The Federal Reserve finds itself in a fascinating situation these days, not dissimilar to Goldilocks looking for just the right porridge, chair, or bed. They want the economy to do well (enough to avoid a recession) but not too well (causing continued inflationary pressure). Chair Powell stated this week in Congressional testimony that conditions are “not far” from supporting interest rate cuts. So, how did the three primary employment reports impact economic conditions and the outlook for rate cuts? Let’s take a look.
The first release was the ADP Employment Report, often seen as a precursor to the official government reports. It showed a gain of 140K jobs. It was a solid report showing gains across many categories but was still below consensus expectations.
The same day, the U.S. Bureau of Labor and Statistics (BLS) released the Job Openings and Labor Turnover Survey (JOLTs). The report showed a decline in job openings and a miss compared to economists’ expectations. Perhaps this porridge was a bit too cold.
On Friday, the BLS also released the Non-Farm Payrolls report, generally regarded as “the” jobs report to watch. According to the Wall Street Journal headline, “Hiring Boom Continues With 275,000 Jobs Added,” one might assume the porridge was way too hot. As is always the case, though, getting past the headlines is essential, particularly in this month’s report.
Why? Even though the February numbers beat expectations by 75K, the December and January numbers were revised lower, by (43K) and (124K), respectively. This means job creation was actually 90K+ lower than previously thought.
Moreover, the unemployment rate ticked up to 3.9% in February. While this is still historically low, it is the highest level in over two years. Finally, average hourly earnings only increased by 0.1% MoM. Again, the smallest wage gain in two years. Combined with a downwardly revised January increase, the porridge was decidedly less hot than it appeared.
So, where does that leave the Fed after this round of employment reports? Examining all three reports in aggregate, it looks like the temperature may be just right at the moment. But remember, while the economic temperature may be just right based on these reports, next week will bring the CPI inflation reports, which could very well affect the balance.
Economy
- Markets were mixed this week on the heels of multiple jobs reports, with the S&P 500 down -0.3%, the Nasdaq down -1.2%, and the small-cap Russell 2000 up 0.3%.
- The ISM Services PMI fell to 52.6 in February from a four-month high of 53.4 in January and below forecasts of 53.
- The S&P Global U.S. Composite PMI was revised higher to 52.5 in February, from the preliminary estimate of 51.4 and up from 52 in January. It was the highest reading since June 2023, as manufacturing production grew.
Stocks
- U.S. equities were in negative territory. Consumer Discretionary and Technology led the decline, while Utilities and Real Estate outperformed. Value stocks led growth stocks, and small caps beat large caps.
- International equities closed higher for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield decreased 9 basis points to 4.09% during the week.
- Global bond markets were in positive territory this week.
- Corporate bonds led for the week, followed by government bonds and high-yield bonds.
