The Market Today
Labor Market Rebounds in March
by Craig Dismuke, Dudley Carter
March Labor Data Shows Rebound in Jobs but Weaker Wage Growth: Nonfarm payroll growth rebounded in March, rising 196k after February posted the fourth-weakest month of the expansion. February’s disappointing 20k figure was also revised up to 33k, still a weak month. Smoothing out some of the monthly fluctuations, the 3-month average fell to 180k, the slowest pace since late-2017 and evidence that job growth is likely coming back to earth. Nonetheless, the strong March showing shows that it is more likely to be a gradual slowing of job growth (arguably a positive development) rather than an acute downturn.
Looking by sector, the economy added 182k private sector jobs and 14k government jobs. One area of strength, the education and healthcare sector added 70k new payrolls, the best monthly performance since 2015. There are two broad areas of concern seen in the March figures, the demise of the retail sector and the softness in goods production. The retail sector shed another 12k jobs and has lost 142k since its peak in January 2017. The pace of manufacturing job growth slowed for a fifth consecutive month, actually losing 6k jobs in March. While some of this is likely related to weak global activity, it is also reflective of trade uncertainty which continues to grip the goods-producing sector.
In the household report, the unemployment rate ticked lower from 3.82% to 3.81% as 369k more people reported as not in the labor force but 201k more persons reported as unemployed. The labor force has now shrunk for three consecutive months, the first time it has done so since 2011. The labor force exodus came primarily from a drop-off in the 55+ age cohort. The overall participation rate fell from 63.2 to 63.0 but the prime-age worker (25-54) participation rate held at 82.5.
Average hourly earnings growth was notably weaker than expected, rising just 0.1% MoM on weaker growth in every sector but business services (+0.45% MoM). Manufacturing sector wages fell 0.18% while education and healthcare wages dropped 0.15% MoM. On a year-over-year basis, earnings growth fell from 3.4% (highwater mark for the cycle) to 3.2%.
Bottom Line: March’s 196k gain in payrolls shows that the labor market remains positive, easing concerns over the surprisingly weak February report. This should ease some of the expectations that the Fed will cut rates before the end of 2019. However, the pace of job growth does appear to be slowing more broadly. The unemployment rate remains very low, below what the Fed believes is sustainable longer term, but a recent trend of weaker participation could create more challenges for businesses trying to fill job openings. And weaker wage growth is likely to keep a lid on inflation pressures and warrant the recent pause from monetary policymakers.
Yesterday – Stocks Extended Recent Run While Treasury Yields Hovered Around Unchanged: The S&P 500 declined gradually throughout the morning session and turned negative just before lunch. However, a steady recovery throughout the afternoon lifted to the S&P 500 to its second consecutive 0.21% improvement and salvaged its recent string of gains. Thursday’s positive finish was its sixth in a row, matching the longest win streak since October 2017, and pushed the index to near a six-month high. Seven of the 11 sectors rose on the day with energy and materials providing the biggest boost. Tech companies were the worst performers, resulting in the Nasdaq lagging the other majors with a -0.05% finish. The Dow outperformed with a 0.6% increase thanks to a solid day for Boeing’s shares on reports of progress on a software patch for the 737 Max’s anti-stall system. Earlier in the day initial jobless claims dropped to a new 49-year low, countering Wednesday’s weak ADP report ahead of this morning’s nonfarm data, but equity markets had closed by the time President Trump gave an update on the trade negotiations. The President said a “monumental” trade agreement could be announced within the next month, adding “We’ve agreed to far more than we have left to agree to. …This is the granddaddy of them all.” The Treasury market showed little response to his take, with the 10-year yield ticking up just slight after the remarks but still ending lower on the day. The 10-year yield closed 0.9 bps lower at 2.52% while the 2-year yield rose 0.2 bps to 2.35%.
Overnight – Sentiment Remains Steady on Hopes for Trade Deal and Jobs Rebound: The general market tone remained upbeat overnight as this week’s trade talks between the U.S. and China neared conclusion and investors waited for the BLS to release nonfarm payroll data from March. Following President Trump’s positive remarks Thursday afternoon (more above), Chinese Vice Premier Liu He said negotiators had “reached new consensus on such important issues as the text” of a trade deal. However, there were no details about any definitive next steps. Chinese markets were closed for a holiday but Japan’s Nikkei rose 0.4% to its second highest level of the year. In Europe, there were developments on the Brexit front related to another potential extension to Article 50’s expiration. Just a couple of hours after European Council President Tusk proposed a 12-month extension for the U.K. to find a way forward, U.K. PM May sent Mr. Tusk a letter requesting an extension until June 30. All remaining 27 EU countries must agree to an extension and the discrepancy between the lengths of any extension is likely to be a major topic of discussion at next Wednesday’s emergency Brexit summit. However, U.K. yields were up at a two-week high on Friday. Ahead of this morning’s U.S. jobs report, equity futures were up a modest 0.1%, while the Treasury curve had moved up around 2 bps between the 2- and 10-year maturities. Levels held relatively steady after the solid rebound in hiring but miss on wages.
Several Pieces of Fed News: New York Fed President Williams kicked off a string of Fed-related headlines Thursday, saying the U.S. outlook is positive, growth is on track, and that monetary policy is currently in the appropriate place. In a lunch appearance, Cleveland Fed President Mester said she expects activity will recover from temporary weakness in the first quarter, but sees little urgency to make any changes to the Fed’s current policy stance. “Could we be done with policy rate increases this cycle? It is possible,” she said, “But if the economy performs along the lines I think is the most likely case…the fed funds rate may need to move a bit higher than current levels.” Philadelphia Fed President Harker echoed his remarks from a recent appearance that his outlook is still positive but that he continues “to be in wait-and-see mode.” He noted he would never say never to the potential for a rate cut, but reiterated that his “outlook for rates remains, at most, one hike for 2019 and one for 2020.” Away from the monetary policy comments, President Trump nominated Herman Cain to fill an open position on the Fed Board.