The Market Today
Another Strong Jobs Report; Presidents Trump and Xi Discuss Trade
by Craig Dismuke, Dudley Carter
October Jobs Data : Total nonfarm payrolls grew 250k in October, bouncing back more impressively than expected from September’s hurricane-related weakness. In fact, September’s tally was revised lower from 134k to 118k although there was an equal 16k-adjustment higher to the August huge tally, bringing it to +286k. As a result, the 3-month average rose to 218k and the 2018 YTD average is now up to 213k. The sector splits highlight the impact of the hurricane with the leisure sector rebounding with +42k payrolls, double its 12-month average, and the construction sector adding an above-trend 30k payrolls. After dropping 32k jobs in September, the retail sector added just 2k payrolls and is poised to potentially have a stronger rebound in November.
In the Household report, the unemployment rate rose from 3.68% to 3.74% (holding at 3.7% with rounding) as 711k more people moved back into the labor force (the third largest jump of the cycle) including 600k more people reporting as employed and 111k more reporting as unemployed. As a result, labor force participation picked up from 62.7% to 62.9%, including the highest rate of prime-age (25-54 years old) participation since April 2010. While Hurricane Florence affected the September report, the October data appears to have also been affected by Hurricane Michael although the BLS did state that there was no discernible effect. The number of people reporting as unable to work due to weather was 198k, 121k above the average impact from weather on the October data over the past 10 years.
Average hourly earnings rose a modest 0.18% MoM which was sufficient to drag the YoY rate up to 3.1%, the highest level of the cycle. Despite the modest earnings growth in October, the past three months have shown solid gains which has brought the 3M/3M annualized rate of growth up to 3.60%, also the highest of the cycle. Noteworthy, one of the weaker sectors for wage growth, education and healthcare, posted a strong 0.33% MoM increase in earnings while adding a solid 44k to the payroll count.
Bottom Line: The October labor reports are quite strong with a larger-than-expected rebound from September’s hurricane-affected results. The trend rate of job growth remains well above what economists expected coming into the year. The unemployment rate remains at its lowest level since December 1969 even with more people moving back into the labor force. And earnings growth have shown some traction recently and is likely to remain close to 3.0% YoY. While these results justify the Fed’s determination to remain on its gradual tightening path, they are unlikely to cause an acceleration until there is evidence of the stronger labor market translating into faster consumer price inflation.
Yesterday – Stocks Jumped on Earnings and Trade Optimism But Yields Fell on Weak ISM and Lower Oil Prices: U.S. stocks were choppy early, briefly turning negative after October’s ISM Manufacturing PMI fell more than expected to a six-month low. However, nine minutes after that report was released, President Trump tweeted that he had spoken with Chinese President Xi and that “Those discussions are moving along nicely,” sending stocks whipping back higher. Stocks strengthened further in late-afternoon trading and the major indices closed near their highs of the day. The Nasdaq led with a 1.75% gain while the Dow and S&P 500 both rose 1.06%. The S&P 500’s materials sector rallied nearly 4% to lead all others, after shares of DowDuPont surged more than 8% on an earnings beat. Consumer discretionary companies added 2.2% while industrials benefited from the positive tone on trade. Energy companies actually rose despite crude prices crumbling. U.S. WTI dropped 2.8% to its lowest level since April 15 after OPEC production was reported at its highest in two years and became the latest factor to create concerns of too much global supply. U.S. WTI finished down 16.9% from a four-year high reached on October 3. Despite stronger stocks, Treasury yields weren’t buying the daily optimism. After moving up overnight, yields dropped after the ISM missed and made another move lower as oil tumbled. For the day, the 2-year yield shed 2.2 bps to 2.85%, the 5-year yield fell 1.9 bps to 2.96%, and the 10-year yield slipped 1.3 bps to 3.13%.
Overnight – Reports of White House Drafting Trade Agreement Cheered by Global Equities: Ahead of this morning’s U.S. jobs report, global optimism had turned higher on hopes the U.S. and China may be making progress on resolving some of their trade differences. In addition to yesterday’s tweet from President Trump (more above), a report was released just before midnight central time that said the president had asked his team to draft a possible trade deal with the United States’ largest trading partner. Bloomberg reported the President had asked members across various agencies to formulate a draft agreement he could take to the G-20 summit later this month in hopes of settling the ongoing trade dispute. U.S. equity futures, which were in negative territory after a disappointing earnings report from Apple after Thursday’s market close, reversed quickly into positive territory and moved up to their highs of the day. S&P 500 contracts were up 0.8%. Markets in Asia were already positive but compounded those gains to close notably higher to end the week. The MSCI Asia pacific gained nearly 2.5%, marking its biggest daily gain since March 2016 and first positive week in the last six. The tone is similarly firm across Europe with healthy gains across the region helping to lift the Stoxx 600 1.2%. That level would represent a 4.2% weekly gain for the index, the best since 2016. Sovereign markets have also been repriced for the increased positivity. Core European yields were higher and the Treasury curve had moved up roughly 3 bps. After the payroll report showed job growth snapped back more than expected and earnings grew more than 3%, the 2-year yield moved to up 3.6 bps on the day, the 5-year yield to up 4.4 bps on the day, and the 10-year yield to up 3.4 bps.
Construction Spending Revised Higher on Non-Residential Investment, but Residential Spending Continues Trending Lower: Construction spending in September was better than expected thanks to a positive revision to August’s data. August spending was originally reported to have been unchanged for the month, but revisions to non-residential investment in structures helped lift that tally +0.8%. September’s construction spending was unchanged from August’s revised-higher level. Public construction fell 0.9% in September but non-residential spending rose 0.1% and residential construction was up 0.6%. The strength in residential spending came from an 8.7% increase in multi-family projects while single family spending actually fell 0.8% and home improvement rose just 0.1%. While the jump in multi-family alleviated the concerns for a month, the slowing pace of residential construction continues to weigh on growth expectations. Moreover, the positive revision to August’s report should boost 3Q’s GDP total in the first revision.
Manufacturing Report Weaker-than-Expected, Recent Decline in New Orders Noteworthy: The October ISM Manufacturing index pulled back 2.1 points on some mildly concerning areas of weakness. The production index, a measure of current activity, pulled back 4.0 points but remained reasonably strong. However, the new orders index, an indicator of future activity, dropped 4.4 points and is now down 7.7 points over the last two reports to its weakest level in 18 months. Also a concern, the new export orders index dropped 3.8 points to its weakest level in two years. Particularly given the concerns about tariffs, weakening global ISMs, and a strong Dollar; the relative weakness in new orders and new export orders is noteworthy.
ICYMI – October 2018 Monthly Review: Reminiscent of February’s episode, surging interest rates sparked a stock market sell-off that led the S&P 500 to its worst month since September 2011. Treasury yields jumped sharply on October 3 after a couple of surprisingly strong economic reports preceded Fed Chair Powell saying policy was “a long way from neutral.” The resultant angst was compounded by concerns of slowing global economic growth and fears of further escalation in the U.S.-China trade dispute. For the month, the Nasdaq plunged 9.2%, the S&P 500 tumbled 6.9%, and the Dow dropped 5.1%. The flight-to-quality caused by the turmoil for equities cut into the sharp, early spike in Treasury yields. After rising as much as 9.4 bps, the 2-year yield finished up 4.8 bps. The 10-year yield rose as much as 19.8 bps but ended October just 8.2 bps higher. Click here to view the full review.