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Weekly Update 4/5/2024: Fed Rates on Hold

  • ISM and JOLTS number released
  • UPS expands relationship with USPS
  • Disney counts the votes
  • JNJ makes shocking acquisition

ISM Results

The Institute of Supply Management released data this week about the manufacturing and services sectors. Factory activity expanded in March for the first time since September 2022 thanks to stronger demand. The figure for March was 50.3, a 2.5 point increase from February. The 50.0 line separates expansion from contraction so this was the first time in 16 consecutive months that the gauge had reached growth territory. “Demand remains at the early stages of recovery, with clear signs of improving conditions. Production execution surged compared to January and February, as panelists’ companies reenter expansion,” said Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, in a statement. Textile mills, paper products and petroleum industries led the growth of the nine industries that expanded. Furniture, paper & rubber products and electrical equipment were part of the six industries that contracted. Notably, inputs costs climbed with the group’s gauge of prices paid, up by 3.3 points, the highest since July 2022.

The ISM index of services fell 1.2 points to 51.4 which kept it in the expansion category last month. Improving supply chains helped order backlogs shrink at the fastest pace since August. Twelve services industries reported growth including accommodation and food services. Four industries showed a decline during the month. The new orders gauge fell to a three-month low. Comments from various companies were interesting as usual. “Lead times and supply are improving, but several strategic items remain difficult to procure,” said one utilities company. While a firm in the retail trade commented: “Product supply chain is calm, and pricing steady.” For this index, in contrast to the manufacturing data, input costs declined more than 5 points, the lowest since March 2020. In a note, Stephen Brown, deputy chief North America economist at Capital Economics wrote: “The plunge in the prices paid index to the lowest level since the pandemic began implies that core services ex-housing, aka supercore, will resume falling back toward its pre-pandemic normal rate.” That would be a great sign for the Fed if indeed it is happening. However, Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement “that even with some prices stabilizing, inflation is still a concern.” Thus, it seems the debate over the current state of the economy will continue.


A key determinant in settling that debate will come from the labor market. Earlier this week, the Bureau of Labor Statistics released its Jobs Openings and Labor Turnover Survey data which showed an increase in hiring in February. Still vacancies rose to 8.76 million (from a downwardly revised 8.75 million in January) even with openings falling in information, health care and retail trade. Finance & insurance, state & local government and arts, entertainment & recreation all recorded the largest job openings by industry. The peak job openings were 12.2 million reached in March 2022. The ratio of openings to unemployed people was 1.36, a four-month low, but still appreciably below the 2-to-1 ratio reached in 2022. The quits rate, which measures voluntary job-leavers as a share of total employment, was steady at 2.2% for a fourth consecutive month, the lowest since 2020. The main takeaway is that if this trend continues—falling vacancies to unemployed and falling quits rate—wage pressures should abate further ahead. That could possibly be the opening for the Fed to cut rates at some point during the summer.

Payrolls and Futures

After a report Thursday showed that weekly initial jobless claims rose to the highest level since January, today the Labor Department said nonfarm payrolls rose by 303,000 in March following a combined upward revision of 22,000 to the prior two months. This was the highest payroll print since last May and was accentuated by growth in health care, construction and leisure & hospitality, which has now bounced back above its pre-pandemic level. The growth exceeded all expectations in a Bloomberg survey of economists with only the prediction from ZipRecruiter coming closest at +250,000. The unemployment rate fell slightly from 3.9% to 3.8%, and the participation rate, which measures the share of the population that is working or looking for work, rose to 62.7%, the first advance since last November.

That uptick in the participation rate, coupled with the number of vacancies from the JOLTS report above, is important because it helped keep the monthly average hourly earnings increase modest at 0.3%, inline with the previous month. What many market watchers get wrong is that the Fed is not trying to destroy the economy with high interest rates or stop people from getting jobs. They need to make sure that inflation from the spending from people with jobs does not get out of control, and, for the most part after a shaky start, they have done that. Next week fresh consumer and producer price indices will be released followed by the March reading of the preferred personal consumption expenditure index. These will be new data points to analyze, and the Fed has consistently said they will be data dependent so the market needs to pay attention (and listen to what the Fed is actually saying not what they want to hear!).

The futures markets are pricing in the statistics. After today’s release, the odds of a Fed rate cut at the next Fed meeting which concludes May 1 is only 6%. For June, that chance increases to 53%, down from 68% at the beginning of March. It is only when the calendar flips to the September meeting that the odds of a cut are solidly decisive at 65%. Recall that at the start of the year, the futures market was pricing in as many as six interest rate cuts over the course of 2024. We are now down to three cuts being priced in. Who knows? We may actually get down to one or none before all is said and done. We will continue to track the figures and report on the facts.

Company Events

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