The Market Today
Labor Market Shows Signs That Trade War Having an Impact; Increase Odds of Fed Cut
by Craig Dismuke, Dudley Carter
Important of the May Jobs Data: The May jobs data is very important given the recent run of disappointing data and fears that the continuation of trade uncertainty might be spreading as far as the labor market. A disappointing jobs report or wage figures would likely put the Fed on a path to a rate cut as early as June or July. A strong report will assuage the growing concerns, but not convincingly (labor is a lagging indicator after all). A strong wage number is likely to erase some of the recent rally for short Treasurys and could be the trigger for the most volatile market reaction.
Labor Market Shows Signs that Trade War Having an Impact: Total nonfarm payroll growth disappointed expectations, growing just 75k in May (expected +175k). Private payroll growth was slightly less discouraging, rising 90k, while the government sector lost 15k jobs. Adding to the weakness, the previous two months’ reports were revised down 75k bringing April’s tally down from +263k to +224k and March’s tally from +189k to +153k. The 3-month average for payroll growth is now down to 151k, evidence of slowing job growth. Additionally, total payroll growth is now averaging 164k for the year, the weakest year since 2010. Every sector of the economy saw weaker payroll growth than the 12-month average. Manufacturing added just 3k jobs (+15k 12-month average), construction added 4k (+18k 12-month average), retail lost 8k (-6k 12-month average), and education/healthcare added 27k (+49k 12-month average).
Unemployment Rate Holds at 3.6%: The household survey showed similar weakness. The unemployment rate ticked up from 3.58% to 3.62% (still rounds to 3.6%) as only 113k more people reported as employed and 64k more reported as unemployed. On a positive note, the 4-month run of more people leaving the labor force reversed with 176k more people reporting as in the labor force. However, the prime-age labor participation rate fell further to 82.1% after peaking at 82.6% in January and falling every month since.
The Kicker – Weak Earnings Growth: The kicker for monetary policymakers was another weak report on earnings. Average hourly earnings were, once again, weaker than anticipated rising just 0.22% in May. This brought the year-over-year growth rate down from 3.22% to 3.11%. A better indicator of recent momentum, the 3M/3M annualized rate fell to 2.73%, the weakest rate since January 2018. Moreover, the weak earnings occurred at average weekly hours worked failed to rebound, holding at 34.4.
Bottom Line: While the May jobs report was not the worse report seen in the past few years, the timing for a weak report was particularly inopportune. The growing fears that trade uncertainty is damaging the economy will only be exacerbated by the May labor data. Slowing payroll growth trumps a still-low unemployment rate, and softer earnings growth will only give the Fed more reason to be concerned about weaker-than-target inflation. As such, this is likely to keep expectations high for a Fed rate cut in coming months.
Overnight Trading – Markets Ready Themselves Ahead of Critical U.S. Jobs Report: Chinese markets are closed today for holiday but there is green across the board for all other major equity markets. Eurozone stocks are up 1.0% led by the French CAC 40 (+1.44%) on the news of better-than-expected industrial production in April. German stocks are lagging after a very disappointing IP report there. Additionally, trade figures from Germany showed a similar trend to U.S. and global figures of declining imports and exports. British Prime Minister May is scheduled to step down today, perhaps opening a new route to a workable Brexit plan. Global sovereign yields have been fairly quiet overnight. However, the markets are gearing up for this morning’s important U.S. labor report. U.S. stock futures are up 0.4% and Treasury yields are slightly lower from yesterday’s close.
Yesterday’s Trading – Stocks Have Best Three-Day Run Since January on Potential for Tariff Delay: Stocks rallied and the Treasury curve flattened yesterday as markets digested mixed reports on U.S. – Mexico trade negotiations. Initial reports emerged that no progress was being made which kept the bid for Treasurys, pushing the 2-year yield back down to 1.83% and the 10-year yield to just under 2.09%. However, later reports indicated that the tariffs, set to take effect next Monday, might be delayed at the request of Mexican negotiators. The yield curve flattened on the possibility of a delay with the 2-year yield closing at 1.88%, up 2 bps on the day as the likelihood of a Fed cut was seen as fractionally less imminent. The 10-year yield rose from the day’s lows but still closed at 2.12%, down 2 bps for the day. Stocks floundered most of the day before rallying on the positive headline with the S&P up 17 (2,843) and the Dow up 181 (25,720). The S&P (+3.5%), Dow (+3.6%), and NASDAQ (+3.8%) have all had their best three-day runs since the beginning of the year.
Household Net Worth Recovers 4Q Loss as Stocks Rebound in 1Q: Household net worth rose $4.7 trillion in 1Q after falling $4.0 trillion in 4Q according to the Federal Reserve’s Flow of Funds report released yesterday. With stocks rebounding 13.1% in 1Q following their 14.0% drop in 4Q, financial assets rebounded $4.43 trillion. Real estate assets increased $264 billion as home prices continued to rise. Homeowners’’ equity rose to its highest level since 2002, up 0.3% to 60.3% as mortgage debt only increased $58.6 billion.