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Weekly Update 4/1/2022: US Economy Adds Jobs; Unemployment Rate Drops to 3.6%

  • UPS expands deal with Google Cloud to prepare for surge in data
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  • Visa & JP Morgan China Amazon renews its longtime co-brand credit card deal with Visa & JP Morgan

Domestic Economic News

The U.S. added close to half a million jobs in March and the unemployment rate fell by more than expected, highlighting a robust labor market that’s likely to support aggressive Federal Reserve tightening in the coming months. Nonfarm payrolls increased 431,000 last month after an upwardly revised 750,000 gain in February, a Labor Department report showed Friday. The unemployment rate fell to 3.6%, near its pre-pandemic low, and the labor force participation rate ticked up. Wage gains accelerated. The median estimate in a Bloomberg survey of economists called for a 490,000 advance in payrolls and for the unemployment rate to fall to 3.7%. Shorter-term Treasury yields rose, S&P 500 futures pared gains and the dollar strengthened after the release on expectations that the data will bolster more hawkish Fed policy. The data suggest that the labor market recovery is continuing at a robust pace as employers have better success filling a near-record number of positions. Inflation, shrinking excess household savings and solid wage growth are factors that could attract more Americans to jobs in the coming months. Covid has also become less of a factor as states broadly lift restrictions. Fed officials, including Chair Jerome Powell, have said in recent weeks that they would support more aggressive monetary policy to curb decades-high inflation, including a possible 50-basis-point hike at the next policy meeting in May. Central bankers have repeatedly pointed to a strong labor market as one reason that the U.S. economy can handle a series of interest rate hikes that’s expected to extend into next year.

Friday’s report showed average hourly earnings rose 0.4% from February and 5.6% from a year ago, the most since May 2020. However, inflation -- at the highest since the early 1980s – is outpacing wage growth, effectively dealing a pay cut to many Americans and starting to dent consumer demand. Despite the labor-market strength, President Joe Biden’s approval ratings from Americans have suffered due to the surge in inflation. Biden on Thursday announced that the U.S. would release a million barrels of oil a day from reserves for six months to help ease a spike in gasoline prices. He’s scheduled to speak on the jobs report later Friday morning from the White House. Leisure and hospitality accounted for a quarter of the payroll gains. Professional and business services, retail trade and education and health services also posted solid advances. The labor force participation rate -- the share of the population that is working or looking for work -- edged higher to 62.4%, and the rate for so-called prime age workers, ages 25-54, rose to a two-year high. The overall participation rate remains one percentage point lower than before the pandemic, due in part to lingering impacts including early retirements, shifting child care arrangements and public health concerns. With Covid cases down and services reopening, businesses can’t seem to fill job openings fast enough. Workers’ improved wage-bargaining power, together with high inflation and dwindling excess household savings, are creating a powerful motivation to work.

U.S. consumer confidence unexpectedly edged up in March, suggesting solid job growth offset Americans’ concerns over decades-high inflation and Russia’s invasion of Ukraine. The Conference Board’s index increased to 107.2 from a downwardly revised 105.7 reading in February, which was the lowest in a year, according to the group’s report Tuesday. The median forecast in a Bloomberg survey of economists called for a reading of 107. Even though confidence edged higher, Americans are facing the highest inflation since 1982, which is outpacing wage gains and being fanned further by the war in Ukraine. That’s already causing some to limit their purchases of certain goods or services, and a slowdown in consumption would pose a risk to economic growth. Still, steady labor market gains have pushed employment back to pre-pandemic levels in some sectors, buoying U.S. households. A gauge of current conditions rose by the most since June to 153, suggesting consumers had a more upbeat assessment of business conditions and the labor market. The Conference Board’s expectations index -- which reflects consumers’ six-month outlook -- declined to 76.6, the lowest since 2014. A measure of home buying conditions held at the lowest since November. Mortgage rates have quickly surged to the highest level in over three years as the Federal Reserve tightens monetary policy to rein in spiraling prices, pushing homeownership out of reach for many aspiring buyers. “These headwinds are expected to persist in the short term and may potentially dampen confidence as well as cool spending further in the months ahead,” Lynn Franco, senior director of economic indicators at the Conference Board, said in a statement.

