The Market Today
August Hiring Disappoints, August Unemployment Disappoints, August Earnings Disappoint
by Craig Dismuke, Dudley Carter
Today’s Calendar – Hiring Disappoints, Unemployment Disappoints, Earnings Disappoint: The August nonfarm payroll report was a disappointment from top to bottom. A total of just 156k payrolls were added last month compared with the economist estimate for 180k. Private payrolls grew by just 165k in August, significantly short of the APD’s projection of 237k. Government payrolls contracted by 9k. In addition to the current month miss, the previous two months were revised down a total of 41k jobs. The August report was the third weakest of the year and, after revisions, the 2017 average dropped from 184k to 176k. If there was a bright spot in the hiring data, it was in that goods-producing industries added 70k jobs which was the third best since 2006. Construction created 28k jobs, the third best of the year, and manufacturing payrolls grew by 36k, matching the strongest result since 2012. Elsewhere, private services payrolls grew by just 95k in one of the weakest months for the sector over the last several years. Hiring in the business services and education and health industries was slightly weaker than it had been recently. The biggest disappointment was in the 4k leisure jobs added. The monthly hiring of leisure workers was the weakest since 2012 and well below the previous 2017 average of 35k.
In the household report, the unemployment rate rose unexpectedly from 4.3% to 4.4%. The driving forces behind the uptick were that 77k more people reported as in the labor force and 74k fewer people reported as employed. That left 151k more people unemployed. With only 77k more people joining the labor force, participation held at 62.9%.
The earnings data was also disappointing with average hourly earnings for all employees rose a disappointing 0.1% in August which left the YoY rate at 2.5% for a fifth consecutive month. The monthly gain was slower than the 0.3% pace in July and below estimates for a 0.2% increase.
Bottom Line: While hiring disappointed estimates, it’s important to remember that it remains above the range that the Fed expects to be sustainable longer-term. But with actual inflation turning lower this year, the Fed has continued to lean on a tightening labor market as reason to remain optimistic about inflation returning to target. With earnings continually refusing to respond to additional hiring, that may become increasingly more difficult to do.
Overnight Activity – Solid Start for September as Markets Await U.S. Payroll Report: Global equities started September on firm footing with almost every major index positive ahead of the U.S. labor report. European stocks led the way with the industrials and materials sectors tied for the top spot. Those sectors were supported early by mostly positive manufacturing PMIs in Asia. A private PMI tracking China’s manufacturing activity rose unexpectedly to its second highest level of the year, confirming the strength in yesterday’s Government-prepared index. The Eurozone’s August manufacturing PMI was also unchanged after revisions at a more-than-six-year high. Global sovereign yield curves steepened marginally on higher yields. The German 2-year yield was 0.7 bps higher while the 10-year yield had risen 3.0 bps. The Dollar had recovered most of yesterday’s decline but reversed lower as the Euro spiked about 5 a.m. CT. The Euro responded to comments from an ECB Governing Council Member that the currency’s moves are within a historical range and we shouldn’t “overdramatize” the recent rally. U.S. equity futures were up around 0.3% and Treasury yields were less than 1.0 bps higher outside of two years.
Yesterday’s Trading Activity – Stocks Rally Towards Records, Yields and the Dollar Fall with Inflation Ahead of U.S. Payrolls: A bit of morning indecisiveness faded just before lunch and U.S. stocks joined a global rally that pushed the major indices back towards record territory. The Dow added 0.25% (170 points shy of its record) as the S&P gained 0.57% (9 points shy of its record). The Nasdaq outperformed with a 0.95% jump that notched the index a new record close. The health care sector led the S&P with nine of 11 sectors and 71% of total stocks improving on the day. The energy sector improved as crude prices rose for the first time this week. Gas prices rose 13.5%, an eighth consecutive daily gain and the sharpest in 18 months. Treasury yields and the Dollar erased an overnight rise after the YoY PCE inflation rate fell 0.1% (as expected) to 1.4% in July. The Dollar also responded negatively to remarks from Treasury Secretary Mnuchin that a weaker greenback can benefit U.S. trade. The 2-year Treasury yield was unchanged at 1.33%. The 5-year yield dropped 1.5 bps to 1.70%, its second lowest level since mid-November. The 10-year yield fell 1.4 bps and closed at 2.12%, the lowest since the day after the election. At the bottom of their post-election range, longer yields are in a precarious technical position ahead of the August payroll data.
Pending Home Sales Point to More Melancholy Housing Activity: The July pending home sales report showed a 0.8% pullback in new contract signings compared with expectations for a half-percentage point gain. Adding to the disappointment, the initial estimate of a 1.5% increase in June was revised down to 1.3%. Looking at the regional results, sales were softer across the board and the three of the four regions reported MoM declines. The NAR’s chief economist said about the data, “Buyer traffic continues to be higher than a year ago, the typical listing has gone under contract within a month since April, and inventory at the end of July was 9 percent lower than last July.” The resultant higher prices are keeping a lid on buying as affordability remains a headwind. He added, “The reality, therefore, is that sales in coming months will not break out unless supply miraculously improves.”