The Market Today
February Adds Just 20k Payrolls – But Look Beneath the Headlines
by Craig Dismuke, Dudley Carter
Nonfarm Payrolls Shock with +20k Headline, Likely Temporary Weakness: Nonfarm payrolls for the month barely rose 20k, 160k worse than the expected 180k gain. The result brought the 3-month average down from 241k to 186k, more in-line with our current expectations for job growth. There are several factors likely weighing down the February total. One factor seen in the household report which likely weighed on the construction and leisure sectors was the effect of bad weather. The household report, from which the unemployment rate figure comes, showed 390k persons unable to work because of weather, the most for a February since 2014. Back to the establishment survey, construction payrolls fell 31k and the leisure sector added no jobs. Versus their 12-month averages, those two sectors, alone, dropped the payroll tally 84k lower than had those sectors hit their 12-month trend rates. The second influence was simple mean reversion in several sectors which showed unsustainably strong growth in recent months. Transportation jobs fell 3k jobs (12-month average growth of +16k) and education and healthcare only gained 4k (12-month average of +45k), both sectors have outperformed in recent months. The retail sector lost 6k jobs which is a continuation of the struggles in that sector.
Underemployment Rate Falls to Lowest Rate Since 2001: In the household report, the unemployment rate fell from 4.00% to 3.82% as 255k more people reported as employed and another month of exodus from the labor market. Another 198k people reported as not in the labor force. One startling figure, the number of persons employed part-time for economic reasons plunged 837k to its lowest level since 2007. It appears the recent surge in this category of underemployment rose temporarily on seasonal hiring patterns. As a result, the underemployment rate fell from 8.1% to 7.3%, the lowest level since 2001, lower than at any point during the previous economic expansion.
Earnings Growth Hits New Cycle High: Earnings growth for the month were solid, rising 0.4% MoM and bringing the YoY rate up to a cycle-high of 3.4%. Like in recent reports, the sectors which saw the strongest wage growth relative to trend were the sectors which struggled to add payrolls – perhaps an indication that the tight labor market is forcing employers to begin raising wages more rapidly. The manufacturing, construction, transportation, leisure, and business services sectors all saw notably stronger earnings growth than their 6-month-trend rates. While such a strong average hourly earnings number may have spooked the markets prior to January, with the Fed already tabling future rates hikes, it has generated a smaller market reaction. In fact, yields are slightly lower after the release.
Bottom Line – Not as Bad as the Headlines Look: With the 3-month average for nonfarm payroll growth remaining at 186, job growth appears to have come back to earth. While the 20k payroll gain is an eye-opening headline, this report was likely distorted by temporary factors. The drop in underemployment and jump in employed persons gives credibility to the unemployment rate’s drop to 3.8%. The huge decline in the underemployment rate will stoke concerns about a tight labor market. And the increase in average hourly earnings is likely to embolden the Fed, but not anytime soon given their recent about-face on near-term rate hikes.
Housing Starts and New Permits Provide More Signs of Life for Housing Market: Housing starts and building permits were both better than expected in January. Housing starts were up 18.6% in January while December 11.2% estimated decline was revised to an even-worse 14.0%. Single family starts roared back while multi-family just ticked higher. Building permits also topped estimates with a 1.4% MoM improvement, as another solid month for multi-family offset a second month of weakness in single family interest.
U.S. Stocks, Treasury Yields Tumbled After ECB Takes a Dovish Turn: U.S. equities slid Thursday and Treasurys tracked a sharp move lower in yield by government bonds across Europe. Before U.S. markets opened for trading, the ECB announced a cut to its 2019 growth forecast from 1.7% to 1.1% and a lower inflation forecast through 2021, to a below-target peak of 1.6%. In response, officials pushed out the earliest date for a rate hike from this summer to at least 2020 and announced a new TLTRO program that will provide cheap two-year funding for European banks who lend into the real economy. Draghi noted “a sizeable moderation in the pace of the economic expansion” and said the risks to the outlook are still “tilted to the downside.” The dovish decision comes less than three months after the ECB decided to end net asset purchases (QE) in 2019 and follows the Fed’s pivot to patience in response to cross-currents affecting the outlook. Peripheral country yields led a sharp decline across Europe, with Italy’s 10-year yield down 12.1 bps to 2.47, matching its lowest level since May 2018. Germany’s 10-year yield dipped 6.3 bps to 0.06%, the lowest level since October 2016. The Euro tumbled more than 1% against the Dollar to its weakest level since June 2017. In response, the 2-year Treasury yield pulled back 4.3 bps to 2.47% (one-month low) with the 5-year yield down 5.9 bps to 2.44% (five-week low). The 10-year yield fell 5.4 bps to 2.64%. The S&P 500 dropped 0.8% on the continued concerns that slower global growth could be longer lasting than feared.
