Waking up on Friday certainly felt different. Equity traders, if they chose, could stay in bed. Futures and bond traders had to get up and at least pretend to work briefly, but could then go back to bed, or proceed to do whatever suits them on any first day of a three day (or two and a half day) weekend, or if observing, what suits them on Good Friday. The investing public, come back today, on Easter Monday, after a shortened holiday workweek.
One set of folks who did not take the day off on Friday, were the folks at the Bureau of Labor Statistics. Friday was March "jobs day", and not a federal holiday. Hence, the show, as they say.... must and did, go on.
At first glance, the results of the two BLS surveys printed about as close to what economists had expected as they (being economists) ever seem to come. There were some items within the results produced by both the Establishment and Household surveys that could lead one to think these March results to be potentially, but not very significantly, softer than how the headline level numbers appear.
The obvious take away? That job creation is decelerating. Private payrolls grew by just 189K in March, dropping in succession from growth of 266K in February and 353K in January. Private sector job creation is cooling from the torrid pace that it had been on. This jibes well with what we saw in the JOLTs report for February last week. This also validates the March results for the ADP Employment Report that hit the tape last Wednesday.
Growth in governmental payrolls is also slowing. Public sector job creation grew by 47K positions in March, down in succession from 60K in February and 119K in January. Job creation, safe to say, is decelerating across the board. Public sector job creation as a percentage of non-farm payrolls has remained a near constant at close to 20% for several months, so there is no real skewing of the data coming from one side of the economy or the other.
Strength in this report can be found in an improving participation rate and improving employment to population ratio (60.2% to 60.4%). This coincides with a drop in both the headline unemployment (U-3) and underemployment rates (U-6). Interestingly, the household survey showed an increase in the number of those employed of 577K individuals, while the numbers of those unemployed individuals decreased by 97K.
Remember that the Establishment survey showed 236K new non-farm payroll jobs. These results often pit the two BLS surveys against each other and the month of March was no different. The implication, and this is based not on data, but on logic and a little reasoning, could be that as the weather has warmed, the ranks of those working "off the books" in fields requiring outdoor labor, such as construction or landscaping may have popped.
The Ugly Stick
The macro ahead of that jobs report was truly awful last week. The March ISM surveys for both the manufacturing and service sectors of the economy disappointed quite badly. A week ago, on Monday, the ISM Manufacturing survey (PMI) printed in a deep state of contraction with almost every key subcomponent contracting within. Not only was March the fifth consecutive month of overt "recession" for the manufacturing side of the US economy, but also the weakest month since the height of the pandemic during the first half of 2020.
Discounting the pandemic, March was the weakest month for the US manufacturing sector since the Great Financial Crisis. This is worthy of some focus.
Two days later, the ISM Non-Manufacturing survey (PMI), also printed well below expectations, though still technically in a headline state of expansion. For this series as well, March was the weakest month since the height of the pandemic and excepting those months where the economy was "shut-down" in early 2020, was also the weakest month since the Great Financial Crisis. This rapidly developing US economic slowdown is reality.
These two surveys sandwiched a much softer than expected, though still not soft report for February JOLTs job Openings and a third month in four for contracting Factory Orders, also for February. All of this came ahead of Thursday's weekly report for initial jobless claims that surprised to the upside and brought with it, a large upside revision made to the week prior.
This, for those unaware, is most unusual for the Department of Labor. They do not often revise this series and when they do, the revisions are not usually noteworthy. Continuing jobless claims (those remaining on the rolls for state level unemployment benefits) have skyrocketed since September (+35.4%) and now stand at their highest level since December 2021. Quite ominous.
The rapidly deteriorating US economic data does seem to have finally been noticed in Atlanta. The Atlanta Fed's highly followed GDPNow model estimate for US first quarter economic growth had to be revised lower twice this past week, first from 2.5% (q/q, SAAR) to 1.7%, and then from 1.7% to 1.5%. This model, incredibly, had shown the first quarter growing by as much as 3.5% as recently as late March.
Evolution...
Last Thursday evening, after many of us called it a week, the Fed published their weekly balance sheet data. This number contracted for a second consecutive week. Huzzah? What appears promising would be that US banking institutions held a combined $148.7B in borrowings from the central bank for the week through April 5th, which was down from $152B the week prior. What was more impressive than that, were the adjustments made within, of these funds owed. Banks are managing the crisis in deposits/reserves in the wake of the second and third largest US banking failures, both regionals, ever.
