The Market Today
Jobs Rebound in April; House passes AHCA (Barely); French Election Looming
by Craig Dismuke, Dudley Carter
Today’s Calendar – Mixed April Jobs Reports Remove Fears of Acute Slowdown, Show Weaker Wage Growth than Expected: Nonfarm payrolls rebounded in April, up 211k versus expectations of a 190k gain. The beat came from an unexpectedly strong month for government jobs which grew 17k. Private payrolls grew 194k which was largely in-line with expectations. Also worth noting, the March payroll report was revised even lower, from +98k to +79k, 19k weaker than initially reported. Adding the March and April payroll data gets us back to 290k total jobs created which is right in-line with economists’ projections – only the mix of when those jobs were added was different. It appears the weather impact in March was larger than initially reported and the April bounce-back was, thus, larger. On the negative side, the strength of private sector payroll gains came predominantly from one of the lowest paying sectors – the leisure sector – which added 61k payrolls, well above their 12M run rate of +25k per month. Of those 61k, 34k were in the accommodation and food services industry.
In the household report, the Unemployment Rate surprisingly fell from its cycle-low 4.5% to a new cycle low of 4.4%, matching the lowest rate of the previous economic cycle. The report showed another 156k persons employed but just a 12k monthly gain in the number of people in the labor force. This is in stark contrast to the recent trend dating back to November 2015 that has seen 179k people entering the labor force each month. As a result of the weak participation number, the overall participation rate fell back from 63.0% to 62.9%. Also in the household report, traditional areas of slack declined further with those working part-time for economic reasons dropping another 281k and the number of long-term unemployed falling another 61k.
Average Hourly Earnings growth disappointed, rising 0.3% MoM in April but with a lower revision to the March data. March earnings were revised down from +0.2% to +0.1%. As such, the YoY rate of earnings growth dropped to 2.5% versus expectations of 2.7%. At the end of the day, this is the where the rubber hits the road for how strong the labor market truly is. On a positive note, average weekly hours worked did tick up from 34.3 to 34.4.
Bottom Line: Nonfarm payroll growth showed the expected rebound in April following the disappointing March report, assuaging some fears of an acute drop-off in job growth. However, those jobs do not appear to be the kind that will necessarily propel economic activity. The household report printed the lowest unemployment rate of the cycle but it came at the expense of improving participation. Earnings growth proved weaker than expected and this will take some of the shine from the recent earnings improvement. However, while the April data is not perfect, it is unlikely to change the Fed’s outlook and does not remove a June hike from the table.
Overnight Activity – Oil Slides as Investors Await U.S. Payrolls: The overnight session has given markets a bout of the jitters with sliding commodity prices in the rear view and U.S. payroll data approaching head on. National holidays continued to keep volumes low in Asia but the tone in European equities has been one of caution. The Stoxx Europe 600 is down 0.1% on mixed results in France (+0.04%), Germany (-0.26%), and elsewhere in the final trading day before Sunday’s runoff vote to elect the next French president. U.S. crude prices are lower by 0.2% this morning ($45.40 per barrel) after falling as much as 3.9% overnight to $43.76. The overnight volatility follows a big drop in crude prices on Thursday that helped knock the Thomson Reuters CRB Commodity Index down 1.9% and to its lowest level since August 2016. The Euro has pulled back modestly after yesterday’s election-related surge but has maintained most of Thursday’s gains. Ahead of this morning’s payroll report, U.S. assets had moved little from Thursday’s closing values. After the report, a slight move higher in yields reversed and the 10-year Treasury yield dropped 1.8 bps. The 2-year yield held essentially unchanged. The Dollar turned lower and equity futures continued to move sideways.
Yesterday’s Trading – Unchanged Equities Hide Tumbling Crude Prices, House Health Care Vote, Sinking Dollar, and Rising Yields: U.S. stocks ended little changed in the final session before Friday’s payroll report, a result that disguised a bit of intraday volatility and notable moves in other asset markets. The S&P ended up 0.1% but only after paring a 0.3% drop just before lunch. That low point for the S&P coincided with a nearly 5% drop in U.S. crude prices. U.S. crude traded with a $45 handle for the first time since before OPEC announced it would cut production (November 2016). Brent crude fell below $50 per barrel, also reaching a more than five month low. U.S. production and inventory data continue to be a more powerful force (drag) than any price lift from OPEC pumping less. Shortly after lunch, the House passed an amended version of the AHCA that repeals certain portions of the ACA, modifies others, and leaves certain facets intact. As is, the bill is expected to face serious headwinds in the Senate. Treasury yields rose for a second day with the 2-year note up 1.2 bps (1.29%) and the 10-year yield 3.6 bps higher (2.32%). Treasury yield changes were modest relative to those on German debt after the pro-EU Macron arose victorious from Wednesday night’s presidential debate. German 10-year debt rose 6.8 bps and the spread between French and German yields tightened to its smallest level of the year. These same forces rallied the Euro which sank the Dollar.