The Market Today
June Brings Good Job Growth, More Slack, and Another Weak Earnings Report
by Craig Dismuke, Dudley Carter
Today’s Calendar – June Brings Good Job Growth, More Slack, and Another Weak Earnings Report: June’s labor reports were mixed with strong payroll growth but weakness where it counts, earnings growth. The economy added 222k payrolls in June, however, only 187k of those were in the private sector with 35k coming from government jobs. In addition to the strong headline reading, the second strongest report of the year, there were positive revisions of +47k to the previous two months’ reports bringing the May tally up to 152k (init. 138k) and the April total to 207k (int. 174k). The trailing 3-month average is now up to 194k from 121k after the May report. For 2017, nonfarm payroll growth has now averaged a monthly growth rate of 180k.
The household report showed the unemployment rate tick up to 4.36% as 245k more people reported as employed and 116k more people reported as unemployed after 361k more people reported as in the labor force. The labor force participation trends have been noisy this year with 2016’s big re-entrance appearing to end in 2017. However, the June report reversed part of the recent exodus. In the job breakdown, 355k more people reported as having full-time jobs and 224k fewer people reported as having part-time jobs. In the slack metrics, 107k more people reported as being employed part-time for economic reasons and just 1k more people reported as being unemployed for more than 27 weeks. Weather was not an issue in the June report.
The biggest concern of the June labor reports was the weakness in earnings growth. At this point, this might be the single most important metric of all. The FOMC is satisfied with the low unemployment rate and the solid pace of payroll growth. They are not, however, satisfied with the weak rate of inflation which is – to some degree – a direct reflection of the weakness in earnings growth. This is the most likely aspect of the economy to derail the FOMC’s ambitious tightening plans. Average hourly earnings grew just 0.2% MoM in June and May’s weak 0.2% growth was revised down to 0.1%. Taken in combination, the year-over-year rate of growth for earnings disappointed at 2.5%. The weaker trend for earnings, which began in January, has continued. Moreover, the most recent reports have been notably weak sending the 3M/3M annualized rate down to 2.0% from a peak of 3.1% in May 2016.
Bottom Line: June payroll growth was strong and easily clears the FOMC’s hurdle. The unemployment rate, despite ticking up to 4.36%, remains below the rate the FOMC believes is sustainable longer term. However, the weakness in earnings growth has emerged as a real threat to the FOMC’s aggressive policy path.
Overnight Activity – Oil Slumps on U.S. Production as Markets Await the U.S. Jobs Report: The recent trend of weaker equities and rising sovereign yields remained in place overnight as markets awaited this morning’s jobs report. Before the payroll data, the energy sector was leading relatively broad-based weakness in Europe as oil prices reentered the limelight. After a brief push higher yesterday on falling U.S. inventories (short-term gain), U.S. crude fell nearly 3% to as low as $44.05 per barrel on rising U.S. production (long-term pain). Sovereign yields rose again overnight except for in the U.K. and Japan. Yields on U.K. Gilts moved lower following a string of disappointing economic reports on home prices, industrial and manufacturing production, construction output, and trade. The British pound also weakened. Japanese yields fell after the BoJ announced an offer to buy 10-year Japanese government bonds. The 10-year Japanese yield has slowly risen for three months, moving towards 0.10% and away from the BoJ’s 0.00% yield target. The Yen fell on the BoJ’s offer. After the June jobs report, U.S. equity futures strengthened notably, the Dollar erased a modest overnight rise to trade little changed as the 2-year yield dropped from +1.3 bps to -0.3 bps (1.39%), the 10-year yield steadied at +1.1 bps (2.37%).
Yesterday’s Trading Activity – Stocks Sink, Euro Rises with European Yields on More Uncertainty around Central Banks’ Stances: The Euro rose Thursday as a sell-off in European sovereigns sent yields surging in another bad day for long positions in global sovereign debt. Almost all signs Thursday were bearish for sovereigns. A weak auction of French government bonds started the selling. A hawkish line in the ECB’s June Minutes described a discussion about potentially removing a reference to re-ramping QE if necessary, furthering concerns about central banks beginning to back away from stimulus. A solid U.S. ISM non-manufacturing report (more below) also pressured sovereign yields. The 2-year Treasury yield settled 0.8 bps lower to 1.39% while the 10-year yield added 4.3 bps to 2.37%. The curve ended at its steepest since May 23. European stocks tumbled and the major U.S indices slumped and finished near session lows. The Nasdaq fell 1.0% while the S&P sank 0.9% and the Dow dropped 0.7%. Crude prices rose after data from the Department of Energy reported a larger-than-expected decline in U.S. crude and gasoline inventories, but fell back from session highs after the same report showed rebounding production. Click here for an annotated timeline.
Non-Manufacturing Report Rounds Out Estimate-Topping Month for ISM Reports: The June ISM non-manufacturing report beat estimates with the headline non-manufacturing PMI rising 0.5 points to 57.4 (expected 56.5), marking the third strongest print since October 2015. Sixteen of 17 industries within the non-manufacturing sector indicated expansion but there were mixed results in a couple of key underlying metrics. The employment index declined but remained at its third strongest level since 2015. Certain industries continued to report difficulties finding the right person with the right skills to fill open positions. The new orders index improved to its third strongest level of the year after dropping to a year-to-date low in May. Earlier this week, the ISM manufacturing PMI also topped estimates. The June series shows a positive rebound from a May lull.
ICYMI – Vining Sparks on CNBC: Vining Sparks Chief Economist Craig Dismuke appeared on CNBC’s Nightly Business Report Wednesday to discuss recent trends in consumer credit and the overall health of the U.S. consumer. Specifically, he discussed what impact recent changes to certain mortgage and credit reporting rules and regulations may have on consumer credit performance and the broader U.S. economy. Click here for the full interview.