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Weekly Update 8/5/2022: Earnings Season Continues

  • Employment figures blow away estimates
  • PerkinElmer announces divestiture
  • Amgen makes an acquisition
  • More earnings reports to review

Jobs Report

Today, the Labor Department released its monthly report on employment. Nonfarm payrolls grew 528,000 in July, and the unemployment rate dropped to 3.5%, matching a half-century low. The expectation was for growth of only 250,000 jobs. The economy has now recouped the number of payrolls lost in the wake of the Covid-19 pandemic. The unemployment rate, derived from a survey of households as opposed to the payroll data which is from a survey of businesses, has now round-tripped. From a low of 3.5% in February 2020, it spiked to 14.7% in April of that year as millions lost their jobs when the full force of the pandemic hit the U.S. Gradually and steadily it has declined back to the February level of over two years ago. Average hourly earnings rose 5.2% last month thereby matching revised numbers from June. The gains were widespread across a variety of industries including restaurants and bars, health care, construction firms and finance professionals.

These sizzling numbers stand in contrast to other labor data received this week. According to the Labor Department’s Jobs Openings and Labor Turnover Survey, or JOLTS, the number of available positions declined to 10.7 million in June from an upwardly revised 11.3 million in May. That 605,000 decline was the largest since April 2020 suggesting that tightness in the jobs market is easing somewhat amid growing economic pressures. The biggest drop in vacancies were in retail and wholesale trade as well as state and local government education. About 4 million Americans quit their job in June, little changed from the prior month. That meant the quits rate, which measures how many people voluntarily leave their job as a percent of total employment, held at 2.8%. Initial jobless claims rose 6,000 to 260,000 in the week ended July 30 according to Labor Department data released yesterday. The figure was in-line with the consensus taken in a survey of Bloomberg economists. Continuing claims rose to 1.4 million in the week ended July 23, the highest since early April. The four-week average for initial claims have been climbing. It currently sits about 254,000 which is an increase from roughly 170,000 in the first week in April.

Demand for workers remains high in those areas that have not recovered fully from the pandemic. Leisure and hospitality, education and healthcare remain understaffed in many areas of the country with “help wanted” signs ubiquitous. Meanwhile, sectors such as technology and real estate, which are more sensitive to the Fed’s rapid rate hike path, have begun to announce more layoffs or stalled hiring. These cross-currents have made the Fed’s job more challenging than it already was. Such a strong headline jobs figure might push decision makers into being more aggressive when the Fed next meets in September. However, there will be another payroll report released early next month for August which might show some cooling. Weekly initial unemployment claims are considered more timely. This week’s figures are from the week ended July 30. The payroll and household data for the monthly report stopped being collected sometime during the second week of July. Payroll data is also notorious for being revised in subsequent periods given the further time to collect and finalize more surveys. Anecdotal evidence is suggesting an overall slowing of the economy but with the consumer comprising two thirds of GDP, any coast-to-coast real slowdown (not related to inventory issues causing temporary swings) is likely going to require some sort of rise in unemployment.

Markets and expectations

What do the markets think? At the beginning of the week, futures markets implied a change in the federal funds rate, the Fed’s benchmark, of +0.566 percent on September 21 when their decision will be announced. Today, post-employment report, that expectation is now for a change of +0.680 percent, much closer to a 75-basis point hike than a 50-basis point move. Of course, that could change next week. Next Wednesday, the consumer price index for July will be released by the Commerce Department. Expectations are for a year-over-year change of 8.7% in prices, down from 9.1% in June. Excluding food and energy, that so-called core figure is for a 6.1% rise, up from 5.9% in the prior month. That kinda sorta means inflation is peaking but still remains far from the targeted range of “about 2%” the Fed covets. Fed governors took to making public comments this week to make sure the market knows exactly where they stand. San Francisco Fed President Mary Daly said they were “nowhere near” being almost done in fighting inflation even though futures markets call for a Fed cut in rates in 2023. “We are still resolute and completely united on achieving price stability, which doesn’t mean 9.1% inflation—it means something closer to 2% inflation, so a long way to go,” she added. Chicago Fed President Charles Evans, Cleveland’s Loretta Mester and St. Louis’ James Bullard made similar points.

Bloomberg Economics has been suggesting that a 5% terminal rate is possible, and this week’s data shows that they might not be far off. With the federal funds rate range currently 2.25%-2.50% that would mean Fed Chair Powell and co. are barely halfway done. A nuanced view of the employment report also shows that though the payroll number was large, the labor force participation rate edged down ever so slightly from 62.2% in June to 62.1% in July. This means that part of the decline in the unemployment rate (from 3.6% to 3.5%) was that less people are looking for a job which means employers are likely going to have to continue luring potential hires with higher compensation which ultimately fuels inflation. Exactly what the Fed doesn’t want to see. However, the silver lining was that that drop was fueled primarily from 16-24 year olds suggesting that students are more interested in enjoying their last few weeks of summer break than working at a summer job!

Next week will also see a release of producer prices for last month. The expectations are for 10.4% annual headline growth in wholesale prices and 5.9% annual rise when food, energy and trade items are excluded. While these figures may be lower than June’s, they, too, remain too high for the Fed to achieve their mandate of stable prices. Next Friday, we will also see another round of University of Michigan consumer sentiment readings. They have taken on increased importance since Chairman Powell mentioned it as a key indicator causing them to boost the June hike from the well communicated and expected 50-basis point change to a more aggressive 75-basis point move at basically the last minute. Economists are expecting consumers to feel inflation over the next year will be 5.1%, slightly below the 5.2% from the previous reading. Longer-term, consumers are only expecting 5-10 year inflation to be 2.8%. And this is the real key because the Fed is deathly afraid of inflationary fears leading to more inflationary fears and creating a self-fulfilling vicious cycle. If long-term price expectations remain “anchored” close to their target, it would go a long way to them not having to be overly aggressive now. Stay tuned.

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