The Market Today
Jobs Data and PMIs Tell Different Story
by Craig Dismuke, Dudley Carter
December Jobs – What Slowdown?: Total nonfarm payroll growth for the month of December blew out expectations, rising 312k along with 58k in positive revisions to the previous two months’ data. The 3-month average for payroll growth is now up to 254k, ending the year at its strongest 3-month rate in two years. For all of 2018, payroll growth averaged 220k per month (214k private, 6k government), 56k per month more than economists projected coming into the year.
Looking at the sector data, there was tremendous strength in the construction and manufacturing sectors which added 38k and 32k payrolls, respectively. The 32k manufacturing jobs added highlights the disconnect between the PMI reports and the hard data (at least the employment data). Also strong were the retail (+24k), education and healthcare (+82k, 2nd best month since 2004), and leisure (+55k) sectors.
People Continue Coming Back into Labor Force: In the household report, the unemployment rate ticked up from 3.7% to 3.9% (3.86% before rounding) on another month of migration into the labor force. The number of people in the labor force rose 419k, including 142k persons reporting as employed and 276k reporting as unemployed. For the year, an average of 217k more people reported as being in the labor force each month, the second-best entrance rate of the cycle. This highlights a hidden form of slack would should help prevent a rapid acceleration in inflation.
Earnings Grow Fastest of Cycle: Key to the report was an unexpectedly strong 0.4% growth in average hourly earnings, bringing the YoY rate up from 3.1% to 3.2%, a new high for the cycle. Some of the increase is likely to be temporary as retail workers saw an unusually large 1.1% MoM increase and transportation workers gained 0.7% MoM. Strengthening the results, the average workweek increased from 34.4 to 34.5 hours.
Bottom Line – More Tension: When considering all aspects of the December labor reports, job growth was exceptional but at least partly the result of a very strong retail season. The rise in the unemployment rate is less of a concern given that labor force participation is continuing to strengthen. And the earnings data were likely stronger than sustainable, but continue to show healthy strengthening of the labor market. This data will complicate the tension between markets looking for a Fed pause and Fed officials who see upside risks to inflation from an ever-tighter labor market.
Powell on Tape: Fortunately for investors, Fed Chair Powell is slated to speak today at 9:15 a.m. CT from the A.E. A. conference. This will be a key opportunity for Powell to soften his December 19 comments and try to assuage some of the fears of a Fed mistake. Already this morning, Cleveland Fed Bank President Mester spoke on CNBC offering a nuanced view on monetary policy expectations. She highlighted that the Fed was in a good place, able to be patient and let the incoming data inform future decisions. While her economic forecast seemed to support additional hikes this year, she also indicated a willingness to stop rate hikes if inflation pressures do not gain traction. As it relates to the balance sheet, she reiterated the preference Chairman Powell expressed to continue allowing it to wind down but also said every policy tool would be on the table if economic conditions deteriorated.
