The Market Today
February Labor Data Very Strong, but Coronavirus Remains Bigger Concern
by Craig Dismuke, Dudley Carter
Coronavirus Update: The number of confirmed cases has now risen to over 100,000, according to the Johns Hopkins CSSE data. There are now 233 confirmed cases spread over 18 states in the U.S. according to the same data, with cases in Colorado and Maryland added late yesterday. The final two questions we are watching, as it relates to the economic impact of the outbreak, are the fatality rate and the duration. The fatality rate, thus far, appears to be sufficiently worrisome to affect consumer behavior. The duration of the outbreak remains unknown. For link to full Coronavirus Chartbook, please click here.
Nonfarm Payrolls Boom in February: The labor market appears to have had more strength than expected as it headed into the turmoil of the coronavirus outbreak. Total nonfarm payrolls increased 273k in February (exp. +175k). December’s tally was revised up 37k to +184k and January’s figures were revised up 48k to +273k. The 3-month average is now up to 243k, the best rate since 2016. By category, the private sector added 228k jobs while the government added 45. Only 7k of the government jobs were temporary census workers, the remaining 38k were new jobs at the state and local level. The manufacturing sector added 15k payrolls and the construction sector boomed with 42k more jobs.
Unemployment Rate Drops to 3.5%: The unemployment rate fell from 3.58% to 3.52% (rounded to 3.5%) as 60k fewer people reported as being in the labor force but 45k more people reported as employed. The various measures of labor slack were mixed but prime-age female participation continues to be the brightest indicator of strength.
Earnings Good but Trend Remains Moderate: Average hourly earnings rose 0.32% MoM, on the strong side of trend growth, on particularly strong wage growth for the construction, finance, and business services sectors. However, the year-over-year rate fell from 3.1% to 3.0%, the weakest reading since 2018. Also on the positive side of the ledger, average weekly hours worked inched up from 34.3 to 34.4 hours.
Bottom line: The labor market was extremely strong through February. Job growth was better than expected, the unemployment rate at its lowest rate since 1969, and wages were growing at a modest rate. However, the survey included data through the week of February 12, the week before the coronavirus began dramatically affecting markets and the economic outlook. As such, the strength of the report will do little to ease fears.
Fedspeak – Another Cut on March 18 or Before?: There are six Fed officials on the tape today including Mester (voter), Williams (voter), George (non-voter), Rosengren (non-voter), Bullard (non-voter), and Evans (non-voter). The key question now is if the coronavirus outbreak has raised their concerns enough to warrant another rate cut at their March 18 meeting, or perhaps before.
Stocks Hammered Again: Treasury yields fell sharply Thursday as U.S. equities continued their wild swings amid elevated uncertainty tied to COVID-19’s global spread. The S&P 500 tumbled 3.4% while the Dow dropped a larger 3.6%. All eleven S&P 500 sectors fell at least 1% with seven sectors sliding more than 3%. Cruise companies have seen their shares hammered amid the virus outbreak, and another ship was kept at sea off the coast of California until those on board could be tested. A man from a previous cruise on the same ship died from the virus and a handful of current passengers were reported to have flu-like symptoms. Airline and hotel shares continued to be crushed by a growing number of widespread cancellations of industry conferences amid virus fears and concerns that consumers will cut back on travel. Bank stocks slumped again as Treasury yields extended declines.
2-Year Yield In Historic Slide as Markets See More Fed Easing: The yield decline continued Thursday with the 2-year yield falling another 9.5 bps to 0.60%, a three-and-a-half-year low. Over an eleven-session slide, the longest in at least forty years, the 2-year yield has dropped 82 bps, the largest eleven-day drop since September 2001. After briefly breaking to an all-time intraday low of 0.90%, the 10-year yield fell 14 bps to 0.91%, a record-low close. Over the last eleven days, the 10-year yield has declined 65 bps, the most in an eleven-day span since August 2011. Oil prices fell on demand worries and uncertainty around if Russia would join OPEC in calling for production cuts. Gold surged more than 2% to its highest level in seven years.
Virus Fears Continue to Crescendo: The incredible price action in U.S. Treasurys has shown no signs of slowing Friday as global equities continue to sink. Despite a synchronized shift from global policymakers to provide stimulus – fiscal, monetary, and from other groups such as the World Bank and IMF – the number of cases and breadth of infections has continued to grow. With no way of knowing how or when the virus will be contained globally, and with concerns that the stimulus measures taken can only go so far to offset a shock of this nature, investors are forced to extrapolate the significant containment measures and early signs of economic contraction in China to other economies around the world. As a result of the potential shock to supply and demand around the globe, investors have continued to sell their riskier asset positions and pile into to safer asset classes such as Treasurys, the Japanese Yen, and gold.
Flight To Quality Gains Steam As Treasury Yields Plummet: Gold is surging with the Japanese yen and oil prices are being crushed by worries around global demand and reports that Russia has told OPEC it won’t support production cuts as of now. Both U.S. WTI and Brent were down around 5%. Equities slumped 2% across Asia and Europe’s Stoxx 600 was 3.6% lower around 7 a.m. CT. Futures on the S&P 500 fell 2.8%, signaling more selling at the open after yesterday’s deep declines. Amid the growing pressure on investor sentiment and global equity valuations, the historic run lower for Treasury yields picked up velocity. The 2-year yield dropped for a 12th day, down 15.4 bps to 0.45% before the January jobs report, the lowest level since January 2015 when the fed funds target range was set at 0.00% to 0.25%. Fed funds futures are now pricing in an effective fed funds rate of around 0.18% by the end of the year, implying a chance the Fed will be forced to cut its target range back to the zero lower bound. The 10-year yield had dropped 17.2 bps to 0.74%, a new historic low, after earlier falling to as low 0.69%. Highlighting how focused markets are on COVID-19, the flight-to-quality gains held almost entirely despite the incredibly strong payroll data.