The February jobs report crushed expectations with US payrolls growing more than expected while wage growth was disappointing. Equity markets were little-changed in response to this number while US Treasury yields backed up following this report.
First, the scoreboard:
- Dow: 16,996, +52, (+0.3%)
- S&P 500: 1,999, +5, (+0.3%)
- Nasdaq: 4,717, +8, (+0.2%)
- WTI crude oil: $36.20, +4.8%
The jobs report handily beat expectations.
In February, nonfarm payrolls in the US rose by 242,000, way more than the 195,000 that was expected by economists and better than the 172,000 jobs that were created in January. January’s number was revised to this level from an initial report of 151,000 new jobs.
Wage growth, however, was disappointing as wages fell 0.1% compared to the prior month and rose just 2.2% over last year. Expectations were for these numbers to rise 0.2% and 2.5%, respectively.
Ian Shepherdson at Pantheon Macro, however, noted that a calendar quirk is likely to blame for this disappointing wage numbers — a quirk that will still be in place in March — and so the read shouldn’t be that overall, wage growth has stalled out.
The most important part of recent jobs reports for Fed watchers has been and remains the wage figures as wages are the necessary condition to create a sustained uptick in inflation. If we consider that inflation is too much money chasing too few goods, then consumers need more money in order to goose prices higher.
The unemployment rate in February remained steady at 4.9%. (Well, actually, 4.918497%.)
Also of note in the jobs report is that the labour force participation rate rose to 62.9%, the third straight month that this number has increased. The labour force rate has often been cited as the sign that something is broken, fundamentally, in the US labour market as this measure has been sitting near 30-plus year lows for some time.
The reality is that this ratio is being dragged down not only by a soft labour market but by the structural shift seen among the US labour force given the rate at which Baby Boomers are retiring.
Under the surface of the headline employment numbers are a few encouraging trends for not just the future of the labour market but the future of the broader US economy.
In February, 62% of total job gains were for black or Hispanic workers, a sign that groups which had seen higher-than-average unemployment rates making gains as the labour market more fully heals itself following the financial crisis. In February, the unemployment rate for black workers fell to 8.8% — down from 10.3% last year — while the Hispanic unemployment rate is down to 5.4% from 6.7% two years ago.
In addition to minority workers seeing larger gains in February, lower- and middle-income workers have also seen an increase in employment, indicating a broadening of the labour force gains.
Torsten Sløk at Deutsche Bank argued that it is gains among these lower-income workers that serve as a major positive for the economy as these consumers have a higher marginal propensity to consume — meaning that the less total amount of money you bring in, the more you’re likely to spend an additional $1 of new income — which has beneficial knock-on effects for consumer spending, the engine of the US economy.
The flows in the labour force are and have been decidedly positive over the last year.
This chart, which comes to us from Deutsche Bank, shows the trend of workers moving from outside the labour force altogether to back in the labour force.
This is the most dramatic re-classification of workers within the labour force and shows an economy that is able to absorb more and more slack, a bullish both for future wage growth, inflation, and general economic prospects.
This year has been all about end-of-day rallies.
According to data from Bespoke Investment Group, the average intraday performance for the final hour of trading is far outperforming any other period of the day, which the firms says investors often seen as a sign of “smart money” activity.
(The old market adage is “sell the open, buy the close.”)
Many consider stronger price action at the end of the day to be an excellent indicator of “smart money” activity. This theory suggests that early day trading is noisy and distorted by hasty reactions to economic data or earnings announcements. Later on, though, we get the more patient investors making decisions. So far in 2016, that theory has been basically correct; while stocks are still down on the year, the huge selling to start the year has been almost reversed and the price action over the last week or so (strong breadth, consistent higher highs, and broken downtrends) has been indicative of a market that wants higher levels. If you’re looking at it from the “smart money” perspective, stocks are still being bought, too, as the chart [above] shows clearly.
Oil prices continued their rally this week, rising nearly 5% on Friday as West Texas Intermediate crude oil, the US benchmark, hit $36.20 a barrel, the highest level in about two months.
In related oil news, the latest Baker Hughes rig count showed the number of US oil rigs in use fell to the lowest since the week of December 4, 2009 this week.
Total rigs in use is now at 392.
Earlier this week, a note from Morgan Stanley’s Ole Slorer said that at the current rate of decline oil rigs in use would hit 0, though of course this is unlikely to happen. Slorer forecast a decline in the oil rig count by the summer, but the read from the market is that as the decline slows and signs increase that perhaps US oil production has topped out and traders betting against oil prices get exhausted, we’re nearer and nearer to a bottom.
Shares of oil driller Seadrill, meanwhile, were up more than 100% at one point on Friday after speculation its owner John Fredriksen raised about $150 million in cash to bail out the company.