Market Snapshot
briefing.com
| Dow | 33725.54 | +597.89 | (1.80%) | | Nasdaq | 12254.12 | +287.54 | (2.40%) | | SP 500 | 4145.03 | +82.54 | (2.03%) | | 10-yr Note | -5/32 | 3.45 |
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| | NYSE | Adv 2475 | Dec 422 | Vol 933 mln | | Nasdaq | Adv 3224 | Dec 1173 | Vol 4.5 bln |
Industry Watch
| Strong: Energy, Financials, Information Technology, Materials, Real Estate, Consumer Discretionary |
| | Weak: -- |
Moving the Market
-- Digesting the April employment report that lent some hope to the idea that a soft landing for the economy is still possible
-- Gains in Apple (AAPL) following its earnings report boosting the broader market
-- Rebound price action in regional bank stocks helping to improve sentiment
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Closing Summary
05-May-23 16:20 ET
Dow +546.64 at 33674.29, Nasdaq +269.01 at 12235.59, S&P +75.03 at 4137.52
[BRIEFING.COM] The stock market closed out the first week of May on an upbeat note. The major indices were showing decent strength right out of the gate, held onto those gains and traded somewhat sideways until about 1:00 p.m. ET when the rally built up momentum. The late afternoon move higher brought the S&P 500 just shy of the 4,150 level before pulling back somewhat by the close.
Today's upside bias was driven by a nearly 5.0% gain in Apple (AAPL 173.57, +7.78, +4.7%) following its pleasing earnings report and capital return plan, along with a solid rebound effort in the regional bank stocks. Standouts in that regard included PacWest (PACW 5.76, +2.59, +81.7%) and Western Alliance (WAL 27.16, +8.96, +49.2%), which had been at the center of recent turmoil before logging outsized gains today, boosted by some short-covering activity.
The SPDR S&P Regional Bank ETF (KRE) jumped 6.3% and the S&P 500 financials sector closed near the top of the leaderboard among the 11 sectors with a 2.4% gain. Other top performing sectors included the energy (+2.8%) and information technology (+2.7%) sectors. The latter was boosted by Apple along with a nice gain in Microsoft (MSFT 310.65, +5.24, +1.7%), which hit a new 52-week high today.
Strength from the regional bank stocks and energy shares contributed to the outperformance of the Russell 2000 (+2.3%).
Market participants were also digesting the April employment report, which was good enough to engender some thoughts that a soft landing for the economy may still be possible despite the Fed's aggressive rate hikes.
Treasury yields rose sharply in response to the employment report and the improved price action in the bank stocks, which led to some unwinding of safety trades. The 2-yr note yield rose 18 basis points to 3.91% and the 10-yr note yield rose 10 basis points to 3.45%.
At the same time, the CBOE Volatility Index moved sharply lower, down 14.7% or 2.95 to 17.14.
- Nasdaq Composite: +16.9% YTD
- S&P 500: +7.7% YTD
- Dow Jones Industrial Average: +1.6% YTD
- S&P Midcap 400: +1.3% YTD
- Russell 2000: -0.1% YTD
Reviewing today's economic data:
- Nonfarm payrolls grew by 253,000 in April (Briefing.com consensus 180,000) following a revised increase of 165,000 in March (from 236,000). Nonfarm private payrolls grew by 230,000 in April (Briefing.com consensus 160,000) after a revised increase of 123,000 in March (from 189,000).
- The unemployment fell to 3.4% in April (Briefing.com consensus 3.6%) from 3.5% in March.
- The average work week was unchanged in April at 34.4 hours (Briefing.com consensus 3.6%). Average hourly earnings increased by 0.5% (Briefing.com consensus 0.3%) after an increase of 0.3%.
- The key takeaway from the report is that it substantiates why the Fed isn't inclined to cut rates soon, but at the same time the continued strength in the labor market after nine rate hikes (the 10th rate hike came after the data for April were collected) lends some hope to the idea that a soft landing for the economy is still possible.
Looking ahead to Monday, market participants will receive the Wholesale Inventories report for March (Briefing.com consensus 0.1%; prior 0.1%).
Tyson Foods (TSN), DISH Network (DISH), Viatris (VTRS), KKR (KKR), and BioNTech (BNTX) are among the more notable companies reporting earnings.