U.S. home-price appreciation accelerated in January. A measure of prices in 20 U.S. cities jumped 19.1%, up from 18.6% the previous month, the S&P CoreLogic Case-Shiller index showed Tuesday. Phoenix, Tampa and Miami reported the biggest year-over-year gains. Price increases peaked in July and have cooled off slightly in recent months. Still, demand for homes remains strong two years after the pandemic hit the U.S., with bidding wars and cash offers common in hot markets. A lack of properties to buy has combined with rising mortgage rates to keep some potential buyers on the sidelines, particularly renters trying to crack into the market. Pending home sales dropped unexpectedly in February, posting a fourth straight monthly decline as the inventory shortage restricts sales.

Applications for U.S. state unemployment insurance rose by more than forecast last week, likely a blip in what’s otherwise a tight and recovering labor market. Initial unemployment claims increased by 14,000 to 202,000 in the week ended March 26, Labor Department data showed Thursday. The median estimate called for 196,000 applications in a Bloomberg survey of economists. Continuing claims for state benefits fell to 1.3 million in the week ended March 19. The rise in applications likely reflects the choppiness of the data week to week, as employers are desperately trying to retain workers and attract new ones. Claims -- which hit the lowest level since 1969 in the prior period -- have been trending downward for most of the year alongside declining Covid-19 cases, and the combination of dwindling savings and decades-high inflation is raising the financial incentive to work. On an unadjusted basis, initial claims increased to 195,460 last week. California, Michigan and Ohio were states registering the biggest increases in unadjusted claims.

U.S. inflation-adjusted consumer spending declined in February, suggesting the fastest pace of price increases in four decades is starting to temper demand. Purchases of goods and services, adjusted for changes in prices, fell 0.4% from the prior month, following a 2.1% jump in January, according to Commerce Department figures Thursday. Spending on goods settled back after the prior month’s surge, while a decline in Covid-19 cases supported a pickup in outlays for services. The personal consumption expenditures price index, which the Federal Reserve uses for its inflation target, increased 0.6% from a month earlier and 6.4% from February 2021, the most since 1982. Unadjusted for inflation, spending advanced 0.2% from January, while incomes rose 0.5%. The median forecasts in a Bloomberg survey of economists called for a 0.2% decrease in inflation-adjusted spending from the prior month and a 6.4% rise in the price index from a year ago. After omicron-related volatility in the prior two months, the government’s data suggest American consumers are feeling the pinch of the fastest inflation in decades. Continued strength in the labor market -- along with excess savings -- has provided many households the wherewithal to keep spending. Still, rapid inflation has eroded wage growth and driven up the costs of necessities like energy, food and rent. This comes at the same time as families receive less government pandemic aid, weighing on the prospects for spending. In our view, consumers pocketed some of their higher wage income in February amid increasing geopolitical uncertainty and rising inflation, even as the latest Covid wave continued to recede.