Overnight – China Data Disappoints Before Conflicting Signals on U.S. Labor Market: Investors often sit on their hands in anticipation of a monthly nonfarm payroll report, but global markets have continued to weaken Friday as investors have elected instead to sell risk out of their portfolios. Chinese stocks sank 4% after a sell-rating was placed on a state-owned insurer and February’s trade data missed. After two daily declines, the CSI 300 has erased the prior four sessions’ gain. Exports from China plunged 20.7% in February, much worse than the 5% decline economists expected, and imports tumbled 5.2% compared to the modest 0.6% dip expected. Data around the Chinese New Year is viewed skeptically as timing can cause unusual volatility in January and February. However, smoothing out sharp swings in the first two months of 2019 shows total year-to-date exports are down 5% from the same two-month period a year ago. The weaker China data was paired with a WSJ report overnight questioning the timing of a U.S-China trade deal and comes a day after the ECB downgraded its growth outlook. After falling 0.4% yesterday, the Stoxx Europe 600 dropped another 0.8% overnight on further worries about the global economy. The Euro recovered modestly from a 21-month low on better-than-expected industrial output data from several larger regional economies. Before the payroll data was released, Treasury yields had added modestly to yesterday’s big move down and U.S. equity futures were weaker by 0.5%.
Household Net Worth Contracted in 4Q Amid Stock Collapse: Household net worth contracted $3.7T in 4Q, the first since 2015 and the largest (in $) 2008, in response to a 14.0% quarterly collapse for the S&P 500. The S&P 500 slid 6.9% in October, posted a modest 1.8% recovery in November, but closed out 2018 its worst December (-9.2%) since the Great Depression in response to global growth concerns and fears of an inflexible Fed. As a result, households’ financial assets lost $3.9T of value. Nonfinancial assets, primarily real estate, somewhat cushioned households’ equity position. Real estate assets rose $287B in 4Q but were up just 4.7% from a year ago, the slowest year of appreciation since 2Q 2012. On the liability side, household debt rose but slowed from 3.6% to 2.9% as weaker mortgage activity (down from 3.1% in 3Q to 2.1% in 4Q) offset a modest uptick in non-mortgage debt (up from 6% to 6.2%). Households’ assets have so far been helped out by a 10.1% recovery for the S&P 500 to start 2019, but it’s yet to be seen if previous negative wealth effects have impacted consumer spending patterns.
Brainard Believes Environment Warrants “Softer” Fed Funds Path: Fed Governor Brainard said she has revised her 2019 growth forecast lower and that greater risks to the outlook warrant a “softer” path for the Fed Funds rate. “Overall, the softer spending data in the U.S. and the slowdown abroad, along with earlier financial volatility, are likely weighing on the modal outlook and might in turn warrant a softening in the modal path for policy,” Brainard said. Despite continued strength in the labor market, “demand appears to have softened against a backdrop of greater downside risks. Prudence counsels a period of watchful waiting – especially with no signs that inflation is picking up.” She supports wrapping up balance sheet normalization this year and personally favors rebalancing the securities portfolio with shorter-maturity bonds.
Consumers Kept Swiping Credit Cards in January: Consumer credit rose an as-expected $17B in January as consumers kept swiping their credit cards and continued to borrow for student loans and larger purchases such as automobiles. Considering the concerns about near-term spending stirred by a contraction in households’ net worth in 4Q (more above), consumers’ willingness to spend with borrowed money should help mollify concerns that consumers entered a prolonged hibernation amid increased uncertainties at the turn of the year. Revolving credit, primarily credit card balances, expanded at a 2.9% annualized rate, up from a disappointing 1.1% in December. January’s retail sales report, scheduled to be released Monday, is expected to show a solid 0.4% snapback in the control group categories after December’s dreadful 1.7% decline. Non-revolving debt rose at a 5.9% annualized rate, consistent with December’s pace.