Jobs Take Center Stage As Recent Data Suggest Slowing Growth, But Friday Report Holds Key

(Wednesday Market Open) NASA announced the astronauts for next year’s planned moon flight earlier this week, but the countdown on Wall Street is already underway for this Friday’s jobs report. And in a twist, the market will be closed for Good Friday.

Don’t be surprised if volatility ticks up Thursday ahead of the report, with some participants possibly moving to the sidelines to avoid getting caught long or short ahead of data that they can’t trade immediately in the cash market. If you plan to trade tomorrow, especially in the final hour of the day, consider taking extra caution and perhaps keeping trade sizes lower than normal.

The monthly jobs data follows job openings data from Tuesday suggesting the labor market may finally be slowing down—possibly good news if you want the Federal Reserve to have reasons to press the pause button on interest rate hikes. That said, Cleveland Fed President Loretta Mester sounded less than dovish this morning, saying in a speech that the Fed will have to raise its target rate above 5% (from the current target range of 4.75% to 5%) to fight inflation, Reuters reported. Mester doesn’t have a vote on the Federal Open Market Committee (FOMC) this year.

Recent data suggest the economy may be slowing, but much of it reflects the “goods” economy, not services. We’ll get a glance at the services sector just after the open today with the March Institute for Supply Management (ISM) Services PMI. Market participants expect another solid month. The analyst consensus is 54.5, above the 50 that indicates expansion and down just slightly from 55.1 in February, according to Briefing.com.

The services economy accelerated in recent months even as goods demand fell, complicating the Federal Reserve’s fight against inflation. Services include everything from restaurant meals to health care to financial services, and robust consumer demand following the pandemic—fiscal and monetary stimulus—has driven services growth (and raised prices).

Morning rush

• The 10-year Treasury note yield (TNX) is barely changed at 3.34% after a sharp drop yesterday.
• The U.S. Dollar Index ($DXY) inched up to 101.67 but remains near six-week lows.
• The Cboe Volatility Index® (VIX) futures climbed to 19.7.
• WTI Crude Oil (/CL) remains near two-month highs at $80.75 per barrel.

Just In

Data’s a bit light today, but there’s some housing news as the weekly MBA Mortgage Applications Index fell 4.1%. Purchase applications dropped 4% and refinancing applications fell 5%. We’ll see if the drop in Treasury yields early this week gets reflected in lower mortgage rates.

And just over an hour before the opening bell, traders got another jobs report preview. Private employment rose by 145,000 positions in March, down from 261,000 in February, according to the ADP Research Institute. Job growth in services slightly outpaced goods-producing positions. Wage gains eased, and ADP said in a press release that the report offers another signal that economic growth is slowing.

The headline number missed expectations, but there historically hasn’t been a strong correlation between ADP’s data and the government March jobs data Wall Street awaits on Friday.

Stocks in Spotlight

Conagra (CAG) shares got a lift this morning after the food products company reported earnings per share that beat analysts’ consensus forecasts and reported revenue that was in line. CAG also raised its fiscal 2023 guidance to a level above the consensus view.

This week’s soft March ISM Manufacturing and February Factory Orders data took a toll on industrials stocks yesterday. Concerns that falling demand in a slowing economy could hit revenue and earnings likely led to selloffs of Caterpillar (CAT), Deere (DE), MMM (MMM), and Lear (LEA). Pressure also hit transport companies, which can be vulnerable in recessions. FedEx (FDX) and CSX (CSX) both slumped.

Industrial stocks rose in late March along with some other so-called “cyclical” sectors as sentiment grew that a less hawkish Federal Reserve and China’s reopening might spark a recovery from recent softness. With Tuesday’s decline, however, the S&P Industrial Select Sector Index (IXI) is up less than 1% year-to-date, well behind the S&P 500® index’s (SPX) gain of around 7%.

One thing that may work in the sector’s favor: Earnings season is ahead, and analysts expect nearly 13% Q1 year-over-year earnings per share (EPS) growth for the industrials sector, according to FactSet. That’s the second-best expected sector performance behind consumer discretionary 

What to Watch

Jobs update: We’re two days way from Friday morning’s March Nonfarm Payrolls report, and here’s how analyst estimates shape up, according to Trading Economics:

• Jobs growth: 240,000, down from 311,000 in February but still historically high.
• Hourly wage growth: up 0.3% month-over-month, after rising 0.2% in February.
• Unemployment rate: 3.6%, unchanged from February.
• Participation rate: 62.5%, unchanged from February.

Just FYI, the U.S. stock market is closed Friday, though futures trading will be open. Anyone hoping to get a sense of market reaction to the jobs data should consider monitoring the futures market Friday and again Sunday night when it reopens for the new week.