Interest Rate Insight and the Fed

The U.S. two-year yield exceeded the 10-year Tuesday for the first time since 2019, inverting yet another segment of the Treasury curve and reinforcing the view that Federal Reserve rate increases may cause a recession. The inversion occurred as two-year yields rose while 10-year yields declined, crossing at a level of about 2.39%. Prior to 2019, when the curve inverted in August during a U.S. trade spat with China, the last persistent inversion of the Treasury curve occurred in 2006-2007. Short-term yields that are higher than long-term yields are abnormal, and they signal that high levels of short-term yields are unlikely to be sustained as growth slows. The inversion of the two- to 10-year segment of the Treasury curve is the latest in a series beginning in October, when 20-year yields topped 30-year yields. In the past month, inversion has come to the 7- to 10-year and the 5- to 7-year segments, among others. The bottom line is traders are pricing in very aggressive short term moves in terms of the Fed raising rates at their upcoming meetings with hikes as high as 50 basis points being priced in. The reality is the Fed will be data dependent and while they are being heavily criticized for being behind the curve in terms of tempering inflation, they are not desirous of putting the U.S. economy into recession. They have been talking tough and we will see some aggressive hikes in the short term – but the yield curve inversion is an indicator they do pay attention to. The 2- to 10- year inversion was short-lived on Tuesday but did reappear on Friday and was duly noted by us. It will be a fine line the Fed walks and we do believe they will in fact base their actions on the economic data as it comes out during the year. Stay tuned!

Impactful International News

Euro-zone inflation accelerated to another all-time high as Russia’s invasion of Ukraine roiled global supply chains and provided a fresh driver for already-soaring energy costs. March consumer prices surged 7.5% from a year ago, up from 5.9% in February and more than the 6.7% median estimate in a Bloomberg survey. Showing the increasingly broad nature of the advance, a core gauge excluding volatile components also hit a new record. Friday’s data follow inflation overshoots this week from Spain and Germany that prompted investors to bring forward bets on when the European Central Bank will end almost eight years of negative interest rates. Under pressure to act as households across the 19-member currency bloc are squeezed, the ECB in March announced an accelerated exit from asset purchases, with some policy makers calling for one or more rate hikes by year-end. Bundesbank President Joachim Nagel on Friday urged the ECB to respond to the accelerating price pressures, saying “the inflation data speak for themselves.” “Monetary policy should not pass up the opportunity for timely countermeasures,” he said. ECB Vice President Luis de Guindos hopes price gains that are now more than three times the 2% target will peak in the next month or two. But that’s far from certain: Russian President Vladimir Putin threatened Thursday that he’d halt natural-gas supplies to countries unwilling to pay for them in rubles -- jarring energy markets again. In another release Friday, S&P Global said its Purchasing Managers’ Index showed input-price inflation in the euro area hit a four-month high in March, stoked by higher commodity, fuel and energy costs. “The question is whether the worst is behind us now and that seems doubtful,” said Bert Colijn, senior euro-zone economist at ING. “From here on there are multiple factors stemming from the war that are set to keep upward pressure on prices.” German 10-year yields were three basis points higher at 0.58%, having earlier climbed as high as 0.62%, while their Italian peers also pared an advance.

The European Central Bank would need to reassess its timetable for withdrawing stimulus if the souring economic outlook weighs on the prospects for consumer prices, according to Chief Economist Philip Lane. Speaking Friday on CNBC after data showed euro-zone inflation surged to another record last month, Lane said bond-buying will still conclude by the end of September if the current trajectory for prices is maintained. Russia’s invasion of Ukraine, however, is sapping confidence and threatening to derail Europe’s pandemic recovery, which could alter that path. “If the medium-term inflation outlook is maintained, we’ll be looking to end net purchases in the third quarter,” Lane said. “However, if the outlook deteriorates by so much that the inflation outlook weakens, then we will have to think again.” That seems like a common sense approach to us.

Talks between Russia and Ukraine Tuesday failed to reach agreement on a cease-fire, but offered a potential pathway to a first meeting between Vladimir Putin and Volodymyr Zelenskiy since the Russian president launched the war. Zelenskiy has repeatedly called for direct talks with Putin to end the conflict, to no avail. Yet significant hurdles remain to any agreement that could end the bloodshed, since each has very different ideas what a settlement would look like. Speaking in Istanbul on Tuesday, Ukraine’s negotiators said that they were seeking security guarantees for areas outside of Russian-controlled Crimea and separatist-held territories, in an apparent concession to Moscow aimed at clearing the way for direct talks at presidential level. Russia responded with an announcement that it was cutting military activity near Kyiv and the city of Chernihiv. Still, Russia’s advance on the capital was already stalled, and previous efforts at diplomacy and overtures such as humanitarian corridors have yielded little or fallen apart. Stocks did rise on initial optimism and oil declined.

