The Market Today
Slowing Job Growth and Soft Earnings Gives Fed Room to Remain Patient
by Craig Dismuke, Dudley Carter
Nonfarm Payrolls Jump on Strong Government Sector, Rebound in Private Jobs: Total nonfarm payrolls for the month of April rose 263k including a 236k increase in private sector jobs and a 27k increase in government jobs. Previous months’ payrolls were revised up 16k bringing the total jobs added figure to 279k, yet another stellar report on job growth. The 3-month average continues to be weighed down by the disappointing February report (revised to +56k), falling to 169k which is the weakest pace in 16 months. The private sector’s 3-month average has now fallen to 154k. The big boost to government jobs likely came from temporary hiring of census workers in advance of the 2020 census (more below). The construction, business services, and education and healthcare sectors were notably strong adding 33k, 76k, and 62k new jobs, respectively. Manufacturing added a mere 4k jobs, well below the 17k average over the past year. Additionally, retail continues to languish, losing 12k jobs in April.
Unemployment Rate Falls to 3.6% on Drop in Participation: The household survey showed the fourth monthly decline in labor force participation with 490k fewer persons reporting as “in the labor force,” the largest monthly decline since October 2017. The number of employed persons fell 103k while the number of unemployed persons dropped 387k. In the volatile job-type reporting, 191k fewer people reported as “employed full-time” and 155k more people reported as “employed part-time for economic reasons,” both indicative of weakness. However, despite those disconcerting metrics, the unemployment rate fell from 3.8% to 3.6%.
Hourly Earnings Growth Continue to Keep Pressure off Fed: The hourly earnings data disappointed expectations rising just 0.2% MoM, keeping the year-over-year rate at just 3.2%. Expectations were for 0.3% MoM gains in earnings and a year-over-year rate up to 3.3%. Seven out of eleven sectors reported weaker earnings growth than their 12-month averages, including a 1.2% MoM drop in utility-workers wages, the sector which had seen the strongest earnings growth over the past year. Compounding the weakness in the earnings figures, average weekly hours worked actually pulled back from 34.5 to 34.4.
Bottom Line: While the payroll report showed strong jobs gains, the 3-month averages have slowed to their weakest paces since 2017. Despite the 3.6% unemployment rate, the household report disappointed by showing another drop in participation and weaker underlying job-type data. The earnings figures were softer than expected which was only compounded by a drop in average hours worked each week. The data, cumulatively, shows the labor market continuing to be strong, but some signs of a weakening pace. Moreover, there is little in this data which will pressure to Fed to change its position on being patient.
Census Bureau Boosts Government Payrolls in Advance of 2020 Census: There was a bit of uncertainty coming into today’s payroll report regarding temporary government hires in advance of the 2020 census. The payroll reports from April of 2009 and 1999 have shown outsized gains in government jobs for exactly this reason. The temporary workers are hired to update Census Bureau’s address book, called address canvassing. According to the Census Bureau’s job application website, hiring for the address canvassing project should begin more strongly later this summer, unlike previous canvassing projects when the pop in hiring has almost all occurred in April. Moreover, a presentation from the Census Bureau back in 2016 highlighted an effort to streamline the address canvassing process for the 2020 census, with some of the work being done in advance and utilizing fewer temporary hires. The 27k in government sector payrolls added was much softer than the 2009 results, but could be prolonged for several months.
Later Friday: At 9 a.m. CT, the ISM’s non-manufacturing index is expected to improve from a 19-month low of 56.1 to 57.0 in April, which could add to the economic optimism created by this morning’s jobs beat. However, markets will quickly shift their focus to a flurry of Fedspeak throughout the remainder of the day and into the evening. Eight separate Fedspeakers will make remarks on Friday, including five who vote on monetary policy in 2019. Investors will be keen to hear if Fed Chair Powell’s comment from Wednesday that inflation weakness should prove “transitory” is the consensus among the voters on the Committee.
Yesterday – Markets Continued to Contemplate Powell’s “Transitory” View of Inflation Weakness: Treasury yields rose again Thursday despite the major equity indices, oil prices, and market-based inflation expectations all moving lower in a continuation of Wednesday’s post-Fed response. The 2-year yield rose 4.0 bps to 2.35%, the 5-year yield added 4.5 bps to 2.35%, and the 10-year yield gained 4.1 bps to 2.54% as investors continued to contemplate for Chair Powell’s view that sliding inflation will reverse in the second half of the year. Yields had risen overnight, but most of the move developed during U.S. trading. The upward momentum began around 9:30 a.m. CT and led to a downturn in equities that erased a small early gain and sent the major indices into negative territory. The Dow fell the most, dropping 0.5% on the day, as the S&P 500 and Nasdaq finished with smaller 0.2% losses. The weakness weighed on eight of the eleven sectors of the S&P 500, but energy companies closed in the bottom slot at down 1.7%, nearly tripling the second-worst performing sectors. Crude prices tumbled nearly 3% following another record week for U.S. crude production, a larger-than-expected inventory build of 9.9MM barrels (biggest since November), and the largest overall inventory level since September 2017. Lower oil prices pushed 10-year market-based inflation expectations down 1.8 bps to 1.895%, the lowest since March, leaving the real yield increase for 10-year notes at 5.9 bps on the day.
Overnight – Yields and Stocks Both Rise into Friday’s Payroll Report: Global equities were generally firmer overnight and Treasury yields ticked higher from Thursday’s close, as investors shifted focus to this morning’s jobs report. Asian equities were mixed, China and Japan remained closed for holidays, while Europe’s Stoxx 600 traded higher by 0.3%. At 6:30 a.m. CT, U.S. futures had firmed by a similar amount alongside the gains across the Atlantic. Treasury yields were near their highs off the day around the same time, the 2-year yield having added 0.8 bps to 2.35% and the 10-year yield up by 1.8 bps to 2.56%. European yields also made modest gains with the U.K.’s 10-year yield adding 1.9 bps and France and Germany’s higher by just under 1 bps. The Eurozone’s core inflation rate was 0.2% firmer than expected in April at 1.2% YoY to match its firmest level in almost two years, although there was some speculation that a later Easter may have skewed up the measure some. Crude prices leveled off after yesterday’s big decline and the Dollar extended its post-Fed gains for a third day. After swinging higher on the initial release, yields have since inched lower while stocks have extended their previous gains.