The Market Today

Groundhog’s Day for the Labor Data – Another Strong Report, But This Time With Earnings Growth

by Craig Dismuke, Dudley Carter


Groundhog’s Day for the Labor Data – Another Strong Report, But This Time With Earnings Growth:

Nonfarm payrolls for the month of January rose 200k, beating economists’ estimates by 20k.  The December tally was also revised up from +148k to +160k although November’s tally was revised lower from +252k to +216k.  January’s figures reflect continued strength in the construction (+36k), manufacturing (+15k), and business services (+23k) sectors.  Retail added +15k, education and healthcare added +38k, and leisure added +35k.  The public sector added +4k payrolls.  Given slower working age population growth, the Fed is looking for payroll growth to stabilize between 100k and 125k per month.  As such, January’s report is well above what they expect.


In the Household Report, the unemployment rate rose from 4.09% to 4.15% (both months officially reported as 4.1% with rounding) as 518k more people reported as in the labor force, the largest inflow into the labor force since 2015.  Ironically, the household report was actually quite positive with 409k more people reporting as employed.  The number of unemployed rose 108k, employed part-time for economic reasons rose 74k, and unemployed long-term fell 94k. Even if the unemployment rate holds at 4.1%, if it is because people are returning to the labor force the Fed is likely to view it favorably.


In perhaps the most important metric, average hourly earnings rose a stronger-than-expected 0.3% along with a positive revision to the December earnings figures.  All told, the YOY rate of growth rose from 2.5% in December to 2.7% post-revision to 2.9% in January.  This marks the best pace of wage growth since 2009 and reflects a rebound from the surprisingly sluggish wage growth seen in 2017.  This is exactly what the Fed has been banking on as they have raised rates, at times when the data did not seem to support a rate hike.  If earnings growth holds this traction in the first half of 2018, a fourth rate hike will begin to gain momentum.


As soon as the jobs report printed, Treasury yields spiked higher, the Dollar was jolted up from its more-than-three-year low, and equity futures remained weak. Yields have since settled back a bit from the knee-jerk reaction highs, but the 2-year yield is up 0.1 bps at 2.16% with the 10-year yield 3.1 bps higher at 2.82%. Tying the implications of the hourly earnings figure into the market response, the 5-year yield is 2.2 bps higher at 2.59% with nearly three-fourth of the shift accounted for by an increase in the inflation expectation component.


At 9:00 a.m. CT, the University of Michigan Consumer Confidence index is expected to be revised up fractionally.  Confidence remains strong, although lower than it was in October and November despite a another +5.9% start to the year for the DJIA.  Also at 9:00 a.m., the final revision to December’s durable goods orders report will be released.



Overnight Activity – Jobs Report Sent Yields Up as Stock Jitters Continue: Ahead of this morning’s payroll report, longer U.S. yields were lower after briefly adding to yesterday’s big gains. The 2-year Treasury yield dropped back 1.2 bps to 2.15% as the 10-year yield shed 0.7 bps to remain at 2.79%. After missing out on sharp rises by longer U.S. yields yesterday afternoon (more below), European yields played catch up with the peripheral countries rising the most. And the angst that has been created for equity markets by rising yields re-emerged. U.S. futures are deep in red territory after being swept up in a European sell-off that has the Stoxx Europe 600 down more than 1%. In other non-U.S. news, the Bank of Japan put its money where its mouth is in attempting to tamp down speculation it’s looking for the policy accommodation exit. The BoJ announced it was willing to buy an unlimited amount of bonds for the first time since July. The 10-year JGB yield, which had moved away from the peg, fell.


Yesterday’s Trading Activity – Bond Rout Grew Louder as Long End Leapt the Most in More than a Year: The recent sell-off in U.S. Treasurys found another gear on Thursday as the long end whipped higher to send the 30-year yield above 3.00% for the first time since May. The Long Bond led the selling adding 8.1 bps to 3.02% in its biggest daily increase since November 2016 to its highest yield since May. The 10-year added 8.5 bps to finish at 2.79%, a new high since April 2014. Thursday’s move in the 10-year yield was its largest daily increase since January 2017. Closer in, the 2-year yield was quieter moving up just 2.0 bps to 2.16%. As a result, the curve steepened the most between 2s and 10s in a single session since the week of the 2016 presidential election to its steepest level since December 20. Stocks had recovered from an opening sell-off but weakened again in the afternoon as the sell-off in the bond market intensified. The major indices ended mixed with the Dow up a modest 0.14%, the S&P down 0.06%, and the Nasdaq smaller by 0.35%. The Dollar extended its worst annual start since 1987 and touched a new low since December 2014.



ISM’s January PMI Slowed But Manufacturing Continued to Look Strong: The ISM’s Manufacturing PMI slowed 0.2 points to 59.1 in January which represented the fourth strongest result in the last six months. While the level of expansion in manufacturing is less impressive in that short context, it was the fifth strongest since 2004 which speaks to the positive performance more recently. Within the details, three key components applied the downward pressure to the headline PMI. The new orders index dropped 2.0 points but was still the second strongest since 2004. Actual production cooled as well but January’s 64.5 represented the third best over the same 13 years. The employment index still signaled growth in headcount but dropped to its weakest level in seven months and there continued to be mentions of labor tightness constraining activity. Keeping the main PMI afloat were growing inventories, the fastest in four months, and slower supplier deliveries. Putting the slower monthly PMI and directionally mixed details into a more meaningful context, activity at U.S. manufacturers appears to have extended its solid run into the new year.

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