Rally continues ahead of the close
05-May-23 15:30 ET
Dow +579.45 at 33707.10, Nasdaq +283.56 at 12250.14, S&P +80.54 at 4143.03
[BRIEFING.COM] The major indices are hanging out near their best levels of the day heading into the close.
Consumer credit increased by $26.5 bln in March (Briefing.com consensus $17.5 bln) following a downwardly revised $15.1 bln (from $15.3 bln) in February.
The key takeaway from the report is that the pace of credit expansion accelerated in March, led by a healthy uptick in revolving credit.
Looking ahead to Monday, market participants will receive the Wholesale Inventories report for March (Briefing.com consensus 0.1%; prior 0.1%).
Tyson Foods (TSN), DISH Network (DISH), Viatris (VTRS), KKR (KKR), and BioNTech (BNTX) are among the more notable companies reporting earnings.
Energy complex futures reclaim lost groun
05-May-23 15:05 ET
Dow +597.89 at 33725.54, Nasdaq +287.54 at 12254.12, S&P +82.54 at 4145.03
[BRIEFING.COM] The rally continued over the last 30 minutes.
A short time ago, Saint Louis Fed President Bullard (not an FOMC voter) said it looks like the Fed is coming toward the end of the tightening process, but it's not clear that inflation is on a downward path, according to CNBC.
Energy complex futures reclaimed some lost ground today. WTI crude oil futures rose 4.3% to $2.97/bbl and natural gas futures rose 1.7% to $2.33/mmbtu.
Consumer credit increased by $26.51 billion in March (Briefing.com consensus $17.5 billion) following a $15.3 billion increase in February.
Zions Bancorp surges in regional bank rebound, JPM upgrade; Bio-Rad falls on guidance, earnings
05-May-23 14:30 ET
Dow +514.37 at 33642.02, Nasdaq +264.81 at 12231.39, S&P +74.26 at 4136.75
[BRIEFING.COM] The S&P 500 (+1.83%) is firmly entrenched in second place among the major averages in the waning hours of Friday's session.
S&P 500 constituents Zions Bancorp (ZION 23.66, +3.73, +18.72%), Live Nation (LYV 77.10, +10.03, +14.95%), and Carnival (CCL 10.04, +0.65, +6.92%) pepper the top of today's standings. ZION is caught up in the Friday regional banking rebound while also nabbing some positive sentiment from a JP Morgan double upgrade to Overweight, LYV moves higher on earnings, while CCL nabs back yesterday's selloff and then some, owing in part to positive travel commentary from Expedia (EXPE 92.83, +3.66, +4.10%) and Live Nation. In related news, the World Health Organization downgraded the severity of the the COVID-19 pandemic, highlighting that the virus is no longer an emergency.
Meanwhile, California-based medical device firm Bio-Rad Labs (BIO 375.09, -87.52, -18.92%) falls to the bottom of the S&P following last night's earnings and guidance miss.
Gold slips to close out first week of May
05-May-23 14:00 ET
Dow +440.14 at 33567.79, Nasdaq +246.28 at 12212.86, S&P +66.28 at 4128.77
[BRIEFING.COM] With about two hours to go on Friday the tech-heavy Nasdaq Composite (+2.06%) continues to rule trading action.
Gold futures settled $30.90 lower (-1.5%) to $2,024.80/oz, owing in part to this morning's jobs report.
Meanwhile, the U.S. Dollar Index is down less than -0.1% to $101.32.
Apple, regional bank stocks, and employment data have market in higher position
It has been a tough week to this point for the stock market. Entering today, the S&P Midcap 400 is down 3.2%, the Dow Jones Industrial Average is down 2.9%, the Russell 2000 is down 2.8%, the S&P 500 is down 2.6%; and the Nasdaq Composite is down 2.1%.
That negative disposition has stemmed mostly from policy angst, which has stemmed from the Fed's rate-hike actions and a warning from Treasury Secretary Yellen that extraordinary measures being used to pay the nation's bills could be exhausted as early as June 1, and price action angst tied to the regional bank stocks.
We can't say that the policy angst has disappeared overnight, but we can say that the price action angst surrounding the regional bank stocks has lessened. Thus far, there has been a turnabout that has the SDPR S&P Regional Banking ETF (KRE) trading up 3.9%.
