Stocks, Yields Head Lower After Lighter Jobs Growth Reignites Fears of Slowing Economy

(Monday market open) Since a major golf tournament just ended, perhaps it’s appropriate that Friday’s jobs data was right down the middle of the fairway.

The question is whether slowing jobs growth in March—accompanied by a host of other softer-than-expected data—means the economy’s next shot ends up landing in a recessionary sand trap, which many analysts expect.

To continue the golf analogy, the jobs report isn’t even the last key swing this week. There’s a set of tee-shots and putts ahead in the form of inflation data, retail sales, Fed minutes, and the start of earnings season. By this coming weekend, it’s likely there will be more clarity around the Federal Reserve’s next move.

Stepping back, Friday’s March Nonfarm Payrolls report from the Department of Labor showed jobs growth of 236,000 in March, right around the 240,000 Wall Street consensus and down from an upwardly revised 326,000 new jobs in February. It was the weakest monthly jobs report in more than a year, something the Fed might welcome as it looks for a tighter jobs market to tamp down inflation.

From a market perspective, the report helped by not being too strong—potentially raising inflation concerns—or too soft, which could have worsened fears of a recession.

The stock market couldn’t react much to the news, as most trading outside of stock futures and bonds was closed for Good Friday. Stock futures and Treasury yields fell early Monday before the bell, but today’s open is the first chance for the majority of traders and investors to respond to the jobs data.

Morning rush

• The 10-year Treasury note yield (TNX) fell 1 basis point to 3.37%.
• The U.S. Dollar Index ($DXY) climbed to 102.3.
• The Cboe Volatility Index® (VIX) futures rose to 19.55.
• WTI Crude Oil (/CL) is up three weeks in a row, trading at $80.92 per barrel.

Treasury yields are off last week’s lows but remain under pressure following the jobs report, which showed more signs of a slowing economy. Even so, chances of a May Fed rate hike jumped to 66% early Monday, according to the CME FedWatch Tool.

Eye on the Fed

This is a big week for Fed watchers, though there’s no meeting until early May. Plenty of Fed speakers are on tap, starting today. The highlight might be Friday’s scheduled Economic Outlook speech by Fed Governor Christopher Waller.

In addition, Wednesday afternoon brings minutes from the last Federal Open Market Committee (FOMC) meeting, giving market participants a chance to see whether there was pushback to raising rates at that time.

While futures trading suggests stronger chances of a May rate increase, the market has pulled back a bit from expectations for future cuts. It’s now pricing in just two cuts by the December/January period, down from three at times last week.

Just In (Last Friday)

Since we didn’t publish Friday, here’s our take on March Nonfarm Payrolls data.

• The jobs report had a lot to like if you want the Fed to push pause on interest rates. It’s good to see labor market participation edge up to 62.6%—the highest since the start of the pandemic—because that often signals more workers looking for jobs, perhaps keeping wage growth in check. People deserve fair pay, but when wage inflation takes off, that can drive higher prices across the economy, hurting workers and businesses.
• On the wages front, March’s monthly 0.3% rise met analysts’ expectations, and the 4.2% year-over-year gain was the lowest post-pandemic level and below February’s 4.6%. The Fed is likely to see that as evidence that its tighter policies are working, which corresponds with what many economists say about rate hikes taking a year to have a real impact. They began in March 2022.
• The slight decline in average weekly work hours per employee may also get a welcome mat from the Fed, because it could hint that companies are now able to fill open positions and don’t have to squeeze more out of each worker. When jobs go unfilled, wages tend to rise more quickly, which can have inflationary ramifications.
• The jobs report also suggested that the services part of the economy continues to outpace goods-producing elements. Leisure and hospitality businesses are still adding jobs at a fast pace. Government and health care also added a decent number of new positions, but construction, manufacturing, and transportation and warehousing all were flat to slightly up. Pay in the leisure and hospitality sector tends to be relatively low, which could explain overall slow wage growth.

Stocks in Spotlight

The market’s been awaiting Q1 earnings for weeks, and now the curtain opens. On Friday several big banks will release earnings reports, including JP Morgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC).

The entire banking industry was in the spotlight last quarter, but for the wrong reasons, as two smaller banks failed and the government and Federal Reserve had to step in to help prevent contagion. There’s a sense that the turmoil might help big banks by attracting more deposits their way if businesses and other banking customers continue to worry about the health of smaller, regional banks.

