The Market Today

February Labor Data Strong


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

February Payrolls Beat Expectations Again: The economy added more nonfarm payrolls than expected, once again, with February’s payroll count gaining 678k (exp. +423k).  Private payrolls accounted for 654k of the jobs while government added 24k.  The previous two months’ payroll tallies were revised up 98k cumulatively. Changes implemented by the BLS in January to the seasonal adjustment methodology do not appear to be a factor contributing to the strong results. Overall payrolls remain 2.1 million below their pre-pandemic level.   By sector, construction (+60k), education/healthcare (+112k), and finance (+35k) posted the strongest results relative to their 12-month trend rates.  The leisure sector recovered another 179k jobs, but is still missing 1.5 million jobs from the pandemic, 824k of which are restaurant workers.  Education jobs, still down 392k from the pandemic, continued to recover but at a slow rate, up 37k between local, state, and private.

Unemployment Rate Drops to 3.8%, Lowest of Pandemic: In the household report, the unemployment rate fell from 3.98% to 3.82% as 548k more people reported as employed, 243k fewer reported as unemployed, and those participating in the labor force rose 304k. The participation rate increased from 62.2% to 62.3%, driven by a large increase in persons between 35 and 44 years old.  Black or African American unemployment fell from 6.9% to 6.6%, Hispanic unemployment fell from 4.9% to 4.4%, and Asian unemployment dropped from 3.6% to 3.1%.

Hourly Earnings Unchanged but Hours Worked Rebound: Average hourly earnings, the bottom line for monetary policymakers, disappointed expectations by being unchanged from January’s level.  This brought the year-over-year rate of gain down from 5.5% to 5.1%.  The weak earnings results came from two issues: relatively weak earnings across most sectors (except retail (+1.3%), IT (+0.9%) and transportation (+0.7%)) and an increase in the average number of hours worked each week.  Hours worked declined in January, likely the results of over 18 million confirmed COVID-19 cases, but rebounded to 34.7 in February.

Bottom line: The February jobs data show a continuation of the tightening of the labor market.  Had the report been weak, the inflation problem was sufficient to warrant a Fed hike in March, alone.  But the labor side of the dual mandate continues to show evidence of being attained.


OTHER ECONOMIC NEWS

ISM Services Index Broadly Disappoints: Markit shaved 0.2 off its preliminary Services PMI estimate for February, still reflecting a pick-up in activity last month following January’s Omicron-related slowdown. The bigger news, however, was the broadly disappointing ISM Services survey. The headline PMI fell from 59.9 to 56.5, disappointing expectations for a recovery to 61.1. The third monthly decline landed the index at its lowest level since February 2021. The details were equally as discouraging, reflecting weakness across the activity and employment indicators while prices rose and supplier delays increased. The activity index fell 4.8 to 55.1, its weakest reading since a contraction in May 2020. New orders slowed to an even greater degree, dragging the index down 5.6 to a twelve-month low of 56.1. Notably, the employment index slid 3.8 to 48.5, the first contraction since June 2021 and weakest reading since August 2020. Supplier delays deteriorated slightly after sharp improvement in December, still holding near the low end of the range since April. Away from those metrics which drive the headline index, prices paid inched back up near December’s all-time high, backlogs of orders jumped back near the record-high level from October, and the number of businesses reporting that customer inventories were too high relative to demand surged to the highest level since September 2020.

Powell Repeats Similar Story to Senate Banking Committee: Fed Chair Powell repeated a similar message to the Senate Banking Committee Thursday to the one he relayed to the House Financial Services Committee on Wednesday. The economic impact of the war in Ukraine is “highly uncertain,” Powell said again on Thursday, but the related surge in energy prices will certainly push inflation up in the near-term and may lead to rising longer-term expectations. While the Fed must remain “alert and nimble” amid elevated geopolitical uncertainty, Powell repeated that it is time for the Fed to begin carefully removing accommodation, starting with a 25-basis point hike this month with the possibility that larger increases could be needed at a later meeting or meetings if inflation doesn’t moderate as they expect.

Mester Said Larger Rate Hikes May Be Needed Later if Inflation Doesn’t Cool: Cleveland Fed President Mester, a current-year voter, supports a 25-basis point hike at this month’s meeting and is open to the idea of larger increases later, depending on inflation trends in the first half of the year. “Starting with 25 followed by further increases in coming months I think puts us in a good position,” Mester said Thursday. “If by the middle of the year after we have taken those actions to move the funds rate up and to start removing accommodation or the size of our balance sheet – if we don’t see inflation moving back down, that would be a signal to me that we have to remove accommodation at a stronger pace, at a faster pace.” If inflation continues to run too hot, “We are going to have to do what we need to do to get inflation under control. It could very well be that interest rates will have to move up above that long-run [neutral] level,” which the median Fed official pegged at 2.50% in December.

Factory Orders Firm Up More than Expected in January: January’s Factory Orders report was stronger than anticipated but overshadowed by the unexpected slowdown in the more timely ISM survey for February (more above). Total orders jumped 1.4%, doubling the expected gain, while orders excluding volatile transportation activity rose 1.0%. Adding to the strength, positive revisions strengthened activity for both categories for December. The capital goods categories that comprise businesses investing in equipment were largely in line with initial estimates in the preliminary release. The 0.9% gain for core capital goods orders was revised up to 1.0% and shipments were unchanged at 1.9%.


TRADING ACTVITY

Stocks Erase Gains, Oil Falls from Decade Highs, and Treasury Curve Flattens to March 2020 Levels: U.S. equities erased an opening gain and failed to hold a midday recovery as the Treasury curve continued to flatten and oil pulled back from their highest levels in a decade. Equities’ retreat began after the ISM’s Service PMI fell unexpectedly on broadly weaker details (more above) and a readout of a phone call between the French and Russian presidents indicated the fighting in Ukraine is unlikely to ease soon. According to an aide to the French President, “President Putin said the Russian Army operation was developing ‘according to the plan’ and that it would ‘get worse if the Ukrainians do not accept surrender terms’.” President Macron was said to have warned ,”the worst is yet to come” after hanging up the phone. Markets bounced back about the time headlines hit that Ukraine and Russia planned to talk again and had reached an “understanding” about establishing safety corridors for humanitarian purposes. The recovery faded, however, and the S&P 500 ended the day down 0.5%. The Dow slipped 0.3% while the Nasdaq slumped a days-worst 1.6%. Shorter Treasury yields edged higher after Fed voters continued to talk up kicking off a series of rate hikes at this month’s meeting, compounding uncertainty and helping to drag longer yields lower. The 2-year yield added 1.8 bps to 1.53% while the 10-year yield shed 3.6 bps to 1.84%, flattening the spread between the two securities to 30.6 bps, the lowest since March 2020. Oil prices made headlines early after reaching their highest levels in years, but faded those gains before the close. U.S. WTI fell around 2% to below $108 per barrel after breaking above $116 overnight, its highest level since 2008.

Markets are in an all-out flight-to-quality overnight after reports that the largest nuclear power plant in Europe had been hit by Russian forces.  According to reports, the last check by Ukrainians showed stable radiation levels, but the fears that the war could turn into something much broader intensified. JPM said in a client note yesterday that the sanctions could resemble the impact of the 1998 currency default.  The 10-year Treasury yield dropped below 1.70% overnight but is coming into this morning back up at 1.79%.  Oil, gold, and the Dollar are all up.  Not up, global equities.  The Euro Stoxx 50 is down 3.3% along with the main U.K., French, and German indices.  The Nikkei fell 2.2%. U.S. equity futures are down just over 1.0%.


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