Wentz Weekly: Ideal Labor Report and Budget Bill Drama

Wentz Weekly Insights
Ideal May Labor Report and Trump/Musk Budget Bill Drama

We apologize for the delay in sending the weekly newsletter the past several weeks. It has been a little longer to get the compliance approval and we will try to adjust for future newsletters.

US Stocks finished higher again last week by 1.5%, now 20% over the early April lows seen after Trump’s Liberation Day, and within just 3% from the all-time high from mid-February. Riskier parts of the market like high beta, the most shorted names, and small caps, all performed better than the overall market. Other outperformers included industrials, which is now the best performing sector so far this year, followed by utilities, while consumer discretionary, energy, and health care are the only sectors in the negative this year. Treasuries were weaker as yields rose across the curve mostly after the as expected labor report Friday.

It was an employment report that some called goldilocks because the report was not too hot and not too cool. The Department of Labor said nonfarm payrolls rose by 139,000 in May versus the estimated range of 100,000-200,000, based on its establishment survey. However, we are starting to see more industries with job losses (health care and leisure & hospitality continue to see the most) and the gains from May (and every other month year-to-date) were down from 2024’s average monthly gain of 168,000.

In addition, as has been the trend for a couple years now, the job gains from March and April were revised lower. March saw a downward revision of 65k to 120,000 while April saw a downward revision of 30k to 147,000.

The household survey showed a 625,000 decline in the labor force while the number of people employed decreased by nearly the same amount. These are basically unchanged from March as April saw an increase similar to May’s declines. Looking at year-over-year numbers, the number of people employed is up 2.109 million as the labor force grew 2.711 million.

The number unemployed has consistently climbed, rising another 71k in May and 602,000 higher from a year ago to 7.237 million unemployed. Excluding the pandemic years, this is the highest number of unemployed people since early 2017.

The unemployment rate remained at 4.2% while the underemployment rate remained at 7.8%. The report continues to indicate a growing labor market although slowing considerably from recent years. The report should keep the Fed on the sidelines at its next policy meeting next week, which is what the markets expect (no change to rates).

Fed officials are in a quiet period ahead of the meeting next week but coming off a busy week of Fedspeak from the last several days. The takeaway, as has been the case for weeks, is patience given the uncertainty around trade and its impacts to the economy and to give officials time to gather more data. Governor Waller, who has been one of the more dovish members (more supportive of rate cuts), gave more dovish comments last week saying he expects higher inflation in the short term from tariffs but it will be temporary and would support rate cuts later this year.

The biggest story of the week though came from trade/tariffs. After being rumored all week, but not confirmed by China, President Trump and Chinese President Xi held a phone call Thursday. Although it was said to be 90 minutes long, the only thing that came out of it was both sides would continue trade negotiations. The best news is that led to a planned meeting today (Monday June 9) in London between US and Chinese trade representatives. The sticking point for the US is reported to be around rare earth minerals where the US says China has not accelerated export licenses fast enough.

But garnering more attention was the fallout and drama between Trump and Elon Musk. Musk began posting on X (Twitter) his disapproval of the reconciliation bill that was recently passed in the House, which is now being worked on in the Senate, and which Trump is wanted to have completed by July 4. The Congressional Budget Office estimated the bill would add $2.42 trillion to the US deficit over the next 10 years.

Musk has been highly critical of the cost of the bill, calling for a more balanced budget. Recall that the Department of Government Efficiency (DOGE), which Musk spearheaded but his term expired May 30, was created with the goal of cutting excessive government spending. Musk has always called for a more balanced budget, but we note the budget bill as it is proposed now removes the EV tax credit, which was obviously beneficial to Tesla and Musk.

We expect many changes to the budget bill before the Senate releases its final version, but unfortunately do not expect it to be more balanced. Republicans hold majority in the Senate, but can only afford losing two votes.

This week begins with Apple’s developers conference Monday, where it is expected to introduce its new iOS, products, and features, as well as the meeting between the US and China. Then on Wednesday we will see the consumer price index. The Treasury auctions on Thursday will receive more attention given the recent concern around the debt and spending levels.

Week in Review:
US stocks were higher last week led by higher risk names and technology as volatility (measured by the VIX index) fell 9.7%, while international stocks were higher but to a lesser degree. The four major US indices finished as follows: Russell 2000 +3.19%, Nasdaq +2.18%, S&P 500 +1.50%, and Dow +1.17%. Treasuries were weaker across the curve as yields moved higher, recouping to decline seen the week prior – the 2-year Treasury yield rose 14 basis points to 4.05%, while the 10-year Treasury bond yield rose 10 bps to 4.51%. The dollar index saw a slight decline of 0.14% while gold rose 1.03% back near record highs. Bitcoin had another positive week rising 3.77%. Oil saw a 6.23% increase for the best week since November over OPEC’s smaller than expected supply increase and increasing tensions between Russia and Ukraine.