That turnabout has helped the mood of the market, as has Apple (AAPL), which posted better-than-expected fiscal Q2 results after yesterday's close that featured better-than-expected iPhone revenue, a 4% dividend raise, and a $90 billion share buyback authorization. Shares of AAPL, which reach far and wide with the equity futures trade, are up 2.6%.
The question is, can Apple, which has risen 14.0% since March 1, versus a 2.8% gain for the S&P 500, maintain that gain or will it eventually succumb to some sell-the-news interest that then weighs on the broader market?
The answer will ultimately avail itself, but there is no question that Apple and the broader market are going to be starting from a higher position today, armed with an added understanding that the employment situation in April was pretty solid all things considered.
There were some sizable downward revisions that combined left employment in February and March 149,000 lower than previously reported; however, nonfarm payroll growth sprung back nicely in April from the revised March level. The unemployment rate, meanwhile, dipped to 3.4% from 3.5%, matching the 54-year low seen earlier this year in January.
The latter point notwithstanding, there are some elements of weakness in the data, namely that the average workweek remained at 34.4 hours, temporary help positions declined by 23,300, and persons unemployed for 27 weeks or more increased to 20.6% of the unemployed versus 18.9% in March. An attention-grabbing strong suit in the report, though, is that average hourly earnings were up 4.5% year-over-year versus 4.3% in March.
The key takeaway from the report is that it substantiates why the Fed isn't inclined to cut rates soon, but at the same time the continued strength in the labor market after nine rate hikes (the 10th rate hike came after the data for April were collected) lends some hope to the idea that a soft landing for the economy is still possible.
Currently, the S&P 500 futures are up 30 points and are trading 0.7% above fair value, the Nasdaq 100 futures are up 72 points and are trading 0.5% above fair value, and the Dow Jones Industrial Average futures are up 199 points and are trading 0.6% above fair value. The 2-yr note yield is up 16 basis points to 3.89% and the 10-yr note yield is up 10 basis points to 3.45%.
Notable headlines from the April Employment Situation Report:
- April nonfarm payrolls increased by 253,000 (Briefing.com consensus 180,000). The 3-month average for total nonfarm payrolls fell to 222,000 from 295,000. March nonfarm payrolls revised to 165,000 from 236,000. February nonfarm payrolls revised to 248,000 from 326,000.
- April private sector payrolls increased by 230,000 (Briefing.com consensus 160,000). March private sector payrolls revised to 123,000 from 189,000. February private sector payrolls revised to 193,000 from 266,000.
- April unemployment rate was 3.4% (Briefing.com consensus 3.6%), versus 3.5% in March. Persons unemployed for 27 weeks or more accounted for 20.6% of the unemployed versus 18.9% in March. The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 6.6% versus 6.7% in March.
- April average hourly earnings were up 0.5% (Briefing.com consensus 0.3%) versus 0.3% in March. Over the last 12 months, average hourly earnings have risen 4.5%, versus 4.3% for the 12 months ending in March.
- The average workweek in April was 34.4 hours (Briefing.com consensus 34.5), versus 34.4 hours in March. Manufacturing workweek was little changed at 40.2 hours. Factory overtime was unchanged at 2.9 hours.
- The labor force participation rate held steady at 62.6%.
- The employment-population ratio held steady at 60.4%.
-- Patrick J. O'Hare, Briefing.com
Paylocity paying the price for its steep valuation as slowing growth, tepid outlook weigh (PCTY)
Paylocity (PCTY), a provider of cloud-based human capital management (HMC) and payroll software, once again exceeded EPS and revenue expectations in 3Q23. On a yr/yr basis, PCTY's earnings and revenue increased by 43% and 38%, respectively, bolstered by healthy demand trends among its SMB customers as they look to modernize their HCM platforms.
Despite the upside performance, the stock is selling off sharply, even as the Nasdaq rebounds higher today. We think there are few factors behind the stock's weakness.
- The core issue is the stock's rich valuation. Even with shares down by nearly 40% since last August, PCTY is still trading with a P/S of about 11x and a forward P/E near 50x. In an environment in which economic growth is slowing, while interest rates are also rising, stocks with pricey valuations become easy targets.
- It becomes even more difficult to justify a rich valuation when a company's own growth rates are slowing, as is the case with PCTY's. Recurring & Other Revenue, a key demand metric for PCTY, increased by 28% in Q3 to $314.2 mln. While that's a solid growth rate, it is a continuation of a downward trend that begin in 4Q22.
