Markets Stuck in Neutral

April 7, 2017

Markets continued their search for direction this week as investors sought to reconcile a weak jobs number against strong reports on manufacturing and services. The mood was notably muted as investors awaited President Trump and Chinese President Xi’s late week summit. This was in part due to anticipation over the outcome of the discussions between the leaders on key economic issues such as trade and investment, but also due to the escalation of military action and rhetoric with respect to Syria and North Korea — the latter with which China plays a prominent role. Wednesday’s release of the Federal Reserve’s March Meeting Minutes refocused investors’ interest on the Fed’s balance sheet by suggesting the Fed will begin shrinking its massive $4.5 trillion portfolio of Treasury and mortgage securities later this year. Despite all this, markets were down slightly for the week, with the S&P 500 posting a -0.30% loss.

Jobs Whiff

There were big hopes for the jobs numbers after a string of previously strong reports. Forecasts were calling for 180,000 new jobs in March based on the recent strength seen in manufacturing and construction. Today’s tally, however, proved to be way off the mark with nonfarm payrolls growing by just 98,000. Despite the big miss, there were several bright spots in the report. The unemployment rate fell to a 10-year low of 4.5%, while the rate that measures underemployed people (those in part-time positions seeking full-time positions) also fell three-tenths to 8.9% from 9.2%, the lowest level since December 2007. While the overall labor force participation rate was steady, the number of “discouraged workers” — those who don’t believe there are jobs out there for them — is down by over 20% in the last year. Wage growth also remained healthy, with average hourly earnings up 2.7% on an annualized basis.

Markets took the jobs miss in stride as many analysts attributed the weak payroll growth to bad weather. In fact, Wednesday’s ADP Report showed 263,000 jobs were added for the same measurement period, well above expectations. The discrepancy between the government data and the ADP report can be attributed to the way employed workers are counted. Government data doesn’t count workers who can’t make it to work for a week due to weather if they are not paid, whereas the ADP data does count those workers as employed and on the payroll. We saw this play out in March’s Labor Department report with the construction industry adding just 6,000 workers, down sharply from a gain of 59,000 workers in February. The industry has struggled to fill jobs for some time, so the lack of jobs growth appears less about slowing worker demand than it does about methodology. As the spring thaw commences, most expect jobs to rebound, although with unemployment at 4.5%, we could start facing job growth deceleration — not on the demand-side but rather from the supply-side.

Factory Floors Keep Humming

U.S. factory floors continued churning out products in March with the Institute for Supply Management’s (ISM) Manufacturing Index hitting 57.2, down slightly from a near three-year high of 57.7 in February. Readings above 50 indicate expansion, while readings below 50 indication contraction. Despite March’s dip, the index notched a seventh consecutive month of industrial expansion with 17 of 18 manufacturing industries reporting growth. New export orders rose to 59.0 from 55.0 in February. Employment on the shop floor proved particularly strong, increasing to 58.9 in March from 54.2 the previous month. Despite recent setbacks for the Trump White House, businesses remain confident that tax, trade, and regulatory reforms are on the horizon.

87 and Counting

The U.S. ISM Non-Manufacturing Index rose for the 87th consecutive month. Although the index eased slightly to 55.2 in March from 57.6 in February, it remains firmly in expansionary mode. Leading the index higher was new export orders which increased to 62.5 from 57.0 in February. Imports also proved strong, rising from 51.0 in February to 56.5 in March. Those increases served to offset a slowdown in business activity/production and employment growth. In the report, firms noted that activity had eased somewhat during the month as companies awaited more clarity on healthcare reform and its impact on their bottom line. Despite the slowdown, businesses are maintaining their revenue projections as healthcare reform appears to be shelved for some time.

The Street just managed to tread water this week as the overall ledger, with respect to economic data, was a push. Add in a more bellicose posture from the U.S. towards North Korea suggesting its willingness to now take independent military action against North Korea, while backing that up a with a non-coalition cruise missile attack against Syria — all in the midst of Trump and Xi’s first meeting — and it is understandable why investors found it hard to get coordinated this week. In fact, it is a little odd investors weren’t more wary, but they’re looking forward to Q1’s earnings, which many analysts see as the market’s best potential catalyst. Those are on tap next week as the major banks start their reporting next Thursday.

The Week Ahead

Markets, as well as Probity’s offices, will be closed on Friday, April 14th in observance of Good Friday. Week in Review will also take a break from the action next week. Our next edition will be published on April 21st.

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