employees. Of the 800,000 furloughed employees, 380,000 were actually forced to not report to work (420,000 continued to work without pay). Assuming those workers had been employed, the unemployment rate would have held at 3.9%. As such, the report was still a bit disappointing although the unemployment rate does remain lower than the Fed believes is sustainable.
Overall, the January jobs report was moderate. The nonfarm payroll reports was, once again, surprisingly strong. However, the slightly disappointing household figures and weaker-than-expected wage growth take a little shine from the aggregate results. Regardless, the labor market continued to weather the vast uncertainty that plagued the investor, business, and consumer confidence at year-end. The Fed is unlikely to be deterred from their path of patience based on this data, but it certainly keeps a rate hike on the table sometime in 2019.
Manufacturing, Confidence, Construction, Auto Sales, and Fedspeak: The economic calendar is packed today, even after this morning’s jobs data. The January Markit and ISM manufacturing indices will be released at 8:45 a.m. CT and 9:00 a.m., respectively. The December ISM report showed the largest monthly drop in a decade, spooking the markets in the midst of the December stock plunge. Also at 9:00 a.m., the University of Michigan will release it final January confidence index after having already fallen to its lowest level since the recession. November’s delayed report on construction spending is expected to show a 0.2% MoM increase in building activity after three consecutive months of contraction. January’s auto sales data will be reported throughout the day with automakers saying the early-2018 soft-patch may be over. In addition to all of the data, St. Louis Fed Bank President Bullard will appear on CNBC this morning and Dallas Bank President Kaplan is slated to speak in Austin at 8:45 a.m.
Yesterday – Stocks Wrapped Up Solid January: U.S. equities were mostly stronger Thursday after ripping higher Wednesday following a crucial Fed decision that was seen putting monetary policy on hold indefinitely. Corporate earnings continued to affect the major indices to different degrees. The Dow ended lower as DowDuPont plunged on a profit warning and Visa pulled back after payment volumes disappointed. Tech shares, however, rallied after Facebook surged 11.3%, the most in three years, in response to upbeat earnings. The Nasdaq rode tech’s strength to a 1.4% gain on Thursday. The S&P 500, affected by all of the above, closed up 0.9%. Shares of GE were the second best performer within the S&P 500, rallying the most in nearly 10 years as investors lauded management’s turnaround plans. Despite a mixed Thursday, the Dow (1989), S&P 500 (1987), and Nasdaq (2001) all posted their best January in years. January was the best overall month for the Dow and S&P 500 since October 2015 and for the Nasdaq since October 2011. Treasury yields extended Wednesday’s slide Thursday in nearly parallel fashion. The 2-year yield dropped 5.0 bps to 2.46% which, save one day earlier in the year, was the lowest close since May 2018. The 10-year yield dropped a similar 4.8 bps to 2.63% which, save two days earlier in January, was the lowest close in 12 months. President Trump held a meeting in the Oval Office after equity trading closed to discuss progress made on trade. While the general tone taken by both sides was one of optimism about progress, including China upping their purchases of U.S. soybeans, there remain differences between the two sides that will not be settled until Presidents Trump and Xi meet later in the month. The meeting had little impact on Treasury yields.
Overnight – Busy Week Ends with Disappointing Global Data and Anticipation of U.S. Jobs Report: With the week’s two biggest policy meetings now in the rearview, investors have shifted focus back to economic data from the world’s two largest economies. The Fed’s pivot to patience and a pause for rate hikes became official at Wednesday’s meeting. A two-day meeting of senior trade officials from the U.S. and China wrapped Thursday with both sides announcing progress had been made, including a pledge from China for more purchases of U.S. goods, and that negotiations would continue in the coming weeks. Top U.S. officials will soon travel to Beijing and Presidents Trump and Xi are likely to meet later in February before the March 1 deadline. A trade deal is seen as increasingly important to calm markets and keep the global economy from grinding to a halt. Overnight, another Chinese manufacturing PMI contracted in January with the Caixin PMI now at a 35-month low. A round of PMIs released alongside the report showed manufacturing also softened across a host of other Asian economies. Still, hopes of a trade deal helped Chinese shares shoot higher by 1.4% in a mixed session in Asia. Just a day after data showed the country’s economy fell into a recession in 4Q, Italy’s manufacturing PMI for January stumbled more than expected to its lowest level since May 2013. Italian yields jumped nearly 20 bps. Treasury yields were little changed ahead of the jobs report and Nasdaq contracts were leading U.S. futures lower as shares of Amazon slipped following its Thursday earnings release. Yields ticked up to their highs of the day after the report.
New Home Sales Surged the Most Since 1992: On Wednesday, the Commerce Department published an updated release calendar for several data series its responsible for publishing, but which were delayed by the month-long government shutdown. The first of those reports was released yesterday after markets opened and showed the largest single-month gain for new home sales since January 1992. The 16.9% MoM surge pushed the annualized pace up to 657k units, the best pace in eight months. In addition to November’s positive results, each of the previous three months was revised higher for a cumulative upward revision of 44k units. At the regional level, sales in the South, which generally account for more than half of total activity, popped an impressive 20.6%. Activity in the Northeast and Midwest also reflected hearty percentage gains while sales in the West slipped to a five-month low. While November represented the peak for several separate measures of mortgage rates, buyers saw affordability improve on the pricing front. The median price tumbled to a 21-month low of $302.4k, representing an 11.9% drop from a year earlier, the biggest annual change since February 2009. While new home sales tend to be volatile, the monthly jump represented a recovery from October’s steep 8.3% decline, the fact that sales jumped as prices fell could portend a potentially more positive outlook for near-term activity, especially if the recent decline in mortgage rates holds in the months ahead.