- Last quarter, Recurring & Other Revenue grew by 31%, preceded by growth of 36% in both 1Q23 and 4Q22.
- When considering the lofty valuation, PCTY's inline Q4 revenue guidance of $299.2-$303.2 mln doesn't really cut it -- especially since the midpoint of that range represents its lowest top-line growth rate since 4Q21 at 31%.
- Relative to peer Paycom Software (PAYC), which reported upside quarterly results on Tuesday, PCTY's earnings report looks a bit disappointing. PAYC issued upside revenue guidance for Q2, and raised is FY23 revenue guidance above expectations.
Still, the fundamental flaws for PCTY look relatively benign. In fact, business is quite healthy, overall, for the company. Under these current market conditions, though, a pricey stock with slowing growth rates is a recipe for a sell-off.
Looking beyond this quarter, PCTY's investments in AI technology could provide the next key growth catalyst. The company recently released AI Assist, a generative AI platform that's integrated with ChatGPT developer Open AI. According to PCTY, AI Assist is the HCM industry's first integration of generative AI, which will help its clients more easily and effectively communicate with its employees.
The main takeaway is that PCTY delivered solid quarterly results, but its steep valuation is acting as a roadblock for the stock in light of the company's slowing growth rates and conservative outlook for FY23.
Expedia Group journeys higher as travel demand remained robust despite macroeconomic hurdles (EXPE)
Travel demand remained robust in Q1, benefiting Expedia Group (EXPE +3%), which registered record lodging levels in the quarter. Investors are also looking past EXPE's double-digit earnings miss in Q1, as an accelerated sequential bump in gross bookings underscored consumers' willingness to shake current economic disruptions, including sticky inflation and recent regional bank failures. Additionally, EXPE announced it repurchased $600 mln of its shares at an accelerated pace during the quarter. Also potentially spurring buying interest today was EXPE taking advantage of the rising popularity of AI, recently integrating ChatGPT into its iOS application.
Although rival Booking Holdings' (BKNG -1%) Q1 numbers (also posted yesterday after the close) were arguably better across the board, topping earnings and sales estimates while boasting a 44% spike in gross bookings, its shares are journeying lower today. A meaningful difference between both firms is their valuation; BKNG trades at a steep premium of 19x forward earnings relative to EXPE at 9x, putting BKNG under a more critical microscope. Also, shares of BKNG have been mightily outperforming EXPE, appreciating by over 25% YTD as of yesterday's close compared to around a 1% gain for EXPE over that same period. As such, BKNG was at a higher risk of profit-taking today.
- Turning to EXPE's Q1 numbers, adjusted EPS of $(0.20) represented a stark improvement over the $(0.47) delivered last quarter. Revs accelerated from Q4, climbing 18.5% yr/yr to $2.67 bln. Gross bookings of $29.4 bln, a 20% jump yr/yr, also represented an acceleration from the +17% increase in Q4.
- International demand stood out, largely due to more of Asia reopening. This re-emergence of major international cities translated to higher hotel demand, helping offset some of the flattening demand in vacation rentals as travelers shifted toward shorter stays within urban locations. Likewise, international flights were more popular than domestic flights as global economies eased COVID restrictions.
- Notably, travel demand remained resilient despite elevated prices. EXPE commented that prices have held up across the board, even climbing within air travel. The only exception has been within the car rental space due to improving inventories allowing rental companies to drive more volume at the expense of price.
- Also worth noting is EXPE's B2B business, which continues to gain upward momentum globally, with revs surging by approximately 55% yr/yr in Q1 compared to +41% growth in Q4. Although the reopening of overseas markets played a significant role in EXPE's resilient B2B business, the company does not expect demand to let up meaningfully anytime soon.
Bottom line, EXPE's Q1 results underscored excellent travel demand trends despite persistent macroeconomic hurdles, an encouraging sign ahead of Airbnb's (ABNB) Q1 report on May 9. Being a tech-focused travel platform, ABNB may discuss its AI-related initiatives at greater length than EXPE, which could ignite a similar positive reaction. However, ABNB's lofty 34x forward earnings multiple could weigh on shares, especially after their nearly 40% jump on the year.
