More Signs Of Weakness In Economy As Jobless Claims Rise Ahead Of Tomorrow's March Payrolls Data

(Thursday Market Open)With the March jobs report looming and the stock market closed tomorrow for Good Friday, Wall Street remains in the same Catch-22 it’s been in for a while.

Bad news in the jobs data—if that’s what it brings early Friday—may be good news from an interest rate standpoint, but a slowing economy isn’t really something that tends to help stocks. We may be seeing indications of that in the market’s reaction so far this week to numerous data points suggesting an economic slowdown. Major stock indexes are on pace for a losing week after several weeks of gains.

It’s been quiet so far this morning in terms of major moves in the indexes, but volatility might pick up toward the end of the day as participants position themselves for tomorrow’s jobs data (see more below).

As an FYI, Daily Market Update won’t be published tomorrow with the markets closed. We’ll be back Monday with jobs report analysis.

Morning rush

• The 10-year Treasury note yield (TNX) is unchanged at just below 3.28%.
• The U.S. Dollar Index ($DXY) remains near two-month lows at 101.89.
• The Cboe Volatility Index® (VIX) futures inches up to 19.3.
• WTI Crude Oil (/CL) rose slightly to $80.72 per barrel.

Just In

Initial weekly jobless claims took a big jump last week to 228,000, and the prior week’s initial claims got an upward revision to 246,000. Analysts had expected 203,000 new claims last week, according to Briefing.com. This could be a clear sign that recent layoffs are starting to affect the overall employment picture, slowing things down in the labor market as the Fed has hoped. The market is likely to interpret it as a sign that the Fed may be more inclined to pause rate hikes sooner.

Just after the data release, futures traders priced in a nearly 60% chance of a pause at the Fed’s May meeting, according to the CME FedWatch Tool.

The pickup in jobless claims followed Wednesday’s soft Institute for Supply Management (ISM) Services report that added another leg to a series of poor data readings over the last week. Does all this weak data mean anything for tomorrow’s March jobs report?

Even a strong jobs report might not convince market participants the economy isn’t starting to sag. Wednesday’s softness in small-cap stocks—which can be particularly sensitive to U.S. economic weakness due to their heavy exposure to the domestic market—could be evidence of declining sentiment about the economy, though one day is never a trend. Growth sectors like info tech, industrials, and consumer discretionary also retreated yesterday amid the gloomy data news.

“For a while, bad economic news was taken as a positive for stocks because it lowered the outlook for further Fed rate hikes,” says Jeffrey Kleintop, Schwab’s chief global investment strategist. Now that the end of the Fed’s rate increase cycle appears to be near, “bad news is bad news again.”

What to Watch

Jobs update: We’re one day away from Friday morning’s March Nonfarm Payrolls report, due at 8:30 a.m. ET tomorrow, 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: 0.3% month-over-month, up from February’s 0.2% monthly rise.
• 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 and so will the bond market for much of the day. Anyone hoping to get a sense of market reaction to the jobs data should consider monitoring stock futures and bonds Friday and again Sunday night when futures reopen for the new week.

Don’t be surprised if volatility ticks up today 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, especially in the final hour of the day, consider taking extra caution and keeping trade sizes lower than normal.

Diving into jobs data: Any headline number under 200,000 likely would be seen as rate-friendly, meaning it might suggest more room for the Fed to at least pause interest 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 (higher wages can force companies to raise product prices).

Digging deeper, watch tomorrow for any signs of labor participation improvement. If it grows from February’s 62.5%, that might suggest more workers are returning to the job market, potentially reducing pressure on companies to lure new employees with higher wages. In other words, it might be disinflationary, to use a bit of “Fed-speak.”

Leisure and hospitality, healthcare, and retail trade positions grew most in the February jobs report—more evidence that the services sector is driving this economy. At the same time, transportation and warehousing lost jobs, while construction jobs barely ticked up. This pace, if it continues, could keep wage growth in check, since the dominant services industries aren’t high-paying. Everyone deserves fair wages for their work, but the Fed has expressed concern that robust pay growth might be fueling inflation and inflation expectations.

