The Market Today
April Jobs Report Temporarily Cools Wage Inflation Fears
by Craig Dismuke, Dudley Carter
Vining Sparks on CNBC’s Worldwide Exchange: Vining Sparks’ Chief Economist Craig Dismuke appeared on CNBC this morning discussing the trade negotiations between Chinese and U.S. leaders and the upcoming jobs report. The trade negotiations are unlikely to garner much market reaction at this point as they are in their infancy with negotiators just feeling each other out. Longer term, the outcome will be important to market stability. Regarding the jobs data, he emphasized the importance of the earnings figures over the actual number of jobs created. He highlighted that of the past 16 jobs reports, nine have shown weaker-than-expected earnings. This has implied a more patient Fed and, thus, stock prices have rallied in response every time. In contrast, three earnings reports have been stronger-than-expected, implying the Fed may not be able to be as patient. Stocks fell on two of those days, including the big drop on February 2nd which marked the beginning to this year’s heightened stock volatility.
April Jobs Report Cools Wage Inflation Fears: Nonfarm payrolls for the month of April rose 164k, 29k below expectations but still reflective of a good trend pace. After a booming February report (+324k) and a +32k revision to March (+135k post-revision), the 3-month average is now 208k. Private payrolls grew 168k while government payrolls fell 4k. The manufacturing sector posted a solid 24k gain while construction payrolls were slightly off their recent streak, growing a still-decent 17k. The weakest sector was transportation which added just 0k jobs versus its 12-month average of +15k.
The household report showed the unemployment rate dropping from 4.07% to 3.93% as the exodus from the labor force resumed. Another 411k people reported as not in the labor force. The number of unemployed persons fell 239k while the number of employed rose just 3k. Incidentally, 133k people reporting as unable to work due to weather, the highest level for an April report on record.
Most importantly at this point in the cycle, average hourly earnings rose a less-than-expected 0.1% MoM. In addition, the March earnings data were revised down from +0.3% to +0.2%. The combination of weaker March and April earnings than expected brought the YoY rate of growth down from 2.7% to 2.6%, putting at least a temporary chill on recent fears of escalating wage pressures. This will calm some investor fears that the Fed could be forced from a gradual mode to a reactionary one.
Bottom line: Nonfarm payrolls continue to run at a good pace despite disappointing expectations in April. The rate of gain should moderate going forward given where the economy is in its cycle. Unemployment remains very low, even lower, thanks to strong job growth and an aging population. But earnings traction has yet to prove stable enough to warrant fears of overheating.
Clarifying the FOMC Statement: Also on the calendar today are speeches from Fed members John Williams, Bill Dudley, Raphael Bostic, Esther George, Robert Kaplan, and Vice Chair Randal Quarles.
Yesterday – Stock Turnabout Pushed Yields Up off Two-Week Lows: The Dow ended essentially unchanged on Thursday as the S&P 500 dropped 0.3%. Not too bad of a day considering where things were headed in early morning trade. The Dow bottomed around 10 a.m. CT, down almost 400 points or 1.6%, and the S&P 500 had fallen 41 points, also 1.6% lower than Wednesday’s close; both broke below their respective 200-day moving averages. Futures had pointed to a weaker open as trade talks between U.S. and Chinese officials began in Beijing and European indexes weakened after a softer-than-expected inflation report there. Adding to pressure, an analyst downgrade for Caterpillar, the Dow’s eighth heaviest-weighted component, coincided with a notable drop in futures trading. But trading turned around 11:30 a.m. CT and stocks clawed their way back above their 200-day moving averages and almost to where they ultimately closed. Treasury yields, which were lower overnight, fell further and bottomed coincidentally with stocks. After a partial recovery, the 2-year yield ended down 1.2 bps at 2.48% and the 10-year closed 2.1 bps lower at 2.95%.
Overnight – Investors Focus on Trade Talks and Labor Data: Global markets moved in different directions Friday as investors reflected on a two-day trade meeting between U.S. and Chinese officials and looked forward to this morning’s U.S. payroll data. After wrapping up what official Chinese news media said were “frank, efficient and constructive” discussions that resulted in “some areas” of agreement but “significant disagreements” in others, the two parties exchanged memos full of requests. According to the WSJ, who reviewed the U.S. memo, the U.S. wants China to cut $200B from its $375B goods trade deficit, cease subsidies for high-tech companies, match lower U.S. import tariff levels on certain products, and withdraw a WTO complaint. Asian equities closed down Friday. European equities strengthened and sovereign yields there inched higher despite disappointing bank earnings and negative revisions to several already-soft regional PMIs. Immediately in front of the jobs data, U.S. yields were near the lows of the day (2s -0.4bps, 10s -1.7bps), the Dollar was up but off the highs, and equity futures were down more than 0.3% and near the lows. Shortly after the reports released, yields reached new lows but stocks remained weak and the Dollar strong.
Another Disappointing ISM: April’s ISM Non-manufacturing PMI was a disappointment, dropping more than expected to a four-month low. The key new orders index recovered modestly but the small gain was offset by weaker trends elsewhere. The supplier deliveries index fell the most, signaling smaller logistical delays in the services activity pipeline. Generally, this is considered a negative economic indicator because it suggests less robust underlying demand. The letdown continued in the employment index which moved down to its lowest level in a year. The production and activity index also slipped. Similar to the manufacturing series, the pullback in the ISM data was in contrast to a modest improvement in the Markit Services PMI. However, based on the lower ISM manufacturing and non-manufacturing PMIs, the 2Q rebound looks to be off to a slower pace than previously expected.
Solid Factory Orders Included Disappointing Revisions for Business Spending: Factory orders were stronger than expected in March and, as expected, transportation orders rose strongly on the back of nondefense aircraft activity. The headline beat was even stronger adding in the effects of February’s 1.2% gain being revised up to 1.6%. Stripping out the bump from transport orders, core factory orders were up a more modest 0.3%. The report included mixed revisions for durable and capital goods activity. Headline durable goods order were unchanged at 2.6% and orders ex-transports were nudged up from flat to 0.1%. However, the changes in capital goods activity were less positive. Core capital goods orders fell 0.4% as opposed to the initial -0.1% estimate and shipments dropped 0.8% instead of -0.7%. Those changes enhance the weaker-than-expected trend in business spending on equipment to start the year.