The Market Today

Strong January Jobs Report but Wage Growth Remains Modest


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Coronavirus Update: The number of confirmed cases rose from 28,276 to 31,532 overnight.  The number of reported deaths rose from 565 to 639. To see our Coronavirus Chartbook, please click here.

Job Growth Remains Solid in January: The economy added 225k nonfarm payrolls in January, a stronger-than-expected headline read which included 206k new private payrolls and 19k government sector payrolls.  There were only slight revisions to the previous two months’ reports adding 7k to the cumulative tally. The 3-month average is now up to 211k, the strongest level since last January. It appears that warmer weather than normal once again made the headline figure artificially strong.  Only 226k reported as unable to work due to weather, the lowest number for a January since 2015.  The construction sector benefited from the weather with 44k new payrolls reported, well above the 12-month average of 12k.  The manufacturing sector was disappointingly weak again, losing 12k jobs in January.  The establishment survey included a benchmark revisions which reduced the total number of payrolls in January 2019 by 453k but which resulted in subsequently better job gains for the remainder of the year.   Additionally, today’s report included revisions to the seasonal adjustment factors dating back to 2015.

Unemployment Rate Ticks Higher but Prime Participation Highest in 12 Years: The unemployment rate ticked up from 3.50% to 3.58% but the underlying details were muddied by population revisions.  The revisions created a break in the data series between December and January making the month-over-month changes incomparable. Adjusting for the population control effect, 418k more persons reported as employed and 156k more people reported as unemployed.  Additionally, 574k more people reported as being in the labor force which lifted the participation rate to its highest level, 63.4%, since 2013. The prime-age participation rate rose to 83.1%, its highest level since 2008.

Earnings Growth Remains Subdued: Average hourly earnings grew a modest 0.25% MoM but positive revisions to previous months helped boost the year-over-year rate of growth to 3.1%.  Nonetheless, after hitting 3.5% in February 2019, there has been less traction in earnings growth ever since.  It continues to appear that earnings growth is settling in between 3.0% and 3.5% rather than pushing above 3.5%. Average weekly hours worked remained soft in January, holding at 34.3 hours.


YESTERDAY’S TRADING

Global Stocks Kept Climbing As Tariffs Cut Fanned Weekly Rally: Overnight trends remained intact by Thursday’s close as stocks rose to new records amid a persistent global recovery, while Treasury yields edged back after moving sharply higher this week through Wednesday. After slumping during the prior two weeks, global equities have been on a tear this week as China stepped in with measures to support its economy and separate research teams said they had made progress towards finding a treatment. Ahead of Thursday’s U.S. session, China announced it was trimming tariffs on roughly $75B of U.S. goods as part of its phase one trade agreement with the U.S., sending stocks in Asia up 1.8% and Europe’s Stoxx 600 0.4% higher to a new all-time record.

Treasury Yields Held Steady After Consecutive Daily Increases: Amid the global resurgence, U.S. equities opened higher and held those gains with a sideways move through the afternoon. The S&P 500 rose 0.3% on a split-sector performance, notching a second consecutive record close. Communication services companies posted a 1.1% gain to lead all sectors as shares of Twitter surged 15.5%. The company’s quarterly results for revenue and user growth both exceeded expectations, sending shares to their eighth-largest daily gain since going public in 2013 and highest level since October. The Dow and Nasdaq also both set new record closes, the Dow’s first since January 17. Treasury yields gave up a jump after jobless claims beat expectations and despite equities’ gains. Flattening the curve by roughly 1 bp, the 2-year yield rose 0.2 bps while the 10-year yield edged down 0.9 bps.


OVERNIGHT TRADING

Market Cheer Checks Up Before Jobs Report: This week’s unyielding cheerful market tone finally checked up overnight as investors looked ahead to this morning’s U.S. payroll report. Global stocks weakened and Treasury yields were leading a slight drop in sovereign yields. China’s CSI 300 ended flat amid broader weakness in the region while a measure of European stocks slipped 0.4% from Thursday’s record level. China announced it was delaying January’s trade data to be released alongside February’s results next month. Germany’s exports and imports disappointed in December and industrial production slumped more sharply than expected. Total industrial production in Germany fell 3.5% MoM and 6.8% from a year earlier, the largest respective declines since 2009. Industrial output in France and Spain also contracted more than expected to close 2019.

U.S. Equities and Yields Fall in Global Decline: Stronger-than-expected ADP results paired with a weaker ISM employment index to cloud expectations ahead of this morning’s payroll data. With an uncertain lead up to the release, Treasury yields had moved down with U.S. equity futures. Before the release, futures for all three major equity indexes had slipped approximately 0.3%. The 2-year yield was 0.6 bps lower at 1.44% while the 10-year yield had dropped 2.3 bps to 1.62%, both well off their overnight lows. After the reports released, yields doubled their pre-payroll declines, a potential response to tepid wage growth and continued uptick in participation, a stable-inflation combination.


NOTEWORTHY NEWS

Kaplan Still Expects No Change to Fed Rate in 2020: Fed President Kaplan from Dallas, who shifted onto the voting committee in 2020, said he still expects the U.S. economy to register “solid growth” this year, despite a hiccup in the first quarter caused by Boeing’s woes. Discussing the economic elephant in the room, he said that it’s too soon to determine the impact the coronavirus will have but that his current position is that it won’t vary much from previous like events. On the domestic outlook, Kaplan acknowledged that business investment has remained weak but noted the softness hasn’t shown signs of affecting the consumer. He still believes inflation will move back towards 2% and said his current base case expectation is for no change in interest rates this year.


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