Stocks in Spotlight

Utility stocks, sometimes called a “bond proxy” sector because of their generally high yields and slow growth, led all S&P 500 sectors yesterday with 2.5% gains. Watch how this sector along with other “defensive” ones like staples and healthcare perform over the next weeks as more data come in. Outperformance by the defensives could indicate more investors battening down the hatches over recession concerns.

Speaking of which, the Atlanta Fed’s GDPNow indicator for Q1 Gross Domestic Product (GDP) got chopped yesterday to 1.5%. That’s down from above 3% just two weeks ago. The new estimate, which reflects recent soft data, is now closer to those on Wall Street, though some analysts predict that GDP might decline in Q1. The official first estimate from the government is due later this month.

GDP doesn’t take place in a vacuum. Softer GDP growth often reflects less demand from businesses and consumers, meaning a possible hit to corporate earnings. It’ll be illuminating to hear corporate leaders’ observations on the economy starting with big bank earnings a week from Friday.

Walmart (WMT) got a jump on that this week, reiterating previous guidance yesterday at the company’s investor meeting. One WMT executive recently hinted that consumers are focused on saving money, noting a higher demand for private label products (sometimes called “generics”) over name brands. For a store like Kroger (KR) that sells its own private-label products, this sort of shift can sometimes be a margin-positive development.

In another retail development, Costco (COST) shares fell 2% in pre-market trading after the company reported a 0.9% gain in March comparable sales—the lowest since April 2020, according to Bloomberg, and the second month of deceleration.

CHART OF THE DAY: BOTTOM FEEDING? This one-year chart of the U.S. Dollar Index ($DXY—candlesticks) shows that it’s now back in a trading range between roughly 101 and 104 that’s held up pretty well from a support standpoint. It’s been about a year since the dollar was trading regularly below this level, and it’s testing that support now. Data Source: ICE. 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

What you wish for: There’s been a host of data over the last week suggesting that the economy might be slowing down. If tomorrow’s jobs report offers more evidence of that, it ultimately could be a tough sell for stock market bulls concerned that slowing growth could hurt company bottom lines. Already this week we’ve seen a trend toward “defensive” trading, with Treasury yields falling and sectors like healthcare, utilities, and staples gaining ground. A poor showing in jobs could accelerate this trend and perhaps fuel worries about the relatively high valuations of major stock market indexes.

At odds: Back in Chicago’s trading floor days, the joke was that the Chicago Board of Trade (CBOT) and its crosstown rival, the Chicago Mercantile Exchange (CME), were the Hatfields and the McCoys because their members often disagreed about the direction of the futures industry. Today’s equivalent of those warring families might be the Fed and the financial futures market, as they continue to differ sharply over the path of interest rates this year. While the market builds in two to three rate cuts by the end of the year, the Fed hasn’t suggested any. In fact, it says rates need to rise more. That sentiment accelerated yesterday when a series of poor data (ISM Services, ADP Employment) coincided with a hawkish speech from Cleveland Fed President Loretta Mester. Even as Treasury yields sank to seven-month lows, the market was left contemplating the Fed’s unrelenting quest to use its rate hammer to stamp down inflation. Ultimately, one side may have to yield, but until there’s a more definitive picture, the feud continues.

Holiday break: While stocks are closed tomorrow for Good Friday, the bond market is open on a limited schedule until 2 p.m. ET, giving another outlet aside from stock futures to check for potential reaction to the jobs data. It may seem odd for the market to be closed on a big data day, but it happened just two years ago when Good Friday fell on April 2, 2021. That’s when the Labor Department released a March payrolls report in which job growth beat expectations by 300,000 and unemployment fell to 6% as the economy emerged from COVID-19. Trading in futures was “muted” that day, according to CNBC coverage at the time. Inflation wasn’t much of a factor then, so the stronger-than-expected jobs news was generally welcomed. The following Monday, the SPX rallied nearly 1.5%. The kicker? That rally took the SPX to 4,077. Two years later, we’re right about at that same level.

Calendar

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.

April 13: March PPI and core PPI. Expected earnings from Delta (DAL) and Progressive (PGR).

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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