However, the political response was skeptical and understandably so. “There is what Russia says and there is what Russia does; we’re focused on the latter,” U.S. Secretary of State Antony Blinken told reporters in Morocco after the talks ended. “We have not seen signs of real seriousness” from Russia toward de- escalating its war, he said. The fighting continued as negotiators met in Istanbul for talks hosted by Turkish President Recep Tayyip Erdogan, and sirens were heard across Ukraine as the delegations briefed reporters once they broke up. Ukrainian negotiator Mykhailo Podolyak said that Kyiv has offered to discuss the status of Crimea, which was seized by Russia in 2014 and has been occupied ever since. Ukraine offers an agreement to Russia that “the sides will resolve issues linked to Crimea and the city of Sevastopol though bilateral negotiations,” he told reporters. His fellow negotiator, David Arakhamiya, said that both sides had “worked out enough documents” for a meeting between both presidents. Chief Russian negotiator Vladimir Medinsky said that Moscow would take steps to de-escalate militarily and politically. He added that Ukraine had presented a clear position that would be passed on promptly to Putin for a response. Russia is willing to offer a presidential meeting at the same time as foreign ministers meet to initial a preliminary deal, Medinsky said. “Thus, assuming quick work on an agreement and finding the necessary compromise, the possibility of attaining peace will become much closer,” he said in televised comments.

Saying talks “are entering the practical plane,” Deputy Defense Minister Alexander Fomin said Russia would “radically” cut military operations in the Kyiv and Chernihiv areas in an effort to “raise mutual trust and create the necessary conditions for conducting further talks and attaining the ultimate goal of reaching agreement.” Still, the negotiators failed to agree on either a temporary cease-fire -- the minimum stated goal of the Ukraine side -- or on humanitarian corridors. Ukraine’s offer to discuss Crimea was over a period of 15 years, and it is approaching the issue having ceded control of the peninsula eight years ago.

Even Moscow’s announcement of de-escalation was tempered by prior reports of Russian pullouts and Ukrainian claims that it was retaking Russian-captured towns in the same areas, casting doubt on whether Russia is serious about negotiating this time. Russian troops shelled the town of Starokostyantyniv, to the west from Kyiv, destroying all fuel stores, its mayor said Tuesday. It also hit two fuel depots in the western region of Rivne. Earlier, Russian troops shelled a local authority building in Mykolaiv, killing at least seven people and wounding 22. Russia’s statement of cutting back military operations is “just words,” Vadymy Denysenko, an adviser to the interior minister, said in a televised interview. Russian shelling is ongoing near Irpin, a Kyiv suburb, and in Chernihov “the situation is extremely difficult,” he said.

Neither is the question of security guarantees an easy one to resolve. Zelenskiy has previously indicated that Ukraine’s ambitions of joining NATO may be unrealistic, moving in the direction of Putin’s demand that Ukraine become neutral. But his alternative, that countries such as Turkey and Germany could provide some sort of defensive guarantee, remains vague. NATO allies have refused to commit troops or aircraft to Ukraine, and it’s unclear what their response would be to such a proposal. Arakhamiya said the accord should be something like Article 5 of NATO, which states that an attack on one member is an attack on them all, with an “even stricter mechanism of activation,” triggering three days of consultations “after which countries must provide aid to us.” Among the guarantors would be UN Security Council members, of which Russia is one. “We insist that it is an international accord, which will be signed by all guarantors of the security and ratified,” he said. “We want it to be a working international mechanism of concrete security guarantees for Ukraine.” Talks were scheduled to resume Friday at the time of drafting this weekly email to our clients. We do hope and pray the talks continue and lead to an eventual cease-fire – for the sake of the Ukrainian people.


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