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Weekly Update 6/3/2022: Payroll Numbers Surprise to the Upside

  • Microsoft trims quarterly outlook based on currency
  • Anthem confirms guidance
  • ISM data mixed

Economic Data

The Labor Department reported that nonfarm payrolls increased 390,000 in May after a revised 436,000 gain in April. The unemployment rate held steady at 3.6%. The median estimate of payroll growth taken in a Bloomberg survey of economists had expected a figure of 318,000 and an unemployment rate of 3.5%. That was a miss on both items. However, it is difficult to interpret the actual numbers for a variety of reasons. For Main Street, it was good that more people are finding jobs because more people cashing paychecks means higher GDP figures as these funds are spent. However, average hourly earnings rose a less-than-forecast 0.3% from April. That means that figure is up 5.2% from a year earlier signaling a slowdown from a 5.5% annual pace in April. Yet, labor force participation rate (which measures the share of the population working or looking for work) crept a little higher to 62.3% and the rate for so-called ‘prime’ working age 25-54 climbed to post pandemic high of 82.6%. What is good for Main Street may not be good for Wall Street. These solid figures may convince the Fed that more work needs to be done on cooling off the economy. It has been the Fed’s sharp pivot from an accommodative stance for the past two years to a sharply hawkish tone starting late last year which has caused the markets the most damage. If that tone is unlikely to change through the rest of 2022, equities will not get any relief from monetary policy.

The Institute of Supply Management had mixed readings on its reports this week. The manufacturing survey came in at 56.1 vs. a consensus expectation of 54.5. Any reading above 50.0 is considered expansionary so the trend seemed to be moving in the right direction. However, today the services survey came in at 55.9 vs. the expected 56.5 which suggests things are moving in the opposite direction for those industries and in fact it was the weakest print since February 2021. The only real conclusion that can be drawn is that the economy is being pressured by a mix of cross currents. Demand, so far, remains robust for certain industries while supply chain constraints continues to play an outsized role in inflationary pressures and manufacturing hiccups. This commentary from the ISM services report is an example of what is happening: “The paper industry is still being hampered by employment issues, freight costs and scarcity of truckers, as well as the war in Ukraine…Mills in North America are still struggling to keep up with demand.” That comment seems to check every box.

The Federal Reserve's Beige Book shows that companies are struggling with rising prices. The report is a periodic compilation of business anecdotes from around the country. A large grocery chain in the Cleveland Fed district said that "customers have recently taken aggressive steps to save. They've shifted from national brands to cheaper store brands. They are also doing things such as purchasing half a gallon of milk instead of a gallon." In the Kansas City Fed district, restauranteurs have noted that customers have been unwilling to fully accept higher menu prices.

Fed Bets

What does the market think of this conflicting economic data? Traders are betting that job growth slows going forward. The trillion dollar question is how fast will this happen? According to the latest Job Openings and Labor Turnover survey, there are still nearly two job openings for every unemployed person. The preliminary estimate for June payrolls is a gain of 325,000 according to Bloomberg’s economic team. That’s a slowdown from today’s number but is it slow enough to have an effect on the Fed’s path? Higher wages will promote higher labor force participation especially as Covid concerns recede. According to the futures markets, fixed income traders have already priced in 50 basis point moves at the Fed meetings on June 15 and July 27. The September 21 meeting is the key. Currently, the markets are pricing in a 41 basis point increase so they are not convinced the Fed will move 50 but also not sure they will settle for only 25. Between early June and late September there will be numerous data points including more monthly payroll figures, consumer and producer inflation reports and another round of quarterly earnings estimates for the Fed to decipher and chew on. It is way too early to bet on if those 41 basis points creep towards 50 or retreat towards 25. A pause in hikes is off the table for now and was emphasized by Fed Vice Chair Lael Brainard and Cleveland Fed President Loretta Mester. What if a cease fire is declared in Ukraine and commodity prices plunge? What if another ‘variant of concern’ arises in the ongoing Covid battle? Watching how the yield curve responds to various events will be a crucial factor in how the markets will respond. We will monitor the situation and report our findings as they develop. Stay tuned.


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