The Market Today
Earnings Growth Disappoints as Labor Market Continues to Tighten
by Craig Dismuke, Dudley Carter
Earnings Growth Disappoints as Labor Market Continues to Tighten: The economy added 145k nonfarm payrolls in December, below the expected 160k gain and the third-weakest reading in 2019. The soft report was expected given that Thanksgiving was as late as can possibly be in 2019. History shows that the seasonal adjustments can cause distorted payroll results in years with late Thanksgivings. As such, we take the December weakness with a grain of salt.
There were only small (-14k) revisions to the previous months’ reports. The December figures brought the average monthly gain for all of 2019 down to 176k, still a better year than expected. The 3-month average pulled back to 184k but remained well above the weakest period of job growth for the year, early-summer, when the 3-month average dipped to 135k.
Private payrolls grew 139k while government added 6k jobs. Like in the ADP report, the construction sector showed a solid 20k gain while the manufacturing sector disappointingly shed 12k jobs. Retail job growth was quite strong, up 41k, the strongest gain since 2017 and possible evidence of the seasonal distortion. Most other sectors showed weaker-than-trend growth.
The household report showed the unemployment rate edging down from 3.54% to 3.50% as 209k more people reported as in the labor force and 267k more reported as employed. Prime-age participation rose to 82.9%, its highest level in eleven years. Other measures also show slack coming out of the market as the number of people working part-time for economic reasons fell 140k and the long-term unemployed dropped 33k. These month-over-month figures take into account the five years of revisions which accompanied the report.
Earnings growth was softer than expected with average hourly earnings rising just 0.11%. This brought the year-over-year rate of growth down to 2.87%, its lowest level of 2019. The number of hours worked each week was just 34.3. The combination of soft hourly earnings and weak hours worked gives more evidence that companies have insufficient pricing power to push wage growth materially higher.
Bottom line: The weaker-than-expected gain in nonfarm payrolls was likely the result of seasonal distortions arising from the late Thanksgiving. The household report shows the labor market continues to tighten. And the earnings data are disappointing, giving no evidence of inflation pressure coming from the labor market.
Bloomberg Survey and Wholesale Inventories: At 8:45 a.m. CT, the January Bloomberg Survey of Economists will be released. At 9:00 a.m., November’s wholesale inventory report will be finalized.
Equities Move Back to Record Highs on Easing Geopolitical Tensions: U.S. equities returned to their record setting weighs on Thursday, just a week after a U.S. airstrike killed Iran’s top military commander and set off a string of geopolitical developments that aggravated markets around the globe. Despite the tit-for-tat military actions over the last several days, Iran’s foreign minister said it had “concluded” its response to the U.S. action and President Trump later said America would implement economic sanctions, but gave no indication of further military activity. The subsequent relief rally sent the S&P 500 up 0.7% on Thursday and to its latest record high. The Dow and Nasdaq gained even more and both achieved new all-time highs in Thursday’s session.
Yields Ignored Optimism, Falling after Solid 30-year Auction: Adding to the optimism, jobless claims fell back again after spiking in December, supporting the belief that seasonal adjustments were behind the unusual jump a few weeks ago, and China confirmed the trade deal should be signed next week. Despite equities’ enthusiasm, Treasury yields edged lower after big moves and solid gains on Wednesday. An auction of 30-year Treasury bonds saw an above-average bid-to-cover ratio, stopped through the when-issued yield by almost 2 bps, and erased an early-morning yield increase across most of the Treasury curve. The 10-year yield, up 0.7 bps prior the auction, fell after the results were announced and closed 1.9 bps lower on the day at 1.86%. The 2-year yield held closer to unchanged at 1.58%.
OVERNIGHT TRADING ACTIVITY
Markets Hold On to Early-Week Recovery: With the U.S. December’s jobs report looming, global equities inched higher while bond yields fluctuated near unchanged after recovering from geopolitical worries earlier in the week. Stocks were stronger in Asia with a broad index rising 0.4% but have cooled somewhat across Europe, evidenced by the a wide-reaching regional index gaining less than 0.1%. Around 7 a.m. CT, prior to the release of the December jobs data, U.S. equity futures were up by 0.2%. Tech companies were leading again, after guiding yesterday’s jump to a new record. Apple was among Thursday’s top performers after the company announced better-than-expected December iPhone sales in China.
Brexit Bill Passes, Paving U.K.’s Way Out at the End of the Month: Although it has had little market impact, the U.K.’s lower house easily passed PM Johnson’s Withdrawal Agreement Bill by a vote of 330 to 231, sending the bill to the House of Lords and paving the way for the U.K. to finally exit the EU at the end of the month. The heavy lifting is far from over, however, as the government must now work on details of the parties’ future relationship before the transition period expires at the end of the year. PM Johnson has said there will be no extension while the EU has indicated it believes it will be nearly impossible to finalize a deal in the eleven months that remain.
Yields Fluctuate around Soft Jobs Report: Just before the jobs data was released, the Treasury curve was lower but by less than 0.5 bps. After the softer-than-expected jobs data, yields initially pulled back by roughly 2 bps, before recovering back less than 1 bps higher than Thursday’s final levels.
Williams Expects Interest Rates “To Stay Lower Than We’ve Come To Expect in the Past”: New York Fed President Williams said in a Thursday speech in London that low inflation, and the corresponding low interest rate environment, are “largely a result of global, longer-term structural factors” that are “unlikely to reverse any time soon.” He specifically singled out “demographic changes, slow productivity growth, and demand for safe assets” as key culprits. Due to the expected persistent nature of these forces, Williams said it will be important for world central banks, likely to more often be “constrained by the lower bound,” to follow through with active policy stances that back up their pledge to lift inflation; “expectations depend on deeds, not just words,” Williams noted.
Fed Stays Focused on Fostering Upward Inflation Pressure: Among the non-voting members, Charles Evans from Chicago said that the economy is in a very good place and that the recent rate cuts have positioned policy rates to a level that should help lift inflation back toward target. He expects no additional rate changes this year and again reiterated his desire to see inflation move above 2% on a sustainable basis. James Bullard from St. Louis agreed that upward inflation pressure would be a welcome development. On the outlook, Fed policy is “considerably” more accommodative that in 2018 and he plans to “wait and see” how the economy responds in the first half of the year.