The Market Today
Softer July Jobs Report Becomes a Sideshow to Escalating Trade Tensions
by Craig Dismuke, Dudley Carter
Job Growth Continues to Slow: The economy added 148k private nonfarm and 16k government payrolls in July bringing the tally to 164k, 1k below economists’ expectations. The previous two months’ totals were revised down 41k, taking Junes payroll growth from 224k to 193k and May’s from 72k to 62k. As a result, the 3-month average for payroll growth dropped to 139.7k, the slowest pace since 2012. The 3-month average for private payroll growth is also at its slowest pace since 2012 at 136.0k. By sector, the goods-producing sectors were reasonably strong with construction adding 4k payrolls and manufacturing adding 16k. However, the manufacturing sector saw the biggest decline in hours worked since 2010 and the fewest hours worked since 2011, indicating more employees but fewer hours worked. Education/leisure, business services, finance, and leisure sectors all same comparable job growth to their 12-month trends. Particularly weak were the information technology (-10k) and transportation (+0k) sectors. Retail continued its losing streak, shedding another 4k jobs in July.
In the household report, the unemployment rate ticked up from 3.67% to 3.71%, still rounding to 3.7% as participation improved with 370k more people entering the labor force. The overall participation rate rose to 63.0; however, prime age participation ticked down to 82.0, the lowest in ten months and now almost fully reversing the stronger trend that began last August. Measures of slack improved dramatically. The number of workers who were in part-time positions due to economic reasons dropped 363k to 3.98MM, the lowest level since 2006. The number of persons unemployed long-term dropped 248k to 1.17MM, the lowest level since 2007. This combination dragged the underemployment rate from 7.2% to 7.0%, the lowest level since 2000.
Average hourly earnings were slightly stronger than expected, rising 0.3% MoM along with June’s figures revised up from +0.2% to +0.3%. This brought the year-over-year rate up from 3.1% to 3.2%. Unfortunately, this occurred against the backdrop of fewer hours worked during the month, down from an average of 34.4 per week to 34.3. Despite the poor performance in payroll gains, the IT and retail sectors both saw markedly stronger earnings growth than their 12-month trend. Despite their strength, the goods producing sectors saw weaker earnings growth.
All told, the data still point to a slowing pace of job growth. More slack continues to come out of the labor market but total wage gains remain tepid, particularly in light of the drop in hours worked. Overall, the report is on the soft side and is unlikely to convince Fed officials that their work is done. The consumer remains the backbone of this economy, buoying it from the exogenous threats, and the labor data is showing evidence of being a bit softer.
Yesterday – Thursday Gave the Fed Plenty to Contemplate: As U.S. markets opened, investors seemingly reassessed their interpretation of the Fed’s decision to cut rates as insurance against global uncertainties feeding back into the U.S. economy. Chair Powell caused quite the stir when he said Wednesday’s cut wasn’t the start of “a lengthy cutting cycle,” but calmed nerves when he clarified he “didn’t say it’s just one” either. He couldn’t exactly explain how to assess what the Fed’s next move would be, because trade tensions were a new variable and they were “learning by doing.” He did say they’d be watching weak global growth, trade, and the U.S. economic data as they “contemplate” what to do next. On that front, numerous global PMIs were reported Wednesday to have contracted in July before the U.S. ISM manufacturing index fell unexpectedly to a near-three-year low. The early-morning yield decline accelerated after the ISM report, but kicked into high gear after President Trump posted his latest tweet on trade. Due to his dissatisfaction with China’s recent cooperation, President Trump announced the U.S. would apply a 10% tariff on an additional $300B of Chinese imports starting September 1. Stocks reversed sharply into negative territory and the bottom fell out from under Treasury yields. The S&P 500 quickly converted a 1% gain into a 1.2% loss, before closing down 0.9%. The 2-year yield, already down 5.8 bps at 1.81% before the tweet, dropped as many as 18 bps to as low as 1.69%. A slight recovery left the 2-year note down 13.8 bps at 1.73%, on top of its lowest level since late 2017. The 10-year yield followed a similar path to a 12.1-bp slump and 1.89% finish, a new low since 2016. Elsewhere, gold surged and oil crashed 8%, notching its worst day since February 2015.
