Case for September Rate Cut Builds After Slower Jobs Data Jobs report shows the unemployment rate ticked up to 4.1%, indicating slack in what has been a strong labor market
The Labor Department reported on Friday that the U.S. added a solid 206,000 jobs last month, slightly beating expectations and continuing a remarkably strong run. But the unemployment rate ticked up to 4.1%, a sign of slack in a labor market that has already shown some hints of gradually slowing down.
There were other indications as well that the job market is continuing to cool. Average hourly earnings were up 3.9% in June from a year earlier, marking their smallest gain since 2021. The counts for both April and May were revised lower by a combined 111,000 jobs. The labor-force participation rate, the share of working-age people who were employed or seeking work, ticked up to 62.6%—an indication that more people entered the labor market. (…)
The jobs report seems to have affirmed investors’ view that the economy is slowing, but not in a drastic way that would prompt more aggressive rate cuts.(…)
For the Federal Reserve, Friday’s report provides further evidence that the labor market appears to have come into better balance. (…)
There likely wasn’t anything alarming enough in Friday’s payroll report to lead Fed officials to push for a July rate cut. But eventually, some Fed officials will say that the risks of a further weakening in the labor market aren’t desirable, even as others may argue that inflation still isn’t showing enough progress to cut rates.
While July may be too early for a rate cut, a mild inflation report next week could lead to Fed doves who are more worried about labor-market weakness to argue that it is time for the central bank to tee up a September rate cut.
One risk is that experience has shown the labor market can go from strong to weak in short order. While the unemployment rate of 4.1% is still historically low, it is up from 3.4% early last year.
The Sahm rule, a rule of thumb popularized by economist Claudia Sahm, says that if the average of the unemployment rate over three months rises a half-percentage point or more above the lowest the three-month average went over the previous year, the economy is in a recession. Over the past three months, the unemployment rate has averaged 4%—0.4 percentage point above the three-month average low of 3.6% over the past year. (…)
If consumers cut back too much, employers could respond by cutting staff, turning what has been a virtuous cycle of rising employment and rising spending into a vicious one.
Complicating the Fed’s job, continuing pandemic-related distortions and the recent wave of immigration have made interpreting labor-market signals more difficult.
Job growth over the past year has been driven by three sectors: Healthcare, government, and leisure and hospitality. Together, they have accounted for 1.7 million of the 2.7 million jobs the economy has added over the past year. Much of that outsize growth is a matter of catching up, since all three sectors were much slower to get back to their prepandemic job levels than other employers.
Employment in all three sectors still appears low relative to their prepandemic job-growth trends. But it is unclear at what level demand for workers will be satiated, and once it is, overall job growth could slow markedly. (…)
The labor market has been erratic on a monthly basis. This chart of stacked payroll contributions suggests a step down in growth rates during Q2…
…but this quarterly chart shows rather stable growth in the last 3 quarters:
If the FOMC is primarily intent to slow private employment, success seems to have peaked in Q4’23. The only recent slowdown in employment growth has been in governments:
This jibes with the findings of the recent services PMI surveys: the ISM, which includes governments, said last week that its “employment Index contracted for the sixth time in seven months and at a faster rate in June” whereas S&P Global’s survey, which “covers only private service sector companies” saw a fresh and “solid” increase in employment, “the sharpest since May 2023”.
Some pundits point out the steep rise in the unemployment rate in Q2, from 3.8% in March to 4.1% in June. In reality, unlike in previous recessions, this recent increase in the UR does not reflect waning demand for labor being mainly the result of labor supply (+375k) greatly exceeding new job creations (+62k).
The Bank of America Institute sees “No major sign of distress for unemployment yet”:
Since January 2024, the unemployment rate has risen from 3.7% to 4.0% in May. Is this rise a hint of labor market weakness or a blip? To gain insight into this, we use Bank of America data to look at the ‘Payroll Disruptions Rate,’ (PDR) which we use as a rough proxy for job losses. We define the rate as the proportion of customers who previously had 12 months of regular payroll payments in their accounts, followed by three months without a payment relative to the total number of customers with 12 consecutive months of pay.
Looking at our estimate of the PDR, we find the rate has averaged 0.9% in 2024 so far, in line with the 2019 average. In May 2024, we estimate the PDR at 0.8% – suggesting there is no sign here of a deterioration.
Recall that S&P Global’s June Composite PMI rose 3.5 points to 54.8 from April to June (+4.0 points to 55.3 for Services), prompting S&P to conclude that “the survey data point to GDP rising at an annualized 2.0% rate in the second quarter, with a 2.5% rate seen for June. Forward momentum is therefore gathering pace.”
Consumer data support continued economic momentum. Aggregate weekly payrolls are up 5.1% YoY in June (+4.4% MoM annualized) and 5.3% in Q2 (+5.0% QoQ annualized). PCE inflation well below 3.0% (+2.6% in May) put real payrolls up in the 2.0-2.5% range, in line with the last 12-month experience in real expenditures.
The Citigroup Economic Surprise Index is nearly as low as it gets with bond yields in normal reaction. If S&P Global PMI (not in the CESI unlike the ISM) proves accurate, surprises could turn positive this summer (chart from Ed Yardeni).
Canada Unemployment Rate Continues to Climb
The job market was effectively stalled in June, with 1,400 jobs lost for the month, allowing the unemployment rate to climb 0.2 percentage point to 6.4%, Statistics Canada reported Friday. The result undershot market expectations for the addition of a modest 25,000 jobs and a unemployment rate of 6.3%.