As for the report itself, any headline number under 200,000 would likely be seen as rate-friendly, meaning it might suggest more room for the Fed to at least pause rate increases at some point soon. However, wages are another important aspect. If they go up more than expected, it could reinforce impressions that the labor market remains a possible source of inflation, since higher wages can force companies to raise product prices.

The worst-case scenario for the Fed, and possibly investors, is a report that shows lower jobs growth but rising wages. That’s the kind of data that could heighten concerns about inflation remaining “sticky” even as the economy slumps. As of this morning, futures trading builds in a 57% probability of the Fed pausing rate hikes at its next meeting in early May, according to the CME FedWatch Tool.

Job Openings and Labor Turnover Survey (JOLTS): Tuesday’s surprisingly sharp dip in job openings sets the stage for Friday’s payrolls data, adding to impressions that job demand is finally falling. The JOLTS report showed 9.93 million job openings as of February, down from 10.56 million in January (a figure that itself was lower than the original January reading of 10.8 million).

The headline JOLTS number is the lowest since May 2021 and reflected large decreases in openings for professional and business services and health care, as well as transportation. One contrary sign in the report was a slight rise in the number of “quits.” People tend to quit jobs when they believe they can easily latch on somewhere else, but not so much during recessions when labor demand falls. Still, if the jobs market is actually slowing, the quits rate could be a lagging indicator, as it takes time for people to sense a change.

This is only one report, not a trend. If Friday’s payrolls report backs it up, maybe it’s something worth chewing over more—but even the current level of job openings remains far above historic averages. We’re not out of the woods yet.

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CHART OF THE DAY: CHANNELING CRUDE.  Despite breaking out of its downward channel in March, WTI crude futures (/CL--candlesticks) looked set to continue their downward projection. However, crude futures found support at 2021 levels and the downtrend’s resistance level. Of course, oil got a shot in the arm from the OPEC+ production cut announcement that took it back to near its 2023 highs. But it remains to be seen if this will prompt a new uptrend or if the sideways trend will continue in a wider channel. Data source: CME Group. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Currency exchange: Gold futures certainly have a shine as they broke past the $2,000 per ounce level on Tuesday, and much of that luster is due to the weaker U.S. dollar. Apparently, commodity traders see the motherlode in precious metals as the dollar’s dominance in the petroleum market comes into question. Though the dollar has come well off its recent two-decade highs, which tends to help gold, the Fed’s tightening of monetary policy over the last year appears to be putting the petrodollar—a colloquial market term denoting the dollar’s status as the primary currency for crude oil payments—at risk, as other countries seek to buy oil in other currencies. This idea of trading crude in other currencies gained currency, so to speak, when the greenback hit those highs last year, making dollar-priced oil more expensive for overseas buyers. There’ve been “increasingly frequent” Saudi comments to that effect, as reported earlier this year by industry publication Oilprice.com, which could open the door to oil trades in yuan, euros, or yen. It’s still mostly talk, but if we see that happen, it could possibly cause dollar weakness.

Happy anniversary: An adage says that it takes about a year for Fed rate hikes to begin having a major impact on the economy. Recent economic data seem to support that as we reach the one-year mark since the Fed began raising rates. Tighter financial conditions finally appear to be moderating economic growth, though there’s still a host of numbers to wade through before the Fed’s next meeting in early May. In case anyone’s counting, Tuesday’s JOLTS report was the fifth data release since last Friday to fall below analysts’ expectations. Both February construction spending and factory orders earlier this week fell sequentially, meaning month-over-month. Inflation shows signs of calming, and so does the jobs market. Treasury yields are down this week on the soft data, and the futures market builds in chances of two to three rate cuts later this year.

Talking Treasuries: Short-term Treasuries rose sharply over the last month amid ideas that banking turmoil could slow the economy and reverse the Fed’s rate hike path. However, there may be more risk now in the short end of the curve if the Fed doesn’t cut rates later this year, as the market expects. That scenario would likely mean short-term yields rising, hurting the value of underlying notes (yields move inversely to prices). That may seem a bit far-fetched considering the 2-year yield dropped 15 basis points to near recent six-month lows below 3.85% Tuesday following the JOLTS data. Still, Treasuries have been extremely volatile lately. The 2-year yield rose nearly 100 basis points between the end of January and mid-March as inflation and rate hike fears flared. No one necessarily predicts a repeat, but anyone investing now should carefully consider possible risk along with time horizon. Yields farther out on the curve may be lower and lock you in longer but tend to be a bit less tied to the fluctuating daily expectations for near-term Fed policy.

Calendar

April 6: No major data or earnings expected.

April 7: March Nonfarm Payrolls, March Wages, March Unemployment; major exchanges closed for Good Friday.

April 10: February Wholesale Inventories.

April 11: Expected earnings from Albertson’s (ACI) and CarMax (KMX).

April 12: March CPI and core CPI.

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