Recent Economic Data

• Employment Report: The monthly employment data reported payrolls increased 139,000 in May, right in the middle of the estimated range. Job gains were seen most in health care with 78k more, leisure and hospitality up 48k, and financial activities up 13k. There were a lot of industries that saw job losses, although none saw major declines. Job losses were led by temporary help down 20k, goods producing like manufacturing down 5k and government down 1k. However, revisions for the prior two months were large once again – March job gains revised down 65k to 120,000, April gains revised down 30k to 147,000. The three-month average in job gains is 135,000. The establishment data also reported a 0.4% increase in wages, a little higher than expected, with wages up 3.9% from a year ago, which was expected to slow to 3.7%. The household data showed the labor force increased by 625,000 people and the number of people employed increased 696,000, however these numbers are basically unchanged from March – the number of people employed has declined 130k, but still up 2.1 million over the past year thanks to 2.711 million entering the labor force. One of the bigger negatives is the number of people unemployed has increased 602,000 over the past year totaling 7.237 million, which, excluding the short period during the pandemic, is the highest since 2017. The unemployment rate remained at 4.2% while the underemployment rate remained at 7.8%. The report was overall in line with expectations but provides more evidence of a slowing labor market. Job gains have averaged 124,000 so far this year compared to the average of 168,000 per month in 2024.

• ADP Payrolls: The monthly payroll report from ADP showed 37,000 new payrolls in the month of May, lower than the 110,000 increase that was expected and the smallest monthly increase in over two years. ADP’s chief economist said hiring was off to a strong start to the year but has recently lost momentum, however pay growth was little changed and remained robust.

• JOLTS: The job openings and labor turnover survey showed on the last day of April there were 7.391 million job openings, a slight increase of about 200k from March and down about 200k from a year ago. Since peaking at an all-time high of 12.1 million in 2022, job openings have steadily declined and have leveled out in the 7 million range since last year, suggesting a normalization of the labor market and in line with the pre-pandemic levels. The number of separations rose about 100k to 5.288 million with 3.194 million of those coming from quits, which decline 150k from last month and down about 200k from a year ago. However, layoffs increased about 200k to 1.786 million to make up a larger portion of separations, something we will continue to monitor.

• Jobless Claims: For the week ended May 31 there were 247,000 unemployment claims, an increase of 8k from the prior week and about 23k above the average this year. The four-week average rose 4.5k to 235,000. The number of continuing claims was 1.904 million, down slightly from the week prior, with the four-week average up 8k to 1.895 million.

• PMI Manufacturing Index: The PMI manufacturing index indicated a modest expansion in manufacturing activity in May, with the index rising to 52.0 from 50.2 last month. The improvement was attributed to a buildup of inventories, the largest increase in 18 years, as manufacturers continued to mitigate potential supply disruptions from tariffs. Output and new orders helped as well while employment levels remained stable and input costs continued to increase.

• ISM Manufacturing Index: The ISM Manufacturing index indicated a small contraction in manufacturing activity in May with an index level of 48.5 relatively unchanged from April’s level of 48.7 for the third straight month of contraction. The new orders index was still negative at 47.6, production was still declining, while employment fell, and the price index remained very elevated at 69.4 indicating additional inflationary pressures. Of the 15 major industries surveyed, 7 reported growth while 8 reported contracting activity.

• Construction Spending: Construction spending in April fell by 0.4% which follows a 0.8% decline in March and was much lower than the 0.4% increase that was expected. The decline came from a 0.9% drop in residential construction spend and a 0.1% decline in nonresidential spending. Over the past year spending has steadily decelerated and is now in the negative territory in year-over-year comparisons. Compared to a year ago construction spending is down 0.5% with residential down 4.7% as homebuilding slows and offset somewhat by a 2.8% increase in nonresidential spending.

• Trade Balance: The trade balance has consistently ran at a big deficit, but that ballooned earlier this year, and hit a record deficit of $138.3 billion in March, as businesses imported more in attempt to get ahead of any potential tariffs. However, this reversed in April with the deficit cut in half to $61.6 billion, down $76.7 billion from March, and much lower than the $118.1 billion deficit that was expected. This should provide a big upward revision to Q2 GDP (a smaller deficit helps GDP). The lower deficit was due to a 3.0% increase in exports to $289.4 billion and a 16.3% decline in imports to $351.0 billion. The amount of cross border trade volume, a broader indicator of economic activity, was down 8.6% in the month (as imports slowed considerably) but still up 5.7% over the past year.

