The slow recovery in the U.S. job market continues.
On Friday, we learned U.S. companies added 192,000 nonfarm payrolls in March, which was a bit below Wall Street’s forecast for 200,000. February’s number, however, was revised up to 197,000 from a prior estimate of 175,000.
It’s worth adding that total nonfarm private payrolls stands at 116,067,000, which is an all-time high.
The economic calendar is much lighter this week. But there are two conversations that are likely to remain heated. The first concerns the internal dynamics of the job market. Who are and aren’t in the labour force? Just last week, we realised we should consider the impact of ex-cons in the workforce.
The second concerns the internal dynamics of the stock market. Specifically, while the S&P 500 remains near all-time highs, high-beta momentum stocks have been getting slammed in what has been dubbed an “internal correction.”
Here’s your Monday Scouting Report:
Ex-Cons And Labour Market Data: During a speech about the job market on Monday, Federal Reserve Chair Janet Yellen named three people who were struggling to find work. We later learned that two had criminal backgrounds.
According to economists Larry Katz and Alan Krueger, decades of rising incarceration rates in America contributed to a material decline in the male unemployment rate. “The reasoning was that criminals out on the street have a lower employment rate — at least in the formal sector — and since the labour force data measure only the non-institutionalized population, a higher incarceration rate lowers the unemployment rate,” explained JP Morgan’s Michael Feroli.
Incarceration rates actually peaked in 2008 and have been declining annually since then, partially due to strained state budgets. “In principle, declining incarceration rates should have a few effects on labour force data,” said Feroli. “For one, reversing the Katz and Krueger reasoning, this should raise estimates of NAIRU, as well as realised unemployment rates. It should also put downward pressure on structural and realised participation rates, to the extent lower incarceration leaves in the non-institutionalized population more individuals with a lower tendency to participate in formal labour markets.”
Feroli estimates that the impact of this trend should have a negligible effect on labour market.
“To the extent declining incarceration may be affecting labour market data it is not due to more ex-cons in the workforce not finding jobs, but rather more people not entering jail, who may have lower employment and labour force attachment rates, consistent with the microeconomic evidence cited by Katz and Krueger.”
- Consumer Credit (Mon): Economists estimate credit balances increased by $US14.0 billion in February. “Nonrevolving credit is projected to drive virtually the entire increase, as revolving credit growth has been muted in the years following the end of the recession,” said Barclays economists.
- Job Openings & Labour Turnover Survey (Tues): Economists estimate there were 4.025 million job openings in February, up from 3.974 million in January. “JOLTS has garnered more attention lately as Fed Chair Yellen often cites the survey when assessing the state of the labour market,” said Credit Suisse economists. “While the unemployment rate gauges the supply side of the employment equation, JOLTS offers a picture of the demand for labour. In January, job openings rose only 60K to 3974K and the job opening rate was flat.”
- FOMC Minutes (Wed): The Federal Reserve will publish the minutes of its February 18-19 Federal Open Market Committee meeting at 2:00 p.m. ET. From Barclays’: “We expect the minutes of the March FOMC meeting to provide colour surrounding the discussion to move away from thresholds to qualitative guidance. While the FOMC statement indicated that this shift “does not indicate any change in the Committee’s policy intentions as set forth in its recent statements,” the median forecast of the fed funds rate rose by 25bp to 1.0% for 2015 and by 50bp to 2.25% at the end of 2016. We look for further discussion surrounding this increase, including whether it was prompted by a faster-than-expected decline in the unemployment rate as we believe.”
- Initial Jobless Claims (Thurs): Economists estimate claims slipped to 320,000 from 326,000 last week. “Initial claims likely fell, pushing the four-week moving average down to a new post-crisis low, excluding the California computer backlog decline in 2013,” said Citi’s Peter D’Antonio. “It appears that first filings are establishing a new lower range. Separately, continuing claims probably remained range-bound and the insured rate held at 2.2%.”
- Monthly Budget Statement (Thurs): Economists estimate the budget deficit came in at $US72.0 billion from $US106.5 billion. From Morgan Stanley’s Ted Wieseman: “Tax refund processing got off to a strong start in February, rising 12% year/year, but that reversed to an 11% decline in March for a cumulative year-to-date rise of 2.7%. Also contributing to the positive deficit swing are larger GSE dividend payments this year, strong 9% growth in withheld income and payroll taxes, a calendar shift that moved some early month payments into February this year, expiration of extended unemployment benefits, and continued restraint on defence and nondefense discretionary spending. For all of fiscal year 2014, the deficit now appears on pace to narrow to $US525 billion, or 3.0% of GDP, from $US680 billion, or 4.1% of GDP, in FY13.”
- Producer Price Index (Fri): Economists estimate PPI climbed 0.1% month-over-month or 1.2% year-over-year. Excluding food and energy, PPI is estimated to have risen by 0.2% and 1.1%, respectively. “Another sizable increase in prices received by farmers (most likely due to the ongoing drought in the West) should put upward pressure on producer prices in March,” said Nomura economists. “In addition, an increase in the price index within the ISM nonmanufacturing survey suggests that services prices might bounce back after falling in February. ”
- Univ. of Michigan Consumer Confidence (Fri): Economists estimate the preliminary estimate of this sentiment index climbed to 81.5 from 80.0 last month. “Consumer sentiment likely picked up slightly in early April,” said Citi’s D’Antonio. “We view the relative stability of confidence measures as a sign that the weak activity data in recent months was weather- related and not fundamental. The March surge in auto sales confirms this view, suggesting that the spate of poor economic data is coming to an end.”
The S&P 500 is just 1.6% from its all-time high of 1,897. But that belies the turmoil going on within the market.
The “internal correction” out of high-beta, momentum stocks into low-beta value stocks has caused the Nasdaq to tumble 5.5% in the past month. Facebook is among the names that are down more than 20%.
“All I’ll say is that you’d think investors would have learned from the tech bubble and housing bubble, but I guess they were just dying to touch the hot stove once again,” said Rich Bernstein in a recent email to Business Insider. “Now they’re getting burned.”
Because valuations still remain high in these momentum stocks, experts see this correction continuing.
However, the market strategists seem to agree that this is good news as it brings more balance to stock market valuations.
For more insight about the middle market, visit mid-marketpulse.com.
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