The Market Today
Hiring Disappoints, Pace of Earnings Gains Flat YoY, Unemployment Rate Falls on Labor Force Exodus
by Craig Dismuke, Dudley Carter
Today’s Calendar – Hiring Falls Short of Estimates and Unemployment Rate Falls on Labor Force Exodus: May’s nonfarm payroll report was a big disappointment. May’s total payrolls of 138k missed estimates by 44k and failed to confirm the supposed strength predicted in yesterday’s ADP data. The official BLS data showed private payrolls grew by 147k, well short of the 253k projected by ADP, while the government sector shed 9k jobs in the month. If the May data wasn’t discouraging enough on its own, the previous two months’ were revised lower by 66k, knocking April’s tally down to 174k and March’s result down to just 50k. At the sector level, goods producing industries added 16k net jobs and manufacturing employment fell by 1k. Services industries added 131k with the biggest gains coming from education and health (+47k), business services (+38k), and leisure and hospitality (+31k).
There was no silver lining in the household report. The unemployment rate fell from 4.40% to 4.29% (lowest since February 2001) but was driven by 233k fewer persons reporting as employed (-367k full-time, +133k part-time) and 195k few persons reporting as unemployed. The 428k sum total of these individuals left the labor force which dropped the participation rate from 62.9% to 62.7%. The drop off in participation essentially erased the gains seen so far in 2017 and pushes the level back towards the average for 2016. The underemployment rate, or U-6 unemployment, dropped from 8.6% to 8.4%, matching the lowest level since June 2007.
Average hourly earnings grew 0.2% MoM, in line with expectations. However, a negative revision to the April data kept the YoY rate flat at 2.5%, short of estimates for a rebound to a 2.6% YoY rate. The length of the workweek was unchanged at 34.4 hours. The earnings data continue to show little wage pressure as a result of what seems like continued tightening in other labor indicators.
Bottom-line: The headline nonfarm payroll was significantly disappointing relative to estimates. And the negative revisions to the prior two months takes away some of the euphoria from the surprisingly strong job growth so far in 2017. However, with the exception of the 50k jobs added in March, hiring continues to occur at a rate above what the Fed expects longer term. The decline in the unemployment rate could keep the Fed on track for June but cause markets to become more suspect about the projected path after June (given the cumulative impact of the entire payroll dataset). This is the current market reaction playing out: the Dollar sold off, Treasury yields rallied (curve flattened), fed funds futures for June didn’t move but futures expectations fell, and equity futures moved back from session highs.
Around the lunch hour, Philadelphia Fed President Patrick Harker and Dallas Fed President Robert Kaplan, both 2017 voters, will offer remarks on the economy in two separate appearances. A couple of weeks ago, Harker called a June hike a “distinct possibility” and said he continued to expect three total hikes for 2017. He also equated the Fed’s eventual unwinding of its balance sheet to “watching paint dry” in an effort to stress how gradual he expected it to be. Kaplan’s positions are well known as a result of frequent public appearances recently. He expects two more hikes for 2017 as well as beginning to unwind the balance sheet this year.
Overnight Activity – Markets Send Divergent Signals as Sovereign Yields Fall, Equities Continue to Run Higher: Yesterday’s record gains for U.S. equities, sparked by healthy private payroll data, has fueled a global rally overnight that has nearly every major global equity index registering healthy daily gains. The yen fell to its weakest level this week, adding to the positive sentiment and helping push Japan’s Nikkei up 1.6% and above 20,000 for the first time since August 2015. In Europe, Germany’s DAX is higher by 1.6% and leading national bourses in the region. The pan-European Stoxx Europe 600 rose 0.7% led by the financials and consumer discretionary sectors. Despite the gleeful shifts in equities, fixed income investors are less giddy. Sovereign yields in Germany, France, and the U.K. fell and the curves flattened. Crude prices moved south after data yesterday showed U.S. producers ramped up production. Analysts also speculate that the U.S. ditching the Paris Agreement could potentially amplify recent gains in U.S. production. The British pound is just ahead of the yen as the day’s worst performing currency as another poll showed additional tightening in the parliamentary race ahead of next week’s elections. Ahead of this morning’s nonfarm payroll report, the Dollar was up with equity futures and Treasury yields were essentially unchanged.
Yesterday’s Trading Activity – Stocks Set New Records as ADP Points to Continued Labor Strength: All three major equity averages climbed to new record highs after the May ADP report rekindled a positive sentiment that the U.S. economy will benefit from further strengthening in the labor market. The S&P added 0.8% as the Dow added 0.7% to record its first record close since March 1. The Dollar and Treasury yields also signaled a positive response but both were off of session highs by the market close. After a more than 2 bp parallel shift higher in the Treasury curve just after the big ADP beat, yields finished up less than 1 bp with the 2-year yield at 1.29% and the 10-year yield settling at 2.21%. Crude prices were volatile. Initial gains on the back of drawdowns of both crude and gasoline supplies dissipated as the same report showed U.S. production rose to its highest level in ten months.
ICYMI – Vining Sparks on Fox Business: Vining Sparks Chief Economist Craig Dismuke appeared on Fox Business Thursday morning to discuss several factors currently impacting the markets and U.S. economy. May’s jobs report was expected to show another solid month of payroll growth and the “disappointment bar” is high for the jobs data to distract the Fed from raising rates again in June. Hopes of deregulation and healthcare and tax reforms by the new administration in Washington have driven market and business confidence higher since the election. However, there remain clouds of uncertainty overhanging these reforms and seeing them actually materialize will be key to translating that newfound confidence into economic activity. Click here to see the full clip.
Construction Spending Disappoints in April: Construction spending fell 1.4% in April compared with expectations for a 0.5% improvement. Despite positive revisions to the prior two months’ results, April’s spending levels fell short of estimates. Within the details, a pullback in spending on home improvements offset a seventh consecutive month of increased spending on construction of new single family homes. In the private non-residential space, total spending fell 0.6% and has weakened for three straight months. To be sure, January’s result was the best on record. The two biggest contributors in the non-residential category, commercial and power, both pulled back in April. In the public category, spending on residential and non-residential was down from their respective March levels.
Manufacturing Activity Holds Steady in May: The headline ISM Manufacturing index was essentially flat in May at 54.9 compared to expectations for an unchanged 54.8 result. Despite little change at the headline level, there were several movements in key component indices worth highlighting. April’s headline index set the low mark for the year, dragged down by steep declines in indices tracking new orders and employment. In the May report, both of these key indices rebounded, but remained at their second lowest levels since the election. On the inflation front, the prices paid index dropped to its lowest level since November. Overall, activity in the manufacturing sector looks to have remained stable in May.