It is the second month this year that employment was virtually unchanged, even as continued high levels of immigration have expanded the working-age population. Employment has failed to keep pace with the growing labor force for more than a year, with the unemployment rate advancing 1.3 percentage points from the post-pandemic low in April 2023.
When calculated using U.S. Labor Department methodology, Canada’s unemployment rate climbed to 5.4% last month from 5.2% in May. In contract, the U.S. added a slightly more-than-expected 206,000 jobs in June while its jobless rate ticked up to 4.1%.
The jobs lost in June, though slight, were focused on full-time positions. And in a further sign of a soft labor market, hours worked fell 0.4% from May.
(…) Average hourly wages climbed 5.6% on a year earlier in June, quicker than the 5.2% rise the prior month and ahead of the 5.3% economists anticipated.
Given base-year effects when comparing wages a year ago contributed to the quickening in pay growth, some economists said the central bank should look through it. (…)
NBF:
(…) Since its all-time low in July 2022, the unemployment rate has thus risen by 1.6 pp, the biggest increase ever seen outside a recession. The rise would have been more pronounced had it not been for the fall in the participation rate. Job creation hasn’t kept pace with the population’s meteoric rise for some time now.
A stagnation in employment as observed in June, while the population is up by 100K, is a recessionary deviation. The weak job market is having a significant impact on individuals trying to enter the workforce. Statistics Canada reported in its release that students had the lowest employment rate since 1998. New immigrants are also struggling to enter the labour market, as their unemployment rate reached 12.7% in June on a 3-month moving average basis, for a total increase of 5.8 percentage points since its trough.
This is equivalent to the variation seen in the 2008-09 recession.
The acceleration in wages thus should not be a source of concern in terms of bringing inflation back down, as economic conditions affect salaries with a delay. What’s more, wage pressures are weighing on corporate profits, which fell sharply in Q1. It is thus likely that some firms will streamline their workforces over the coming months.
No less than 13 out of 15 sectors have seen a decline in output per employee between Q3 2022 and Q1 2024, with the goods sector showing far greater contractions than the services sector. It is thus not surprising that the goods sector has seen a contraction in employment since the start of the year.
As the restrictive monetary policy will continue to limit economic growth in the coming months, we expect the unemployment rate to maintain its upward trend towards 7% by the end of the year.
EARNINGS WATCH
A Bumper US Earnings Season Is Key for Stocks to Scale New Highs
Analysts’ upgrades to profit estimates have outnumbered downgrades going into the second-quarter reporting period, according to a Citigroup Inc. index. At the same time, expectations for 12-month forward earnings stand at an all-time high, data compiled by Bloomberg show.
“Given the lofty implied growth expectations, markets likely need to see raises coupled with solid execution-driven beats to sustain recent gains or push higher from here,” Citigroup strategist Scott Chronert wrote in a note. “The concern is while fundamental trends are positive and consensus estimates are attainable, valuations suggest the buy-side will demand more.”
The second-quarter season begins in earnest on July 12, when JPMorgan Chase & Co. reports results. It will follow a rally of about 35% in the S&P 500 Index since its October low, with the benchmark notching record highs more than 30 times this year, fueled by the buzz around artificial intelligence and bets on lower Federal Reserve interest rates. (…)
In fact, the Q2 earnings season has already started with early reporters per LSEG/IBES:
19 companies in the S&P 500 Index have reported earnings for Q2 2024. Of these companies, 84.2% reported earnings above analyst expectations and 15.8% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 79% of companies beat the estimates and 16% missed estimates.
In aggregate, companies are reporting earnings that are 4.1% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.2% and the average surprise factor over the prior four quarters of 7.3%.
Of these companies, 47.4% reported revenue above analyst expectations and 52.6% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of companies beat the estimates and 38% missed estimates.
In aggregate, companies are reporting revenues that are 0.4% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.2%.
The estimated earnings growth rate for the S&P 500 for 24Q2 is 10.1%. If the energy sector is excluded, the growth rate declines to 10.0%.
The estimated revenue growth rate for the S&P 500 for 24Q2 is 4.1%. If the energy sector is excluded, the growth rate declines to 3.9%.
The estimated earnings growth rate for the S&P 500 for 24Q3 is 8.4%. If the energy sector is excluded, the growth rate improves to 9.3%.
Trailing EPS are now $231.16, up 6.6% YoY. Full year 2024: $243.81e. Forward EPS: $261.39e (+13.7% YoY). Full year 2025: $278.48e.
TECHNICALS WATCH
- The 13-34week EMA is extended but still positive:
- Stock market trading volumes are surging outside the regular hours (pre-market and after-market trades) — this may be a combination of increased retail and offshore participation in the market… and to both ends arguably a symptom of further band-wagoning into US Large Growth stocks. (Callum Thomas)
Source: @Barchart
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Americans are playing the stock market in record numbers, with almost three in five investing in stocks, according to a Charles Schwab survey released in June. Members of Generation Z start investing when they’re 19, on average, compared with 32 for Gen X and 35 for baby boomers, according to the survey. Sports betting has also exploded, with Americans wagering more than $220 billion in the past five years, according to the American Gaming Association. “Trading has become interchangeable with the same kind of online betting that we’re seeing for games and in the sports world. It’s part of a gambling zeitgeist,” says Peter Atwater, an economics professor at William & Mary.
(Bloomberg)
- SPX to VIX Ratio: An interesting way of looking at rising stocks and stable/low volatility is the S&P 500 vs CBOE VIX ratio — this indicator is looking stretched and at levels where it tends to pullback from the upper trend channel line. (C. Thomas)
Source: @i3_invest