Lyft crashes as rideshare price cut strategy fuels concerns about margins and profitability (LYFT)
Lyft (LYFT), which has been fighting an uphill battle against rival Uber (UBER) in the rideshare market, delivered upside 1Q23 results while generating adjusted EBITDA of $22.7 mln, exceeding the high end of its $5-$15 mln guidance range. The results mark an improvement from last quarter when LYFT badly missed EPS expectations as its contribution margin -- the amount of revenue remaining after variable costs have been deducted -- eroded to 35.3% from 47.1% in the year-earlier period.
LYFT's improved quarterly results, though, are being overshadowed by its disappointing guidance and related concerns about its strategy to cut rideshare prices. For Q2, the company guided for revenue of $1.00-$1.02 bln (+2% at midpoint) and adjusted EBITDA of $20-$30 mln, essentially flat with Q1. Both of those guidance ranges fell short of estimates.
- The issue isn't demand. LYFT's rideshare growth actually accelerated for the first time in over two years with Active Riders up 9.8% in Q1 compared to last quarter's 8.7% increase.
- This acceleration in growth has likely translated into some much-needed share gains against UBER. During the earnings call, new CEO David Risher stated that he believes LYFT "strengthened its category position" in Q1.
Clawing back some market share from UBER is good to see. However, those share gains are coming at a cost. In fact, the strategy that LYFT is implementing reminds us of Tesla (TSLA) and its price-cutting spree that has protected its market share but has also put a serious dent into its margins. The key difference, of course, is that TSLA is the leader in its market, while LYFT is second and is far behind UBER.
- LYFT plans to be more competitive with UBER on pricing in Q2, which should lead to another sequential increase in the rideshare growth rate. It's worth noting that only part of Q1 incorporated the lower rideshare prices.
What investors really want to see, though, is improving profitability from LYFT.
- In late April, the company announced a restructuring plan that includes the elimination of more than 1,000 positions. Last night, CFO Elaine Paul disclosed that the restructuring plan will ultimately result in $330 mln in annual savings, which should bolster LYFT's bottom-line.
- To investors' dismay, though, those savings will not flow through to LYFT's adjusted EBITDA because it intends to invest the cost savings in service improvements. Along with the price cutting strategy, those investments weighed on LYFT's Q2 adjusted EBITDA guidance.
The main takeaway is that LYFT is "between a rock and a hard place." Either the company keeps rideshare prices high to protect margins at the expense of falling further behind UBER, or it lowers prices to win back share at the expense of margins and profits. The core issue is that UBER's scale, technology, and ability to attract and retain drivers provides it with significant competitive advantages over LYFT. Based on the stock's collapse, it's evident that investors have lost confidence in LYFT's ability to overcome these disadvantages.
Apple looking delicious today as upside iPhone revs lead the way; AR/VR headset next up (AAPL)
Apple (AAPL +5%) is trading nicely higher after reporting Q2 (Mar) results last night. The headline numbers of a nice EPS beat and upside revenue were quite good, especially in light of macro and FX headwinds. After production headaches due to China COVID shutdowns in DecQ, Apple says that supply was not a problem in MarQ. Apple also announced a $90 bln share repurchase program and hiked the dividend by 4%.
- iPhone was the star of the show with revenue coming in much better than expected. Revenue rose 1.5% yr/yr to $51.33 bln, a record iPhone result for MarQ. Apple says iPhone 14 continues to delight users with its long-lasting battery and advanced camera. Apple said that production issues in DecQ may have pushed some sales into MarQ. iPhone outperformance helped to offset weakness in other areas.
- Probably the biggest disappointment was Mac sales, which fell 31% yr/yr to $7.17 bln, which was below street estimates. In fairness, Mac was lapping a very difficult compare last year which included the incredibly successful rollout of its M1 chips throughout its Mac lineup. However, Apple also conceded that Mac faced some macroeconomic and FX headwinds.
- iPad revenue fell 13% yr/yr at $6.67 bln, which was in-line with street ests, Similar to Mac, iPad revenue was hurt by macro and FX challenges as well as lapping the M1-powered iPad Air last year.
- Wearables revenue was flat yr/yr at $8.76 bln, which was slight upside. Wearables was up 5% to $20.9 bln, which was a bit light but not bad.