Apple was Just an Appetizer for Bears that Feasted on ISM Plunge: Investors had a lot to fret about Thursday after Apple cut its revenue guidance due to an unexpectedly large slowdown in China, a top White House economist predicted “a heck of a lot of U.S. companies” will be similarly affected, and a popular gauge of U.S. manufacturing collapsed the most since the Great Recession. Apple’s announcement occurred Wednesday after markets closed and set the shaky tone for markets early in the overnight session. The S&P 500 fell more than 1.4% within the first thirty minutes of the cash open. Sentiment was further shaken after collapsing new orders and weaker production pulled the ISM manufacturing PMI to its lowest level since November 2016 (more below). As the PMI print hit the wires, the S&P 500 tumbled as much as 2.5% (the Dow as much as 677 points, or 2.9%) and Treasury’s rallied sharply. The 10-year yield fell from up 1.6 bps on the day to down 6.0 bps immediately following the report. Stocks recovered briefly but gradually drifted back to close near the lows of the day; the Dow finished down 2.9% with the S&P 500 off a slightly smaller 2.5%. The sector split reflected the impact of the day’s big events. Tech companies tanked more than 5% as shares of Apple closed down 10%. The broader economic implications of Apple’s China-driven revenue cut and the ISM’s confirmation that global manufacturing slowed into the end of the year doubly punished the industrials and manufacturing sectors. The rally in Treasurys also impressed. The 2-year yield dropped 8.9 bps to 2.38% while the 5-year yield fell 10.0 bps to 2.36%, both posting their biggest daily declines since May 2018 (Italian political turmoil) and both closing below the effective Fed Funds rate. Fed funds futures experienced an eye-catching adjustment as well, as the implied rate path plunged to price in a roughly 75% chance of a rate cut by the end of the year. The 18 bps adjustment to the December 2019 contract rate was the second largest daily adjustment of the cycle to expectations 12 months out. Earlier Thursday Dallas Fed President Kaplan said he favored holding off on any additional rate increases in the first half of the year. The 10-year yield closed 6.7 bps lower at 2.55%, leaving the 2y10y year spread 2.4 bps steeper at 17.3 but flattening the spread between the 3-Month T-Bill and 10-year note to 14.6 bps, a new low for the cycle.
Overnight – Trade Hopes Take Some of the Sting Out of Thursday’s Moves: Markets in Japan stumbled 2.3% Friday in a catch-up trade after a long holiday break while the rest of the world’s equities look a little brighter ahead of an important day for U.S. economic events (i.e. payrolls and Powell). Trade developments have been a catalyst for the emotional market swings of late and the improvement in sentiment overnight came after China’s Ministry of Commerce confirmed talks between mid-level trade officials from the U.S. and China would take place next week. Adding to Friday’s optimism was a stronger-than-expected PMI from China that indicated the services sector was somewhat shielded from turmoil that led to contraction in two separate manufacturing PMIs for the first time in over a year. The Caixin Services PMI inched up to 53.9 in December, matching its highest level since February, and helped lift the composite PMI to a five-month high of 52.2. China’s CSI rose 2.4% and led broader gains in the region. The Stoxx Europe 600 moved up over 1.4% on the trade news and despite a reminder that the Eurozone’s economy has slowed. December’s already-disappointing preliminary estimates for the Eurozone services and composite PMIs were both revised down 0.2, leaving the composite at 51.1, its lowest level since 2014. Nonetheless, the recovery in risk kept European yields higher with Germany’s 10-year yield up 3.7 bps. Treasurys tracked the global moves and had recovered a large portion of yesterday’s decline (2-year +4.8 bps, 10-year +5.6 bps) ahead of the jobs report. After the surprisingly strong jobs report, yields shot higher in knee-jerk reaction and remain above their pre-release levels. The 2-year yield was 7.9 bps higher (2.46%) with the 10-year yield up 6.8 bps.
U.S. Joins Synchronized Slowing of Global Manufacturing PMIs: Data Thursday confirmed the U.S. wasn’t immune to the global slowdown of manufacturing activity in December. The ISM reported U.S. manufacturing pulled back more than expected to close out 2018, with the headline PMI posting its biggest one-month decline of the cycle. The 5.2-point drop pulled the index down to 54.1, its weakest level since November 2016. The larger-than-expected drop is consistent with signals from regional Fed surveys that posted steep declines in the final month of the year. All five key underlying ISM indices weighed on the headline with the biggest drag coming from new orders and production. New orders slumped 11 points, the second biggest decline of the cycle, to their weakest pace since August 2016. Production cooled the most since 2012 to its slowest pace since October 2016. Employment indications held up better at just a six-month low. As activity slowed, pressure on supplier deliveries lessened and the prices paid index, an indicator of input inflation, cooled to its lowest level in 18 months. In addition to the disruptions it’s caused for global markets, the trade dispute between the U.S. and China has been blamed for the synchronized slowdown in global manufacturing and led to fears it may cause a slowing of activity more broadly.