Wentz Weekly: Another Strong Labor Report

Wentz Weekly Insights
Another Strong Labor Report

Stocks were lower across the board last week, although the S&P 500 fared better thanks to some of the mega cap stocks, with the big stories about a pickup in Treasury yields and commodity prices, and the continued hot labor market. The S&P 500 declined almost 1% for its worst week of the year while the 10-year Treasury yield rose 20 basis point to 4.41% for its highest since November.

Stocks ended the week on a strong note though after the employment report Friday morning was considered a “Goldilocks”. The Department of Labor’s data showed there was a 303,000 increase in payroll in March with payroll growth averaging 280,000 over the past four months and 244,000 over the past 12 months with a decline in payrolls last seen in 2020. Payroll gains were widespread, seen the most in health care, government, leisure & hospitality, and construction, and no declines in any major industries. This data reflects payroll gains that is well in excess of the population gains.

Even more, the revisions for the prior two months was positive by a net 22,000. This is a reversal of a recent trend where new data showed revisions were substantially negative. There was no explanation for this but the overstatement in the initial data could have been to seasonal adjustment factors or survey issues.

That is data from the establishment survey – a survey given to businesses. On the other hand, the household survey reflects civilian employment which includes self-employed individuals and has painted a different picture in recent months. But March was different and the data from the household survey matched the strength seen in the establishment survey, reversing a recent trend. The number of people employed rose nearly 500,000 while the number of people unemployed fell 29,000, resulting in a 0.1% decline in the unemployment rate to 3.8%.

Another piece of good news is the labor force grew by 470k bringing the labor force participation rate to 62.7%, although this is still roughly half a percent lower than the pre-pandemic trend.

What made this a “Goldilocks” report is that the job gains were not seen in combination with a large increase in wages. The average wage increased 0.3%, right in line with expectations, and up 4.1% from a year earlier. While this is higher than historical average, it was not too high to be considered inflationary.

While this was a solid jobs report, we are cognizant of the mixed picture over the last 12 months between the establishment and household surveys. For example, over the past year payroll growth has totaled 2.93 million, while civilian employment is up only 642,000 and negative four of the past six months. Two possible explanations of this could be payroll data reflecting the surge in immigration and people getting two jobs (neither of which may be included in civilian employment/the household survey).

What this means the most for markets is those that are hoping for rate cuts may have to wait longer. With a strong economy, inflation that has recently appeared stickier, and a labor market that continues to add more jobs than expected, the Fed may not be as inclined to lower rates as aggressively as it previously said. The economy may in fact be able to handle these higher rates.

The next big event for the markets is the next inflation data on Wednesday with the consumer price index. After that, all eyes will turn to earnings season that begins later in the week.

According to FactSet, earnings are mixed heading into Q1 earning season. The consensus estimate sees a 3.6% year-over-year increase in profits, however this is down from the estimate of 6.1% three months ago (although it is normal to see earnings estimates move lower through the quarter). As FactSet also notes, one of the takeaways from fourth quarter earnings season (those companies that reported January to March) was the trend of companies providing softer first quarter and 2024 guidance – 112 companies provided Q1 guidance over that period with 79 of them providing negative guidance. For markets to continue momentum heading into summer months we would like to see the earnings picture improve.

Week in Review:

Stocks ended up having their worst week of the year and only the fourth negative week, with Megacap preventing larger index declines, after seeing a pickup in bond yields. The major US indices finished as follows: NASDAQ -0.80%, S&P 500 -0.95%, Dow -2.27%, and Russell 2000 -2.87%. Treasuries were a notable decliner after yields rose across the curve – the 2-year Treasury yield rose 13 basis points to 4.76% while the 10-year yield rose 20 bps to 4.41% for the highest since November. Commodities continue to move higher, most notable crude oil with a new six-month high after a 4.5% increase for the week while copper rose 5.7% for the highest since mid-2022. Gold is also on a record run, rising another 4.8% to another new record of $2,325/oz, while the dollar index declined 0.2%.

Recent Economic Data

• Job Openings: The number of job openings on the last day of February was 8.756 million, relatively stable from the level in January and near the lowest level since the beginning days of the pandemic. Over the past 12 months job openings have fallen about 1.1 million and are down about 3.4 million from the record high of 12.18 million exactly two years ago. However, there are still about 1.5 million more job openings than there were prior to the pandemic. On the other hand, the number of “separations” rose 110k to 5.559 million, with 3.484 million of those coming from quits which has held steady for three months now, and layoffs which were 1.724 million and risen 128k from last month and steadily increased the past several months.
• ADP Employment: ADP says its payroll data showed 184,000 new private payrolls in March, a little above the consensus expectation of 150,000. It said job gains were the strongest since July and were strong across all industries, led by leisure and hospitality. Its data also showed pay gains surprised with a much larger increase than expected, particularly because of the industries seen in (construction & manufacturing).
• Jobless Claims: The number of jobless claims for the week ended March 30 was 221,000, an increase of 9k from the prior week and continuing to come in at a tight range between 200k and 225k. The four-week average saw a slight increase at 214k. The number of continuing claims declined 19k to 1.791 million, which has remained relatively unchanged since July, but reaching a post-pandemic peak around 1.829 million in January.
• PMI Survey: The PMI manufacturing index was 51.9, above the 50 breakeven level for the third straight month now, indicating growing manufacturing conditions. The report noted softening new orders, but nearly everything else that improved included a growth in production and employment. The report did note “sharper rises in both input costs and output prices” however.
• ISM Survey: The ISM manufacturing index was 50.3 for March, up 2.5 points and the first time 50 in months in 17 months. This report noted an improvement in new orders with stronger demand with fewer respondents reporting “soft” conditions. The prices index moved higher amid higher commodity costs.
• ISM Services Survey: The ISM services index was 51.4 for March, the weakest level since September, driven by a deceleration in new orders which was 54.4 – still in expansion territory but lower than recent months. The big news was a deceleration in the prices paid index, which fell to 53.4 for the lowest since March 2020.
• Construction Spending: Construction spending declined 0.3% in February, the second consecutive decline after 12 straight months of increases. Construction spending has been strong compared to a year ago, rising 10.7% with both residential and nonresidential spending contributing, rising 6.5% and 14.2% from a year ago, respectively.
• Vehicle Sales: The number of vehicle sales in March was 15.5 million, on a annualize rate, below the 16.0 million expected and slightly below 15.8 million seen in February. This is above the 14.9 million rate in March 2023, but vehicle sales are still below the pre-pandemic trend of about 17.5 million.
• Trade Deficit: The trade deficit in February widened by another $1.3 billion in the month compared to January to a monthly deficit of $68.9 billion. The wider deficit was due to a $7.1 billion increase, or 2.2% increase, in imports, only partially offset by a $5.8 billion increase, or 2.3% increase in exports. That deficit number is a direct impact to GDP – a wider number subtracts from GDP. Another way to view the trade data is looking at volume of trade to gauge activity. Here, the volume increased a pretty strong $12.9 billion, or 2.2% overall compared to January and up 3.4% from a year ago.