The data showed that banks held $69.7B in outstanding borrowed funds from the Fed's discount window, down from $88.2B a week earlier, while borrowings from the Fed's new BTFP (Bank Term Funding) program stood at $79B, up from $64.4B in a week's time. This matters. Banks have 90 days to repay loans from the discount window, but a full year to pay back funds borrowed from the newer program. (Both are based on the liberal use of collateral.) Unless something else blows up in the immediate future, this could suggest that the banks are finding a way to contain the crisis (for now).
Side Effect
There's always a but. This "but" could very well be what drives a US economy obviously teetering on the brink into an overt condition of recession. Bank behavior is evolving, but that could result in reduced access to credit. Data tracked by the Federal Reserve showed commercial bank lending drop by almost $105B for the two weeks ending March 29th, the largest two week contraction for this data point since 1973. More than $45B of that decrease came in the last week alone, among smaller banking institutions.
This reduction in lending is likely due to the banks themselves having tightened credit conditions (and requirements) in the wake of these recent banking collapses. Contraction was evident in commercial, industrial and real estate loans.
The report showed a $23.5B reduction in lending across the 25 largest US chartered banks for those two weeks, and a $73.6B reduction at smaller institutions (likely due to deposit instability/insecurity). This report also showed that commercial banks in the aggregate saw a $64.7B reduction in deposits for that latest week, marketing 10 consecutive weekly declines.
Pressure on Treasury Yields
Last week's poor macroeconomic performance did manage to drive the entire Treasury yield curve, with the exception of the short end, which is being propped up by the Fed, lower. The bond market continues to bet that the Fed will react to a sputtering economy, even all market participants witness those speaking on the central bank's behalf continuing to insist that they (as a unit) are committed to prioritizing the fight against consumer level inflation over keeping the US economy out of a state of contraction.
What's apparent for the moment, is that as long as the Fed's idea of full employment is not seriously threatened, they only feel a necessity to address the one side of their dual mandate that is not currently stable. Readers will see here that the yield for the US Ten Year Note has actually given up a rough 10 basis points for consecutive weeks and has fallen precipitously in little more than a month's time.
It was a little rougher for the US Two Year Note last week, as it also was the week prior. This product has more of an impact on and is more impacted by what the Fed does to the short end of the curve. We're talking about 10 or so basis points last week and almost 120 basis points in about a month.
As seen below the inversion between the yields of these two Notes did improve, if that's what you call it, by six basis points...
That said, remember that the spread between the yields of the US Ten Year Note and the US Three Month T-Bill are considered the most accurate harbinger we have as a warning of any coming contraction in overall economic activity, and this spread only continues to worsen. If history serves as any kind of guide, the spread foretells the coming of a potentially severe period of economic darkness...
We must ask ourselves, as we always do and always have... "Is it different this time?" Perhaps it is. The Fed has more than warped free market price discovery at the short end of the curve, while rushing with great haste (and probably also great recklessness) to return the belly of the curve on out to the long end to the forces of "organic" demand and supply. The problem with this is, nobody remembers how to price credit without also factoring in the potential for central bank interference at the point of sale.
Even if such intervention never materializes, it certainly still impacts price discovery. As far as this spread is concerned? You and I better hope it is different this time.
Fed Funds Futures
As the zero-dark hours pass quietly on Monday morning, I now see Futures trading in Chicago showing a 63% likelihood of a 25 basis point increase being made to the target range for the Fed Funds Rate on May 3rd. There remains a 37% probability for no rate hike at all on that date. This would bring the FFR up to 5% to 5.25%, where this market sees it standing until a first rate cut (80% probability) is priced in on July 26th.
These futures markets are currently betting 4.25% to 4.5% Fed Funds Rate by year's end and incredibly a 2.75% to 3% Fed Funds Rate within 18 months from now. This suggests a wildly aggressively dovish trajectory for monetary policy in 2024. In short, these markets see the FOMC being forced to react to an economy in a more than serious state of decline within nine months.
Marketplace
Equity markets ended the four day holiday-shortened work-week mostly lower than where they started it. Trading volumes remained light to very light, which has been the norm of late, but is also expected during a holiday week.
Readers will see that the Nasdaq Composite had tested its 21 day EMA again last week, even as late as Thursday, The index gave up some moderate ground for the period, thus avoiding becoming technically overbought, but still has not had a serious run-in with either its 50 or 200 day SMAs since mid-March.
