Summary and Price Action Rundown
US equities hit new records today as disappointing US jobs data eased overheating fears and reinforced the accommodative policy posture of the Federal Reserve, keeping Treasuries tame and sinking the dollar. The S&P 500 advanced 0.7% today to surmount last week’s record high, taking year-to-date gains to 12.7%. The tech-heavy Nasdaq outperformed as a hint of doubt crept in over the growth outlook following the lagging nonfarm payroll data. The Euro Stoxx Index also registered solid gains while Asian bourses were mixed overnight. Longer-dated Treasury yields fluctuated but closed little changed, with the 10-year edging up to 1.58%, while the dollar fell back to a more than two-month low. Oil prices continued to chop near the top of their recent range, with Brent crude closing just above $68 per barrel.
April Jobs Figures Miss Estimates by a Country Mile
After a series of economic readings earlier this week that were strong but slightly below expectations and encouraging initial jobless claims yesterday, the nonfarm payroll tally for last month was a major disappointment, lending further credence to the Fed’s cautious guidance. The US economy added 266 thousand jobs in April, following a downwardly revised 770 thousand rise in March and well below market expectations of 978 thousand, as employers face worker shortages. Job gains were centered in leisure and hospitality, with 331 thousand and local government education with 31 thousand. However, these gains were partially offset by losses in temporary help services, losing 111 thousand and in couriers and messengers, losing 77 thousand. Jobs also fell 18 thousand in manufacturing and 15 thousand in retail trade and were unchanged in construction. In April, nonfarm employment is down by 8.2 million, or 5.4%, from its pre-pandemic level in February 2020. Furthermore, the unemployment rate rose to 6.1%, from 6.0% in March and well above market expectations of 5.8%, as more workers began looking for work and re-entered the labor market. The number of unemployed people increased by 102 thousand to 9.81 million and the number of employed was up by 328 thousand to 151.2 million, while the activity rate rose to 61.7% from 61.5%. Unemployment levels were down considerably from their recent highs in April 2020 but remained well above their levels prior to the coronavirus pandemic.” – MPP view: We’re going to see a lot of fluky numbers like this over the coming months but this downside surprise was consequential. Our base case had been that the market eventually would come around to believing the Fed’s guidance but not until the FOMC had been forced to get more explicit about the taper timeline – we may have to reassess this as today’s data is making more market participants true believers (like we are) in the Fed’s staunchly accommodative posture.
Fed Communications Focus on the Long Path to Recovery
Sagging payrolls underscore the Fed’s cautious messaging, as markets reprice policy expectations to align more closely with the dovish guidance. During a call with reporters earlier this morning, Minneapolis Fed Chair, Neel Kashkari, said it was essential to maintain the current ultra-accommodative monetary policy stance following the dramatically substandard monthly gain in US jobs. The regional Fed president noted that today’s subpar jobs report is an example of just how far the economy remains from the Fed’s employment goals, and he doesn’t “see any reason right now to change something that is working.” Kashkari expressed that the most important step right now is “to rebuild this labor market and put them back to work,” and in the future, “there will be plenty of time to normalize monetary policy,” he said. In a separate speech this morning, Richmond Fed President, Thomas Barkin, speculated that today’s disappointing jobs figure might be attributable to the growing challenges of matching unemployed job-seekers to available positions. He additionally conjectured that the stimulus checks deployed earlier this year are allowing low-wage workers to be “a little choosy” when selecting from available positions.
Elsewhere, Treasury Secretary Yellen spoke during today’s White House press briefing, and stated that while “today’s jobs report underscores the long haul climb back to recovery,…the 266,000 jobs added in April represent continued progress,” and “we should also be encouraged by the ongoing expansion of the labor force.” She continued on to state that “we will reach full employment next year.” Nonetheless, Yellen noted the unevenness present within the labor market recovery, and tied the Biden administration’s $4 trillion fiscal plans to invest in American families and workers to achieving “a strong, prosperous economy this year and in 2022,…[and to] our country’s long-term economic health.” President Biden additionally delivered remarks today and firmly defended his $1.9 trillion pandemic relief package. “When we passed the American Rescue Plan, I want to remind everybody, it was designed to help us over the course of a year, not 60 days,” he said. Markets reacted accordingly to today’s overall discourse, broadly improving as the continuation of fiscal and monetary support was again firmly acknowledged by lead policymakers. Yields on the benchmark 10-year Treasury fell below 1.5% this morning, though bounced back to 1.58%, with futures markets repriced rate expectations to incrementally push back the anticipated timing of hikes. – MPP view: Please see our Market Viewpoint this weekend for a deeper dive into the Federal Reserve outlook.
Additional Themes
MPP Video – Brendan and John discuss the Biden administration and its proposed $1.8 trillion American Families Plan, which is the more social and softer infrastructure-focused. The all-important Fed communications and what a massive earnings season. Enjoy the weekend! MPP Macro Video
MPP Video: The Crypto Dome – Markets Policy Partners enters the Nucleus195 Crypto Dome, joining Adam Blumberg from Interaxis to discuss the shifting regulatory environment for cryptocurrencies, how the Treasury is likely to work in conjunction with the SEC, and what it all means for RIA’s and the individual investor. MPP Crypto Video
Latest Podcast – Well That Number Was Unexpected – Tony, John, and Brendan are joined by Stratton Kirton, Managing Director at HPS, to break down the surprising April jobs numbers. The gang discusses why predictions may have missed the mark and what the numbers mean for the state of economic recovery. They also discuss Treasury Secretary Janet Yellen stepping on the Fed’s toes and the implications of the Biden administration’s COVID-19 vaccine patent decision. Latest Macrocast
First Quarter (Q1) Earnings Season Wraps Up with Stellar Headline Numbers and Muted Market Reactions – The overarching theme of Q1 earnings season was the lack of apparent investor enthusiasm over blockbuster headline results, suggesting that much good news was already priced into stocks. A key subplot was management commentary on rising input costs and the potential for those increases to abate over the coming quarters as supply chains are reassembled. Overall, among the 438 of the S&P 500 companies that have reported, 70.7% have topped sales estimates and 87.0% have beaten earnings forecasts, which are historically high rates of upside surprises. Nevertheless, reporting companies have, on average, experienced a 0.2% decrease in share price in the trading session following the release of their results, and while the S&P 500 is up 2.2% since the start of earnings season.
Looking Ahead – Next week will be a major week of economic data, with the US consumer price index (CPI), the producer price index (PPI), retail sales, and industrial production, initial jobless claims, consumer sentiment, and small business optimism all due. Global inflation readings will also be in focus, with China’s CPI and PPI, along with CPI for Germany and France. Industrial production data for the EU is also on the calendar, amid a recent trend of upside surprises for regional economic figures. The barrage of Fed communications will continue, with Vice Chair Clarida, Fed Governor Brainard, and hawkish outlier Dallas Fed President Kaplan all delivering remarks. OPEC will also issue its monthly oil report with crude prices fluctuating at recent highs.