Company News

• Tesla’s Troubles: Tesla shares moved lower last week after it reported it delivered 387k vehicles in the first quarter, well below the estimate of about 455k, which was already reduced several times through the quarter. In addition, it said it produced 433k vehicles. Tesla said the decline was partially due to the early phase of the production ramp in the updated Model 3 and factory shutdowns from shipping delays.
• Medicare Advantage Increase: Health insurance stocks were under pressure last week after news came from the CMS (Centers for Medicare & Medicaid Services) that Medicare advantage plans will only be getting a 3.7% payment increase in 2025, which was proposed by the government in January. This came as a surprise to most, as only once in the past 10 years have final rates not improved from the governments initial proposal, according to Bloomberg.
• Endeavor Group M&A: Private equity group Silver Lake Management announced it has agreed to acquire the sports and entertainment company Endeavor Group in a deal valued at $13 billion by buying the remaining shares it does not already own for $27.50/share, a 9.1% increase from where shares traded prior to the announcement. Endeavor Group is the controlling investor in sports properties such as Ultimate Fighting Championship (UFC), World Wrestling Entertainment (WWE), and Professional Bull Rider (PBR), among many others.
• Apple Home Robot: A Bloomberg article says Apple is exploring home robotics as the potential ‘next big thing’ which comes after its automotive (EV) program got shutdown after proving to be unsuccessful. The article says Apple engineers are exploring a mobile robot that can follow users at home as well as a robotic table-top device that can move a display around. It says this could be a way it capitalizes on artificial intelligence, but its not clear what approach Apple will take. There is a concern at Apple if consumers would be willing to pay a high price for the device.
• Charging For AI-powered Search: Alphabet is weighing charging a price for advanced search features that would be powered by its artificial intelligence, according to the Financial Times. It said the main Google Search feature would continue to be free, but a paid version would add AI-generated features to its Gemini AI assistant in things such as Google docs and Gmail.

Other News:

• OPEC Meeting: At the latest policy meeting to review the oil market and its member’s ongoing agreement on production cuts, the oil cartel OPEC+ decided to keep its oil policy unchanged but did pressure some nations to improve compliance with its commitment to cut oil production, after data shows production by the group was over its target in January and February. OPEC said it decided to stick with its previously announced oil production cuts of 2.2 million barrels/day for the first half of the year to help support prices. Last week oil WTI crude oil rose to a six month high of about $87/barrel, up nearly 25% from the beginning of the year over continued tensions in the Middle East and improving economic conditions.
• Recent Fed comments:
  • Atlanta’s Bostic said he sees just one rate cut this year and it would not be until the fourth quarter, based on his expectation the process to bring inflation lower will continue to be bumpy and economic growth and unemployment continues to be robust. He moved his expectation from the third quarter because inflation is easing “much slower than what many have expected.”
  • San Francisco’s Daly said there is no urgency to cut rates, citing a bumpy disinflation process, strong economic growth, and tight labor market. She said three rate cuts this year is a reasonable baseline, but will all depend on inflation progress.
  • Cleveland’s Mester spoke more on risk management when it comes to policy, saying cutting rates now would risk “undoing the progress” we have already made on inflation, adding that cutting now poses a bigger risk than keeping rates at current levels for too long. She said with the labor market and economic growth being “very solid” there is no need to cut rates yet.
  • In Fed Chairman’s public appearance last week, he stuck to his message that came from the Fed meeting two weeks ago – despite the stronger inflation data the first two months of the year, progress is still being made on inflation and that has not materially changed the Fed’s view on inflation. He reiterated it is “likely” rate cuts will begin “at some point” this year, although acknowledged more confidence is needed before doing so, meaning more data to confirm inflation continues to decelerate.

Did You Know…?

Tax Day 2024:

Tax Day is quickly approaching! As a reminder, individuals still have time to contribute to IRAs! Tax Day is not just the deadline for filing your taxes, but also the last day to make Traditional or Roth IRA contributions for the 2023 tax year. Individuals can contribute up to $6,500 into their IRA, and $7,500 if over 50 years old (keep in mind the amount you can contribute may be reduced or even phased out completely if you make over a certain income).

Have questions or want to make a last second 2023 contribution?

Reach out to us at 330-650-2700

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