- Emerging Markets was another important topic with India being described as an "incredibly exciting market" and a major focus for Apple. It just launched its first two Apple stores there, one in Mumbai and one in Delhi. CEO Tim Cook visited and saw a lot of excitement firsthand. There are a lot of people coming into the middle-class, and Apple feels that India is at a tipping point. Apple also had a stellar quarter in other emerging markets, with records set in several countries.
Overall, it was a solid quarter but pretty much as expected. Strong iPhone revenue helped to offset some weakness in Macs an iPads. The sizeable buyback authorization and dividend hike were a nice bonus. All eyes now turn to WWDC, Apple's annual Worldwide Developers Conference in early June. Excitement is building for what is expected to be the launch of Apple's AR/VR headset, which would be a new product category for Apple. The first headsets are expected to be pretty pricey with cheaper versions likely in the next couple of years.
Apple shares have been on a nice uptrend, up nearly 40% from their January lows and the stock is flirting a new 52-week high today. Suppliers to keep on note include: SWKS, CRUS, AVGO, QRVO, TSM, and QCOM, among others (SMH); SSNLF, LPL (for displays) and LITE (for FaceID).
DoorDash drops off from initial gains as lingering economic concerns spur profit-taking today (DASH)
DoorDash (DASH -2%) dropped off from initial gains today, sparked by its better-than-expected earnings and revenue figures in Q1. The food and grocery delivery firm's solid numbers were bolstered by robust demand within its U.S. grocery and convenience categories alongside its acquisition of Finnish food delivery company Wolt, which closed last year.
So why are shares pulling back despite the market rallying? Shares have appreciated roughly 11% leading into DASH's Q1 report since April 25, adding to the risk of profit-taking today. Additionally, general economic concerns remain across DASH's major markets. Stubborn inflationary pressures could begin to weigh on volume growth in upcoming quarters. Delivery fees make already-expensive restaurant prices that much higher, which could start meeting tougher resistance from consumers unless inflation eases more meaningfully. Although the same can be said for rival Uber Eats (UBER), the company's ride-hailing service, which saw substantially higher Gross Bookings in Q1 than its delivery service, helps shield it from solely depending on food and grocery delivery.
- Turning to DASH's Q1 results, the company delivered a narrower GAAP loss than analysts feared, improving its earnings to $(0.41) per share from $(0.48) in the year-ago period. The company's recent cost-cutting actions, including November layoffs, continue to bear fruit. This was also reflected in DASH's net revenue margins expanding by 100 bps yr/yr to 12.8% in the quarter. Additionally, the company anticipates adjusted EBITDA to possibly more than double yr/yr in FY23, projecting $600-900 mln compared to $361 mln generated last year.
- Part of DASH's cost-cutting also flowed through to the consumer, allowing for a more affordable product, helping fuel its consistently robust revenue growth. DASH grew its top line by 39.8% yr/yr -- identical to Q4's growth -- to $2.04 bln. Meanwhile, Marketplace GOV rose 29% to $15.9 bln, topping DASH's $15.1-15.5 bln forecast, on a 27% jump in total orders.
- On a pro forma basis, incorporating the results from Wolf for both periods, DASH's total orders climbed 17% yr/yr, with Marketplace GOV gaining 20%.
- Encouragingly, yr/yr growth in DASH's total orders from its non-restaurant categories remained significantly higher than its U.S. restaurant category. DASH also believes it gained share in U.S. convenience and grocery categories. A contributing factor in DASH's unfavorable reversal following otherwise solid Q4 results was uneasiness surrounding its COO Christopher Payne announcing his departure on March 1. Mr. Payne led DASH's foray into new delivery services, including grocery, which achieved Marketplace GOV growth of around 100% yr/yr in 3Q22 and 4Q22. Therefore, by maintaining its positive momentum in non-restaurant categories, such as grocery, DASH is showcasing its ability to continue gaining share even without its former COO.
- Looking ahead, DASH's Q2 and FY23 forecasts were mostly upbeat. The company expects Marketplace GOV of $15.9-16.2 bln in Q2, signaling a potential sequential increase. Furthermore, DASH raised its FY23 Marketplace GOV to $63.0-64.5 bln from $60.0-63.0 bln.
Overall, DASH delivered a solid Q1 report, but investors remain worried about the road ahead, especially if food and grocery prices do not begin dropping more meaningfully.
