The Market Today

Payroll Recovery Accelerates Earlier Than Expected

by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)

Stimulus Bill Moves to Next Step in the Senate: Senators were split 50:50 down party lines on whether the chamber would begin debate on the $1.9 trillion stimulus bill the House passed over the weekend. Vice President Harris cast the tie-breaking vote in favor of Democrats. The Senate will now debate the legislation, consider proposed amendments, ensure the bill complies with all the rules of the reconciliation process, and is satisfactory to at least 50 Senators. Among the key changes expected to be made, the $1,400 direct payments to individuals will be phased out more quickly than was legislated in the House bill. Senate Majority Leader Schumer said, “No matter how long it takes, the Senate is going to stay in session to finish the bill this week.”


Stocks Slumped as Longer Yields Surged on Lack of New Information from Powell: In some instances, no news can be good news. That wasn’t the case yesterday, however, for markets and investors hoping Fed Chair Powell might hint at a potential policy shift to address rising longer-term rates. With the Fed Chair sticking to his it’ll-be-awhile-until-we-recover guns and dancing around questions about recent interest rate moves, stocks sharply erased their pre-speech gains as the 10-year Treasury yield reversed higher. The S&P 500 fell from up 0.6% on the day to down 0.6% shortly after his remarks. Tech shares were struck harder by the 10-year yield moving from down 0.8 bps at 1.47% to up 6.2 bps at 1.54%. The S&P 500 ultimately settled 1.3% lower, saved from an even sharper drop by energy gains as crude prices surged. U.S. WTI rallied more than 4% to close near $64 per barrel, its highest level in almost two years, after OPEC decided not to increase supply in the weeks ahead. The Nasdaq fell 2.1%, narrowly missing a technical correction at down 9.7% from its February 12 all-time high while erasing its year-to-date gain. The ultimate impact in the bond market was a notably steeper Treasury curve, with the 2-year yield up 0.4 bps to 0.15% and the 10-year 8.3 bps higher at 1.56%, its highest level since February 19, 2020. The spread between the two securities’ yields widened to 142 bps, or 1.42%, the most premium since November 2015.

Negative Momentum Knocks Asia Lower, Begins to Fade in Europe Ahead of U.S. Jobs Report: For a second day, weakness from the previous U.S. trading session tripped up global markets overnight, although the negative momentum began to fade early in Europe. Stocks closed 0.7% lower across Asia and opened down more than 1% in Europe. The Stoxx 600, however, had trimmed that loss to less than 0.2% as U.S. futures staged a recovery ahead of this morning’s jobs report. Despite longer Treasury yields continuing to drift higher, with the 10-year yield up 1.4 bps to 1.58% at 7:15, a.m. CT, futures contracts on the major indices had gained around 0.4%. The 10-year yield jumped to up 5.1 bps on the day at 1.62% in the aftermath of the stronger-than-expected payroll report.


Powell is Comfortable With Current Policy: Fed Chair Powell didn’t live up to what realistically were unrealistic expectations for a possible major policy announcement on Thursday. In an interview with the Wall Street Journal, Powell reiterated that the economy has a long way to go for a full recovery and that it’s going to take some time for the Fed’s dual goals to be achieved. As a result, the Fed will keep rates low and continue the current level of asset purchases until further notice. Inflation is likely to pick up this year but he repeated his belief that above-target readings will be transitory, primarily due to the significant slack that remains and the powerful disinflationary forces that were evident for years prior to the pandemic. He wouldn’t specify a particular level of market interest rates that would worry him, saying several times that it would be disorderly market conditions or tightening financial conditions that could create some concerns. Addressing a question about speculation for an imminent Operation-Twist-like maneuver, he said he is comfortable with current policy, adding that if financial conditions change materially, the Fed will use their tools to create an environment that will help them achieve their goals.

Factory Orders Beat Expectations but Business Investment Revised Lower: Total factory orders rose 2.6% in January, beating expectations for a 2.1% gain, and December’s 1.1% improvement was revised up to 1.6%. Durable goods orders were unchanged from initial estimates, up 3.4% from December, while orders of nondurable goods rose 1.9%. While the broader metrics were solid, the indications for current and future business investment in equipment were disappointing. A softer-than-expected 0.5% initial estimate for capital goods order was revised down to 0.4% and shipments were knocked down a few tenths, from 2.1% to 1.8%.


Payroll Recovery Accelerates Earlier than Expected: The labor market slowed more than initially reported at year-end and the recovery has now accelerated sooner than expected according to this morning’s data on the labor market.  December’s payroll loss was revised down to 306k but January’s tally was revised up from +49k to +166k.  More convincingly, the economy recovered 379k payrolls in February including 465k in the private sector.  Government jobs, down 86k, were hit by a loss of education payrolls again.  Local education jobs dropped 37k while state education jobs fell 32k.  Also appearing weak, the construction sector lost 61k payrolls.  However, according to a note in the BLS report, “Severe winter weather across much of the country may have held down employment in construction.”  The sectors hardest hit by the pandemic business closures posted solid results; the retail sector added 41k jobs while leisure added 355k.  Restaurant workers jumped 286k but remain down 2.0 million from their pre-virus level.

Unemployment Rate Drops but Could Have Dropped More if Not for Weather: In the household report, the unemployment rate dropped from 6.32% to 6.22% as 208k more people reported as employed and 158k fewer people reported as unemployed.  The labor force participation rate held steady at 61.4% but remains well below the pre-virus 63.4%.  The report likely would have been even stronger if not for adverse weather conditions as 897k people reported as unable to work due to weather.  The average impact on February workers over the previous five years is just 379k.  Also a positive sign, the number of people reporting as temporarily unemployed fell 517k while the number of long-term unemployed only increased another 125k.

Bottom Line: The labor market remains in a big deficit relative to its pre-virus level.  However, the spring recovery expected to occur given the drop in virus cases and economic reopenings appears to have begun in February.  This is unlikely to change the Fed’s views on policy nor the likelihood of an additional round of stimulus being passed.

Trade Deficit Increases but Volume Continues to Rise: The monthly trade deficit increased more than expected, once again, in January.  The deficit increased $1.2 billion to $68.2 billion as imports rose 1.2% and exports rose just 1.0%.  On a positive note, overall trade volume, an indicator of global economic growth, continues to recover each month.

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