Even so, banking giants like those reporting Friday saw their stocks take a hit last month and not recover much since. They’ll all be in the spotlight in coming days, not just for the usual information on earnings, revenue, trading volume, and loan demand. Their credit quality and loan books will likely be monitored more closely when they unveil Q1 results and discuss outlook for the rest of the year.

Banks aren’t alone approaching the earnings starting gate. Delta (DAL) kicks off airline earnings Thursday, and UnitedHealth Group (UNH) is on tap Friday. Shares of UNH got a boost last week as the Biden administration rolled out new Medicare rules on overbilling that, according to some analysts, won’t be as tough on their businesses from a regulatory standpoint. That’s in part because they’re being phased in over three years rather than all at once. The UNH earnings call Friday morning could provide more insight.

What to Watch

With the jobs report out of the way, attention likely turns to three key March data points straight ahead on this week’s calendar.

Consumer Price Index (CPI): This critical look at consumer inflation is due at 8:30 a.m. ET Wednesday and follows a lower-than-expected 0.3% rise in Personal Consumption Expenditures (PCE) prices last month. Wall Street expects a 0.3% increase in headline CPI and a 0.4% increase in core CPI that strips out energy and food, according to Trading Economics. February CPI growth was 0.4% and 0.5%, respectively, so we’re looking at what analysts think will be a slight move in the right direction, from an interest rate standpoint. Meaning the Federal Reserve might be more likely to pause rate hikes if inflation growth shows signs of easing.

Producer Price Index (PPI): On Thursday morning, again at 8:30 a.m. ET, we’ll see how wholesale inflation looked in March. Analysts expect PPI to be flat month-over-month, and core PPI to rise 0.3%, Trading Economics says. PPI fell 0.1% in February and core PPI was flat, so estimates now are for a slight uptick but nothing too scary.

Retail Sales: Friday morning brings a host of financial sector earnings reports as well as March retail sales. This important indicator of consumer demand fell 0.4% in February, and much of recent data suggest the economy has gotten more sluggish since then. Will this show up in the retail sales figures? If so, it could be another warning sign for companies that depend on consumers showing up to drive revenue and earnings. Analysts expect that February’s retail slowdown extended into March and will drop retail sales by 0.9%, according to consensus from Trading Economics.

No rest: Speaking of Treasuries, the normally sleepy bond market has been extremely volatile lately. What might be next? Check this episode of WashingtonWise, a Schwab podcast for investors.

CHART OF THE DAY: FORCE FIELD: Last Friday’s March Nonfarm Payrolls report showed labor force participation rising to 62.6%, the highest it’s been since March 2020. A growing participation rate  has the potential to slow wage growth, clamping down on inflation. Data source: Federal Reserve FRED database. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade. For illustrative purposes only.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

Services growth questioned: The services sector has been a major source of jobs growth over the last year. The leisure and hospitality industry alone added another 72,000 in March, according to last week’s payrolls report. Yet questions about how long this job growth can continue also arose recently as the March Institute for Supply Management Non-Manufacturing Index ended up well below Wall Street analysts’ expectations. The headline of 51.2 compared with the Briefing.com consensus of 54.5, and 55.1 in the prior report. Though anything over 50 signals expansion, this one barely made the cut.

Demand slowing? Other numbers deeper within the ISM report showed even less exuberance. New orders, which give insight into current demand, fell sharply. So did employment. Prices paid fell to its lowest level since July 2020.  The report’s key takeaway, Briefing.com noted, is that the services sector “is slowing noticeably, with a cooling off in the new orders rate.” That’s potentially bad news, considering services growth helped prop the economy over the past year as goods demand decreased. The ISM report was a snapshot of services health, not a trend, so we’ll see if the weakness carries over in future reports. If it does, you may hear arguments that the long positive trend in services might be waning, contributing to chances of a recession.

One more jobs takeaway: If you remove 47,000 new government positions from Friday’s jobs report, jobs growth in the private sector rose less than 200,000 in March, backing up impressions from last week’s softer-than-expected ADP National Employment report. There may also have been a weather component to recent jobs data, as strong growth in January and February coincided with unusually mild weather across large parts of the country.

Calendar

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).

April 14: Expected earnings from BlackRock (BLK), PNC Financial Services (PNC), JP Morgan Chase (JPM), Citigroup (C), Wells Fargo (WFC) and UnitedHealth (UNH). March Retail Sales and April University of Michigan Preliminary Consumer Sentiment.

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

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