Company News

• Meta: The Wall Street Journal reported Meta is making a major bet that automation is the future of ads by looking to automate advertising with artificial intelligence by 2026. It is aiming to let brands fully create ad concepts from scratch and target ads with AI by the end of next year. It would also enable advertisers to personalize ads using AI so users can see different versions of the same ad in real time. A separate report by TechCrunch says Meta is looking at using AI-powered systems to take responsibility for evaluating the potential harms and privacy risks of up to 90% of updates made to its apps, allowing it to update its products more quickly.

• Constellation Energy: Constellation Energy shares rose over 10% early last week after it said it agreed to sell power to Meta’s data centers from its Illinois nuclear plant for 20 years starting June 2027. The Wall Street Journal reports the deal is the first of its kind in the US with an operating nuclear plant, unlike the Microsoft and Constellation deal from last year involving the Three Mile Island plant that is currently offline.

• Wells Fargo: Shares of Wells Fargo rose after the Federal Reserve said it will be removing its asset growth restriction, which was put in place back in 2018 after its accounts scandal, after saying the bank has met all conditions required by the consent order. The restriction was put in place to punish the bank for creating fake accounts and other deceptive sales practices in 2016.

• TikTok: People close to the White House reported Trump is planning to sign another 90-day extension to the delayed ban of TikTok, which is set to end June 19 in the current delay, according to Fox Business. The tweet by Charles Gasparino adds the future of TikTok has been enmeshed in US-China trade talks and “will likely be used as leverage by the Chinese in crafting a deal. One caveat is that if Trump sees a strategic advantage in crafting a deal by letting it go dark, and that could happen, said a Wall Street exec who was working on the deal to move it into US hands.”

Other News:

• Beige Book: The Beige Book, a report on economic activity across all Fed districts released about every 7 weeks, reported economic activity declined slightly since the previous update mid-April. Half of the Fed’s 12 districts reported a decline in activity, 3 reported no change and 3 reported slight growth. All talked about the higher level of economic and policy uncertainty which has led to more caution for household and business decisions. Consumer spending was mixed as most districts reported a slight decline. Districts reported prices increases continued at a moderate pace and the expectation is prices will rise at a faster pace going forward.

• GDP Model Estimate: The Atlanta Fed’s GDPNow forecasting model’s latest estimate June 2 sees GDP growing 4.6% in the second quarter, above the prior estimate a week prior of 3.8%. This is a big bounce from the 0.2% decline seen in Q1. The upward revision was due to higher estimates for personal consumption (consumer spending) and domestic investment growth. The bounce in Q2 was initially from a narrower trade deficit, after it exploded in Q1 as imports surged to get ahead of tariffs (higher imports detracts from GDP growth).

• Global Growth Estimate Downgrade: The Organization for Economic Co-operation and Development (OECD) said it has cut economic growth forecasts for the US and globally for the second time this year as tariff tensions weigh on expected growth. The US economic growth outlook was revised down to 1.6% growth for this year and 1.5% for 2026, down from 2.2%. Other reasons driving the lower estimate is elevated economic policy uncertainty, a slowdown of net immigration, and smaller federal labor force. Global growth was revised to 2.9% for 2025 and 2026, down from 3.1%, citing a concentrated slowdown in the US, Canada, and Mexico and the assumption tariff rates will remain higher. 

• OPEC Oil Production Increase: The oil producing group OPEC met over the weekend and agreed to hike production again by another 411,000 barrel/day, although that was a little less than the increase that was expected. This is the third consecutive month it has hiked production (or “normalized” production, since these moves are just bringing production to normal levels after they were cut during the pandemic). Oil rose on Monday as the increase was less than expected and heading into the weekend oil traders made short bets on the expectation OPEC would increase production by a more substantial amount and had to unwind those bets Monday.

• Tariff Updates:
  • Reuters reported the Trump Admin has asked all countries to submit their best offers on trade negotiations by Wednesday in attempt to accelerate trade talks with partners ahead of the July 9 expiration of the reciprocal tariff pause. The report says the US will evaluate each offer within days and offer a “possible landing zone” that could include a reciprocal tariff rate.
  • Trump said early Wednesday morning that Chinese President Xi is “very tough, and extremely hard to make a deal with!!!” Negotiations seemed to have taken a step back, with Chinese Foreign Minister saying the recent “negative measures” by the Trump administration have been groundless and undermine China’s rights and interests, adding the US needs to meet halfway and work together. Another report from the Wall Street Journal says an agreement/access to rare earth minerals are playing an outsized role in negotiations.
  • Trump held a phone call with Chinese President Xi where Trump said it lasted about 90 minutes and focused almost entirely on trade. Both sides agreed they would have officials meet soon for more talks. It was reported Trump administration officials have accused China of walking back on a pledge made during their early May meeting of approving the export of additional rare earth minerals to the US, while China has grown frustrated at US, accusing them of violating the trade truce based on its moves to impose new restrictions recently on student visas and semiconductors.