The Market Today
Decent Jobs Data Unlikely to Move the Needle; Stocks Respond to Higher Rates
by Craig Dismuke, Dudley Carter
Decent Jobs Data Unlikely to Move the Needle: Nonfarm payrolls grew 134k in September, disappointing economists’ expectations for a 185k gain. However, Hurricane Florence appears to have taken a toll on the payroll account of approximately 20-35k which should result in a rebound in future months. Moreover, August’s payroll tally was revised 69k higher to 270k keeping the 3-month average at a healthy 190k and the 2018 average at 208k. Looking at the details, private payrolls grew 121k, government sector jobs grew 13k, manufacturing jobs rose another 18k, and the construction sector added 23k payrolls. On the weak side, the retail sector shed 20k jobs while the leisure sector lost 17k. The two sectors, combined, underperformed their 12-month average rates of growth by 67k reflecting the impact of Hurricane Florence.
The household report showed the unemployment rate dropping from 3.85% to 3.68% as 420k more people reported as employed against just 150k more people entering the labor force. While overall participation in the labor force held steady at 62.7%, prime-age participation fell off 0.2% to 81.8%, matching the weakest readings of the year. Also reflecting the hurricane impact, 299k people reported as unable to work due to weather, the second-highest reading for a September since at least 1976 (the highest was last September when Hurricanes Harvey and Irma impacted the data). If there was an area of weakness in the report, it was the 263k increase in the number of people working part-time for economic reasons.
The focus for investors, average hourly earnings rose 0.29% MoM keeping the YoY rate at 2.75%. However, August’s strong earnings number was revised slightly lower to 0.33% MoM which also brought the YoY down to 2.75%. Despite the slightly weaker revision, the 3M/3M annualized rate of wage growth, a momentum indicator, rose to 3.41% which is the strongest rate of growth since 2009. Despite the hurricane, hours worked held steady.
While the nonfarm payroll number was short of expectations, the temporary hurricane impact and strong August revision offset any concerns. The drop in the unemployment rate continues to show the tightening of the labor market although the increase in people working part-time for economic reasons mitigates that. Average hourly earnings have shown more momentum recently, but the revisions to August’s data tempered the pace of acceleration. The September jobs data are unlikely to change the outlook for Fed officials, and for market expectations of future rate hikes.
Yesterday – Stocks Succumbed to Pressure from Higher Rates: It was a push-and-pull kind of day for U.S. markets Thursday. Higher rates initially led to stock weakness. That weakness eventually deepened enough to cause a flight to quality that pulled Treasury yields back down. And that flight to quality ultimately broke, allowing stocks to end down but off the lows and yields finish roughly unchanged. Stocks opened lower as pre-market futures trading had predicted and spent the remainder of the morning adding downticks to the tape. The major indexes had withstood a Wednesday’s surge in rates but ultimately conceded amid global weakness Thursday. After falling as much as 1.4%, the S&P 500 ended the day down 0.8%. The sector splits showed that higher rates played a role in the daily downturn. U.S. banks, which should benefit from higher interest rates, were the best performers and left the financials sector as one of only two to improve on Thursday. The information technology sector, which has easily outpaced all others in 2018, led all losses with a 1.8% drop. Considering that outperformance so far, the sector seems to have the most to lose on any broader revaluation. Also weighing on tech were analyst downgrades of several semiconductor stocks and a report about China using chips to infiltrate several large U.S. companies. Energy companies fell as well, as crude prices tumbled amid the broad risk-off moves. Also adding pressure was Wednesday’s build in U.S. inventories, which was the largest since March. Asserting themselves as the driver of activity over the last 36 hours, interest rates held despite the downward pressure from equity weakness. The 2-year Treasury yield was less than 0.5 bps lower despite Fed Funds futures continuing reprice to a higher future overnight rate. After climbing as high as 3.23% overnight, the 10-year yield settled back to end up 0.6 bps at 3.19%, its highest yield since May 2011.
Overnight – Tech Weakness Weighs Globally As Higher Interest Rates Continue to Affect Sentiment More Broadly: Global equities fell Friday after steep losses Thursday in the U.S. and Treasury yields crept back up ahead of the morning’s payroll report. There was widespread weakness across both Asia and Europe and, as was the case with yesterday’s U.S. losses, tech companies have been the biggest drag. In fact, the MSCI Asia Pacific Tech index closed at its lowest level since July 2017. Traders were pointing to the report (more above) alleging a Chinese chip attack as raising questions about Asia’s future involvement in the U.S. technology supply chain, and the fact that U.S. Vice President Pence had criticized China for election meddling as another factor that could play into the ongoing trade fight. Higher interest rates, however, are likely a bigger driver of the broader weakness. European yields are on the rise overnight with the German 10-year yield, despite another spike in Italian yields, adding 1.8 bps to 0.55%, its highest in mid-May. U.S. yields were also higher ahead of the jobs report, with the entire curve inside of the 30-year bond up just over 1.5 bps. After the report showed the unemployment rate ticked down to 3.7%, stock futures added to losses and Treasury yields rose further, with the 2-year yield up 2.1 bps to 2.89%, the 5-year yield up 2.3 bps to 3.07%, and the 10-year yield 2.9 bps higher at 3.21%.
Capital Goods Data Softer than Initially Estimated: Factory orders were 0.2% stronger than expected in August, as a large jump in transportation activity lifted overall orders 2.3% from July. Removing that boost from transportation activity (+13.1%), remaining orders were hardly changed, rising only 0.1%. More importantly as it relates to past and future investment in equipment by U.S. businesses, there were negative revisions to last week’s initial estimates for both main core capital goods metrics. Capital goods orders, an indication for future activity, were revised from -0.5% to -0.9% while shipments, an indication of past investment, fell from +0.1% to -0.2%.