US labor markets are and have been strong. I don't think anyone will dispute this conditional reality three months into 2022. On Friday, the Bureau of Labor Statistics posted the results from the agency's employment related surveys for March. According to the BLS, the US economy created 431K jobs in March. This number fell about 60K short of expectations, but is in no way considered a weak number. Beyond that, February's estimate for non-farm payroll expansion was revised from 678K up to $750K (+72K).
In addition, the official unemployment rate dropped from 3.7% to 3.6%, while the "underemployment" rate, perhaps even more impressively, dropped from 7.2% to 6.9% (seasonally adjusted). Average hourly wages beat expectations at growth of 5.6% year over year, while the average workweek of 34.6 hours, which is still on the strong side, fell short of consensus.
All in all, March did not show any real signs of any slowdown in demand for labor. This enables the voting members of the FOMC to consider a more aggressive posture in early April than they might have taken otherwise. One month ahead of the May 4th (next) policy statement, futures markets trading in Chicago are pricing in a 69% probability of a 50 basis point increase being made to the target of the Fed Funds Rate at that time. As for the June 15th meeting, those futures are currently pricing in a 78% of "at least" an additional 50 basis point hike, with a 19% probability of a 75 basis point hike.
So what's so peculiar? Well, I could not help but notice that while the Fed gears up to slow down inflation and prevent the economy from "overheating" due to a hot labor market that as the week wore on... the inversion of the US Treasury yield curve had deepened, the Dow Transports fell out of bed, and even as seven of the 11 S&P sector-select SPDR ETFs closed out the week on the plus side, the top four performing sectors over the past five days were indeed the four sectors considered to be most "defensive" in nature.
In plain speak, financial markets are pricing in a much tougher economy in the short to medium term future than we face to our immediate front.
As readers rise to meet the week, the US 30 Year bond pays about 10 basis points less than does the US Five Year Note, while the US Ten Year Note pays about 11 basis points less than the US Seven Year, 16 basis points less than the US Five year, 23 basis points less than the US Three Year, and about 5 basis points less than the US Two Year Note. That same US Ten Year Note still pays about 104 basis points more than the 1 Year T-Bill and about 186 basis points more than the US 3 Month T-Bill. To me, this signals that though economic recession may be in our future (not a sure thing), that this sustained contraction in economic activity is probably (at this time, could change) at least 18 months out.
Equity markets, as mentioned above, sent mixed signals. While the truckers like JB Hunt (JBHT) , Landstar (LSTR) , and Old Dominion (ODFL) led the transports lower, broad weakness was also felt across delivery services such as FedEx (FDX) and United Parcel Service (UPS) , as well as the rails and maritime shippers. Put bluntly, even as the Nasdaq Composite and Nasdaq 100 put together weekly gains of 0.65% and 0.72%, respectively, and as the S&P 500 closed out the week better than "unchanged", investors were aggressively selling the stock of any company that moves freight. Not typically a good sign.
This week, I am currently tracking nine public appearances to be made by Fed officials this week, seemingly bunched into both Tuesday and Thursday, and headlined by Lael Brainard. Brainard, already a member of the Fed Board of Governors, has been laying low for a long while as she waits on Senate confirmation to the post of Fed Vice Chair. She will, however, discuss inflation at a virtual event on Tuesday hosted by the Minneapolis Fed.
In addition, the Federal Reserve Bank will release the Minutes from the March policy meeting this Wednesday afternoon. I would expect that there could be at least some detail if not something truly specific in regards to how the Fed plans to pare down the balance sheet moving forward. There is at least from a market perspective, a possibility that a course of action was discussed that was aggressive enough to provoke the high-speed, keyword reading algorithms that control price discovery in 2022. Tread lightly on Wednesday afternoon.
As for the weekend just past, the Fed was out and about. New York Fed Pres. John Williams spoke on inflation Saturday from Princeton, NJ and mentioned undergoing a "sequence of steps" and that he expects "that this process of reducing the size of the balance sheet can begin as soon as the May FOMC meeting."
San Francisco Fed Pres. Mary Daly, a former dove, interviewed with the Financial Times over the weekend, and that piece was published on Sunday. Daly referred to US labor markets as "very strong", and "tight to an unsustainable level." Daly is quoted by FT as saying "If you want a job in the United States, you can get one and you can probably get multiple jobs at this point. If you're an employer looking for workers, it's hard to both hire them and retain them." Daly adds... "The case for 50 (basis point rate hike), barring any negative surprises between now and the next meeting, has grown. I'm more confident that taking these early adjustments would be appropriate."
But, It's Still April
Yes, it is, and April has just gotten underway. They say "Sell in May and go away" for a reason. That reason is because April tends to bring with it the season of optimism. Not only do we play baseball that counts in April, but April is often the best performing month of the year for equities. That's why so many portfolio managers, while beating around the bushes in preparation for coming economic weakness that is only exacerbated by the war in eastern Europe, and pandemic related shutdowns in China, refuse to truly get "light" equities for now.
Talk about seasonality. I thought about how far to take back my research. I picked 2007 as that is the first year that trading on the NYSE trading floor switched over to what was then termed a "hybrid" model, but was really the end of the open outcry, two-sided, ongling, centralized market model. There is no doubt in my mind that price discovery prior to, and post 2007, are different animals.
Beginning with 2007 (15 years), the S&P 500 has posted a positive April 93% of the time, easily better than the 73% second best positive performance, which is a three way tie (May, July and December). Additionally, over the past 15 years, April has posted a mean return of 3.06%, far better then July's +2.19%, which is second best. Note here, that while May is included in the above three way tie for second place in frequency of finishing the month positively over the past 15 years at 73%, May... over those years has posted a mean return of just 0.16%, which is eighth best.
In Other News...
The China Securities Regulatory Commission confirmed, on its website, plans to revise confidentiality rules in regards to overseas listings. This could lead to Chinese corporations listed in the US avoiding being delisted if the rules meet US standards.
Evidence of heinous atrocities committed by Russian troops in Ukraine mounts further as the Ukrainian military retakes cities and towns previously held by Russian forces to find civilians buried in mass graves and others unburied in the streets with hands bound and bullet holes in their heads. Both French President Emmanuel Macron and British Prime Minister Boris Johnson accused Russia/Putin of war crimes, while Macron called for increased sanctions on Russian energy commodities.
Not a lot of macro to look forward to this week. Hardly any earnings. War in eastern Europe. Covid surging in China, and rebounding here at home. Inverted yield curve. Equities hopeful, but skating on thin ice with the S&P 500 once again trading this >< close to 20 times forward looking earnings. The Fed. I'd tell you to buckle your chin straps, but you already know the drill. Clean socks and two sources of water. Stand by to move out.
Economics (All Times Eastern)
10:00 - Factory Orders (Feb): Expecting -0.5% m/m, Last 1.4% m/m.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (ATC) (.21)