Overnight – Global Markets Slump as Trump Threatens Tariffs, China Hits Back: The U.S. sell-off spread worldwide overnight as global equities spiraled lower under the pressure of the threat for new tariffs on Chinese goods. Friday’s main event was expected to be July’s nonfarm payroll report, but the labor data will now share the spotlight with an escalation of U.S.-China trade tensions. After the initial tariff announcement, President Trump dismissed the market’s drop and later said, “We are starting at 10% and it can be lifted to well beyond 25%, but we’re not looking to do that necessarily. But this would be done in stages.” Beijing hit back in a statement (Bloomberg translation), saying if the U.S. moves forward with new tariffs, “China will have to take necessary counter-measures to firmly defend the core interests of the nation and the fundamental interests of the people. The U.S. will have to bear all the consequences.” A spokesperson for China’s Foreign Ministry added, “We won’t accept any maximum pressure, intimidation or blackmail. On the major issues of principle we won’t give an inch.” Chinese stocks dropped 1.5% while Japan’s Nikkei slumped 2.1% as the yen surged in the flight to quality. The Stoxx Europe 600 was trading down nearly 2%. European government bond yields declined, sending the U.K. 10-year yield 4.1 bps lower to 0.55%, the lowest level since 2016. Germany’s 10-year yield slid 4.4 bps to a new all-time low of -0.50%. Ahead of the payroll report, U.S. equity futures signaled more losses with the S&P 500 down 0.3%, and Treasury yields added modestly to yesterday’s plunge. The 2-year yield was 2.2 bps lower at 1.71% around 7 a.m. CT as the 10-year yield dipped 3.1 bps to 1.86%.
July Manufacturing ISM Fell Unexpectedly to 35-Month Low: A day after Fed Chair Powell pointed to U.S. manufacturing as a weak spot in an otherwise stable domestic economy, the ISM’s July manufacturing PMI fell unexpectedly to its lowest level in nearly three years (August 2016). The headline index dropped from 51.7 to 50.2, while economists had expected a small recovery to 52. Three of the five indices that drive the headline PMI actually firmed up, but were offset by bigger declines in production and employment. New orders inched up by 0.8 points but remained low, supplier deliveries slowed, and inventories contracted but at a slower pace. However, the production index dropped 3.3 points to 50.8 while the employment index fell 2.8 points to 51.7, both near three-year lows. Adding to the disappointment, indices tracking prices paid, orders backlog, and exports and imports all contracted.
Construction Spending Posted Surprise Drop in June: Construction spending tumbled unexpectedly in June and was only partially cushioned by positive revisions to the prior months’ data. Total spending fell 1.3% in June, worse than the 0.3% gain expected, while May’s 0.8% decline was trimmed to 0.5% and April’s gain was revised up from 0.4% to 0.9%. Spending on new single family homes remained weak and improvements to existing homes declined. Private sector spending on non-residential projects, or business structures, also slowed. Both housing and business structures were weak spots in the first estimate of 2Q GDP. Despite a solid recovery for federal government projects, overall government dollars slipped on a big drop at the state and local level.
ICYMI – July 2019 Monthly Review: Compared with the end of June, the Treasury curve flattened in July on a rise in shorter yields as stronger U.S. data weighed on investors’ expectations for a larger adjustment, but didn’t keep the Fed from cutting rates in response to global uncertainties. A stronger-than-expected June payroll report, hotter-than-expected core inflation, and robust retail sales couldn’t distract the Fed from its plan for an insurance cut to support the U.S. economy. The Fed cut rates for the first time in more than a decade, and while markets ended July expecting additional rate cuts, symmetric optionality added to the forward guidance and a clumsy press conference tempered those expectations. Click here to view the full July recap.