Last Updated: 05-May-23 14:32 ET | Archive
History not on labor market's side
You must hand it to the U.S. labor market. Thus far, it has shown no signs of cracking -- softening maybe, but not cracking -- despite ten consecutive rate hikes by the Federal Open Market Committee (FOMC) that, in aggregate, have moved the target range for the fed funds rate 500 basis points higher in a little over a year.
The speed with which the policy rate has risen has a lot of market participants on edge, yet the April Employment Situation Report made it clear that the pace at which the policy rate has risen has not sent the labor market over the edge.
Expecting Worse
The April unemployment rate of 3.4% is a 54-year low. The Black unemployment rate of 4.7% is an all-time low.
When unemployment rates are at multi-decade lows, it is only natural to think they can't get any better. It is also natural to think they are destined to get much worse, especially when the Fed is aggressively raising interest rates, the possibility of a debt default looms on the horizon, credit conditions are bound to tighten because of the regional bank crisis, and credit quality is expected to erode because of refinancing and repayment risk that has intensified with the higher rates.
Heck, even the Fed expects things to get worse.
The last Summary of Economic Projections provided in March showed a median estimate of 4.5% for the unemployment rate in 2023 and 4.6% in 2024. That is significantly higher than the 3.4% unemployment rate seen today, but as we showed a few weeks ago in this column, that would be below the average unemployment rate seen during every recession since 1980.
Recession Period Initial Claims Average Unemployment Rate Average | Jan. 1980 - July 1980 | 512,000 | 7.0 | | July 1981 - Nov. 1982 | 554,000 | 9.0 | | July 1990 - March 1991 | 434,000 | 6.1 | | March 2001 - Nov. 2001 | 416,000 | 4.8 | | Dec. 2007 - Jan. 2009 | 376,000 | 5.9 | | Feb. 2020 - April 2020 | 2,405,167 | 7.5 | Source: NBER; FactSet
In other words, the Fed's own projection isn't as dour as it appears at first blush. Looked at another way, the projection conveys a hopeful view that the Fed's tightening actions won't ultimately lead to a recession for the U.S. economy.
Cooling Off
Sure enough, we heard Fed Chair Powell say at his press conference following the May FOMC meeting that he continues to think "...that it's possible this time is really different." He was answering a reporter who asked why he was optimistic that a recession could be avoided. Fed Chair Powell responded that he thinks as much because there is so much excess demand in the labor market.
He has a point in that regard. The latest JOLTS - Job Openings Report showed 1.6 job openings for every unemployed person; moreover, the Fed Chair sounded pleasantly surprised that the unemployment rate is lower today than it was when the Fed started to raise rates in March 2022. Back then, the unemployment rate was 3.8%.
Accordingly, he thinks "...it is possible that we can continue to have a cooling in the labor market without having the big increases in unemployment that have gone with many prior episodes." He acknowledged such an outcome would go against history but that the excess demand for labor, coupled with the moderation seen of late in wage growth, leaves him inclined to think that it is more likely the U.S. will avoid a recession than have a recession.
The April Employment Situation Report corroborated his thinking in some respects.
- It showed a cooling off in hiring activity with the 3-month average for nonfarm payrolls dropping to 222,000 from 295,000 in March and 524,000 in the same period a year ago.
- It showed temporary help services employment declining by 23,300.
- It showed average weekly hours for all employees sticking at 34.4 after peaking at 35.0 in January 2021.
- It showed persons unemployed for 27 weeks or more increasing to 20.6% of the unemployed versus 18.9% in March.
Granted there was an uptick in average hourly earnings to 4.45% year-over-year from 4.30% in March, but that did not alter the downtrend in average hourly earnings seen over the past 13 months.
What It All Means
To be fair, Fed Chair Powell did not rule out the U.S. having a recession. It's just not his base case. Then again, it wasn't his base case either that inflation would turn out the way it has.
We digress. We are talking about the labor market this week. It remains solid all things considered, but of course employment is a lagging indicator.
Our review of the report is that it creates some hope that a soft landing for the U.S. economy is possible, yet we are also reminded of Sir John Templeton's famous view that "The four most dangerous words in investing are: this time it's different."
Fed Chair Powell isn't saying categorically that this time is different for the economy, only that it is possible. We like his optimism, although the history of aggressive Fed tightening cycles is not on the side of the labor market or the economy.
-- Patrick J. O'Hare, Briefing.com
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