The Market Today
February Boom for Jobs, Earnings Momentum Short-Lived
by Craig Dismuke, Dudley Carter
February Brings Boom in Jobs, Weak Earnings (Again): The February labor market reports were mixed with 1) very strong payroll growth, 2) more workers moving back into the labor force than expected (a sign of more potential slack than expected), and 3) another disappointing read on average hourly earnings growth.
Total nonfarm payrolls increased 313k in February, beating expectations by a huge 108k. This was driven by a 287k increase in private sector jobs and a 26k increase in government jobs, an unusually high tally for the government sector which has averaged just +1k per month over the past 12 months. Manufacturing payrolls were also extremely strong, up 31k for the month versus a 12-month average of +16k. In fact, every sector experienced an increase in payrolls over their 12-month averages except for education/healthcare and IT. The two biggest standouts were the retail and construction sectors. Construction jobs were up 61k (+21k 12-month average), the strongest since March 2007. Retail jobs rose 50k (+3k 12-month average). Breaking down the data by service-type, February saw 100k additional goods producing jobs which was the strongest since August 1998. In addition to the huge February numbers, January’s payroll growth revised up 39k to +239k, an even stronger start than initially reported. Thus far in 2018, the labor market is showing real strength as business confidence has soared.
The household report was equally strong as it relates to job creation although the unemployment rate stuck at 4.1%. The number of employed persons rose 785k including 729k full-time employed (this data tends to be volatile on a MoM basis). The only bit of concern for Fed officials may have been the number of people who entered the labor market, up 806k pushing the participation rate up from 62.7% to 63.0%. This is an indication that there may be more slack out there than expected which could work to keep earnings pressure subdued. Another weak point in the data was a 171k increase in people employed part-time for economic reasons.
As we have discussed previously, the most important number in this morning’s data is the average hourly earnings figure. And as-expected, earnings were weaker than expected, rising just 0.1% in February. Recall that the strong January earnings report was one of the three data points which triggered the early-February market volatility. Faster wage growth implies faster inflation implies faster rate hikes thus higher interest rates. That combination spooked the markets in early February. However, this morning’s earnings number proved, once again, that sustainable growth in wages remains elusive. The YoY rate of earnings growth fell from 2.8% YoY (revised down from 2.9%) to 2.6% in February.
Bottom Line: Job growth continues to run at a much faster rate than is sustainable longer term. This should bolster consumer sentiment and, eventually, affect consumption habits. However, even with the labor market tightening, wage growth remains weaker than would be expected. The Fed continues to believe wage growth will eventually pick up and this report is unlikely to change that outlook. We continue to expect a March hike and an upward shift in the Fed’s infamous Dot Plot.
Yesterday – Yields Fell After ECB Decision, Stocks Rose as Tariffs Excluded Canada and Mexico…For Now: Stocks jumped at the open but faded into lunch as reports trickled out that the President would sign the previously announced metals’ tariffs at 2:30 p.m. CT. Ahead of the signing, however, additional news headlines indicated the tariffs would go into effect in 15 days, but likely exclude Canada and Mexico on an indefinite basis. Stocks turned upward and positive on those reports and the Canadian Loonie and Mexican Peso strengthened. After Trump put his signature on the paper, stocks pushed higher with the Dow closing up 0.38% and the S&P 500 finishing 0.44% stronger. Treasury yields, likely impacted a bit by the fluid tariff speculation, were presumably affected more by a downward pull from European yields. Markets had initially responded to the ECB’s removal of its QE bias from the Statement by pushing the Euro and yields up. However, the ultimate conclusion was a dovish one after Draghi stressed subdued inflation pressures that required continued stimulus. The Euro and European yields closed near their lows of the day. The 2-year Treasury yield dropped just 0.2 bps while the 10-year yield settled down 2.6 bps.
Overnight – Markets Respond to North Korea News as They Look Ahead to U.S. Payrolls: An atypical geopolitical development involving North Korea boosted sentiment across Asia ahead of a highly-anticipated U.S. jobs and earnings report. Stocks rose across Asia after it was reported Thursday evening that President Trump had agreed to meet with the Kim Jong Un, a step untaken by any previous sitting U.S. president. Details of the meeting are yet to be decided but shares in the region rallied and the Yen pushed lower on hopes of denuclearization. Also pressuring the Yen was the latest policy announcement from the Bank of Japan. The central bank left its policy positions unchanged, upgraded its outlook for foreign economies, but kept steady its timeline for inflation to approach 2%. Kuroda said he saw no changes to the good economic fundamentals but would persistently continue easily policy until inflation reaches 2%, which the central bank expects sometime in fiscal 2019 (April 2019 – March 2020). Ahead of this morning’s payroll report, U.S. equity futures and the Dollar were little changed while the Treasury curve was higher by 1.5 to 2.0 bps outside of two years. After the big pop in payrolls that was paired with a regression in hourly earnings and uptick in participation, stock futures climbed despite yields rising further. The Dollar fluctuated but was little changed.
Household Net Worth Rose Again Even as Debt Levels Increased at a Cycle-High Pace: Household net worth grew by $2.076T in 4Q17 as more gains in consumers’ equity holding helped boost financial assets by $1.7T and continued home price appreciation lifted real estate assets by $0.5T. The $2.3T increase in total assets was offset somewhat by a cycle-high pace of increase on the liability side of the balance sheet. Total liabilities rose $0.2T and at a 5.2% annualized pace, the fastest since 2007. Those gains were consistent with increases reflected in the previously released consumer credit reports, which also showed a slower pace of leveraging to start 2018. Overall, households continued to realized positive benefits to their equity positions as asset values continue to improve.