Fed Stands Despite Softening Jobs Market, And Poor Earnings Guidance

The Fed meeting and the jobs report were always destined to be financial market movers. The direction was the only question. In the normal course of events, a weaker than expected jobs report would cause angst in the financial markets (i.e., falling prices). But, not this time. It appears that “bad economic news” is “good financial news” because the markets have become deer in the headlights for rate cuts. Both events excited the Bulls with the equity markets ending the week (May 3) up significantly (1.4% Nasdaq, 0.6% S&P 500, 1.1% Dow Jones).

The Fed

The Fed met on April 30 – May 1. The formal meeting statement was tilted to the dovish side as was the post-meeting press conference, a significant reversal from prior pressers. Markets were worried that the higher-than-expected inflation data in Q1 would cause the Fed angst. But Powell assured his audience that the Fed considered the slightly hot inflation data as just a bump in the road, and that the Fed was satisfied that the path to its 2% inflation goal was still clear with no need for tighter policy.

Then on Friday (May 3^rd), Non-Farm Payrolls (NFP) came in weaker (+175K) than expected (+240K). In addition, other important labor market indicators also showed weakness. The sister Household Survey (HS) only showed +25K job growth. The HS is used to calculate the unemployment rate. With +25K in net new jobs, but +87K of growth in the labor force, the U3 unemployment rate rose back to +3.9% from March’s +3.8% reading. The more comprehensive U6 unemployment number rose +0.1 percentage points to +7.4%, the highest reading since November 2021. Part of the blame for the rise in U6 was the +161K spike in the “Part-Time for Economic Reasons” category. That total now stands at 4.47 million, a three-year high. In addition, the workweek contracted by a tenth of an hour, which Rosenberg Research says is equivalent to an additional loss of -160K jobs.

Of the 175K growth in NFPs, at least half was due to the Birth/Death model (B/D) add-on. [BLS adds a number based on a long-term trend line to NFPs every month to compensate for the fact that they do not have small businesses in their survey.] According to Rosenberg, the B/D add-on ignores such things as business bankruptcies (up more than 30% from a year ago) and new business formations (down -5% year over year). So, it appears that the disappointing NFPs were even weaker.

In addition to the jobs report, the recently released JOLTS (Job Openings and Labor Turnover Survey) showed falling hiring rates, much lower voluntary quits, and lower job openings. Job openings are at their lowest level in three years and the voluntary quit rate is the lowest in four. In addition, the hiring rate is the slowest since the 2020 pandemic.

The latest Challenger Gray and Christmas (the temporary help firm) layoff report showed +65K new April layoffs, the third highest level for April since 2010. In addition, according to Challenger, hiring announcements for April were -85% below normal.

So, all in, the labor market is rapidly softening. It appears the Fed sees this. So, while the Fed didn’t move rates lower at its May meeting, the incoming data has convinced markets that there will now be two rate cuts this year, that’s up from zero or one just prior to the Fed’s April 30-May 1 meetings. In addition, during the after-meeting press conference, Powell said that any unexpected weakness in the labor market would prompt the Fed to begin the rate cutting process even if the disinflation momentum continues to stall out. Given the recent rise in layoff announcements, this appears to us to be a matter of “when,” not “if.”

One more significant item from the Fed meeting, one which has received very little media coverage, was the announcement that the Fed would be reducing the sales of Treasury securities from its portfolio (known as Quantitative Tightening (QT) which lowers bank reserves and impacts their lending ability) from $60 billion/month to $25 billion/month, more than halving the monthly tightening. So, while, on the surface, the Fed looked like it stood pat, in reality, it made its first easing move this cycle.

So, it isn’t a wonder why equity prices have risen, especially after the drubbing markets took in April.

Bond markets also celebrated. The 10-Year Treasury, which was as high as 4.69% on Wednesday (May 1) closed a tad below 4.50% on Friday. The 10-Year Treasury serves as an index for mortgage rates, which recently hit 7.30%. That has sent the housing market into a deep funk. Hence, lower rates are something the market yearns for and celebrates.

Earnings…