The S&P 500 again (as it had the week prior) showed a similar pattern to the Nasdaq Composite over the past week, but came closer to holding the ground gained for that week prior than did its more tech-focused competitor. Note that the S&P 500 currently stands at the precipice of what some of us refer to as a "baby" or "swing trader's" golden cross, which is when the 21 day EMSA crosses over the 50 day SMA...
For the past four trading days, the S&P 500 gave up just 0.1%, ending the period with a very mild rally of 0.36% on Thursday. The S&P 500 closed last week up 6.92% year to date. The Nasdaq Composite gave up 1.1% last week after rallying 0.76% on Thursday. This put this index up 15.49% for 2023. The Philadelphia Semiconductor Index had been the beast this year. Not so much last week. This index, which readers know that I always watch closely, lost just 0.46% on Thursday, but took a nasty beating of 4.92% for the week. This index now stands up 21.31% for the year.
This leaves us with the Russell 2000. The "small-cap" index gained a mere 0.13% on Thursday, but took a loss of 2.66% over the four day period. The Russell is now 0.39% lower for 2023. We have had to have a close eye on the KBW Bank Index for the past several weeks for obvious reasons. This index finally has calmed a bit over the past couple of weeks. The KBW gained 1.05% on Thursday to cut its loss to 1.97% for the week. The KBW is now down 20.26% year to date.
Six of the 11 S&P sector-select SPDR ETFs shaded red for the short week. Defensive sectors led the way, as Utilities (XLU) at +3.13%, benefited from slumping bond yields. Health Care (XLV) placed second for the week at +3.14%. Growth and cyclicals populated the bottom rungs of the weekly performance tables, with Industrials (XLI) and Discretionaries (XLY) both surrendering more than 3% over four days. Technology (XLK) may have only given up 1.28% for the week, but as mentioned above, the semiconductors were taken for a profit taking joy ride.
According to Dow Jones, the S&P 500 now trades at 18.54 times forward looking earnings, which is up from 18.12 times a week ago. This ratio now tops the S&P 500's five year average of 18.5 times, and is now well above its 10 year average of 17.3 times. More a sign of contracting earnings expectations than of rising stock prices? For last week, at least, that's true. Does that pressure equities this week? I think it should.
On That Note...
According to FactSet, 106 of S&P 500 constituent companies have issued earnings guidance for the quarter about to be reported. Of those 106 companies, 78 have issued negative guidance, which is above both the first quarter five year average of 57 and the first quarter five year average of 65. Conversely, 28 of these 106 companies have issued positive earnings guidance for the quarter. This is below both the five year average of 39 and 10 year average of 33. Just an FYI... the Technology (27) and Industrials (16) sectors are the leaders in issuing negative guidance going into the "season."
The Week Ahead
First up, readers need to know that on Friday, First Republic Bank (FRC) , a name that has been in focus for weeks now, in a regulatory filing, informed that it will suspend payments of quarterly cash dividends across its seven series of preferred stock. The bank also announced that it will delay its quarterly earnings release until Monday April 24th. FRC had been set to report earnings this week along with many of the high-profile banks that traditionally kick off the "season." That has changed.
The week ahead is chock full of key macroeconomic events. In short, this week will be a doozy that puts the focus on the ability for high-profile macroeconomic data to potentially impact central bank policy. Wednesday comes in hard with March CPI data followed by an auction of $32B worth of Ten Year Notes and the Fed Minutes for the policy meeting of March 22nd.
Next up is Thursday, with the March PPI numbers and an auction of $18B worth of Thirty Year Bonds. Lastly, Friday lands with March Retail Sales and March Industrial Production in tow, and then finishes with February Business Inventories. That last one, as much as the others, can be a GDP mover. Expect the Atlanta Fed to have to revise that GDPNow model twice this week as well.
This week will finally bring with it the start of second quarter earnings season, but the action will be light until Friday and then all heck will break loose. Thursday actually starts off the season with Delta Air Lines (DAL) , but then Friday comes calling with some of the heaviest hitters in the banking game and what they "show and tell" will move the markets. That's when we'll hear from BlackRock (BLK) , Citigroup (C) , JP Morgan (JPM) , PNC Financial (PNC) , UnitedHealth Group (UNH) and Wells Fargo (WFC) .
Economics (All Times Eastern)
10:00 - Wholesale Inventories (Feb-rev): Flashed 0.2% m/m.
The Fed (All Times Eastern)
16:15 - Speaker: New York Fed Pres. John Williams.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (TLRY) (-0.06)
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Job Creation Decelerates, Rapid Economic Slowdown, Treasury Yields, Week Ahead - RealMoney
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