February was the worst month for jobs creation since September of 2017. Expectations for February were relatively modest, expecting around 180,000 new jobs for non-farm payrolls. The data from the Bureau of Labor Statistics released this morning shows just 20,000 jobs were added last month and the unemployment rate dropped to 3.8 percent from 4 percent. The drop in unemployment and underemployment rates was much sharper than expected and shows a much stronger than anticipated household survey.
The Dow Jones dropped 200 points at the open of today’s trading on the news of the weak jobs report. Notably, the construction market lost more than 30,000 jobs according to the report while leisure and hospitality jobs remained flat.
Analysts with Goldman Sachs argue that the winter weather likely affected payroll growth by at least 100,000 jobs. They also assert that “the underlying pace of job growth also appears to be slowing.”
However, jobs numbers for December and January were both revised up to show 12,000 more jobs created than what was previously shown.
Another positive note was that wage growth was the best it has been since 2009. The year-over-year average hourly earnings increased by 3.4 percent. That was above expectations of a 3.2 percent increase.
The ADP private payroll jobs numbers were up 183,000, which was modest at best. But the more important piece of the National Employment Report was seeing January’s private sector numbers be revised up to 300,000 from 213,000. Analysts believe February’s numbers are an indication that job growth, while still strong, may have hit its zenith and will moderate from here on out.
The US Trade Representative’s Office published a statement in the Federal Register confirming previous reports that the US will hold off indefinitely on added tariffs for Chinese goods. The tariffs were initially set to take effect on March 1. This has been seen as a positive sign that a trade deal between the US and China is likely to happen.
While that’s a positive, the trade deficit is another story. The United States’ trade deficit has reached an all-time high under President Trump.
According to a report from the Commerce Department released this week, the trade gap with China went from $375.5 billion in 2017 to $419.2 billion in 2018. The deficit in 2017 was the previous high.
As far as the overall trade deficit, the United States was sitting $891 billion in the hole last year. The report from the Commerce Department shows that the United States is importing at a faster pace than it is exporting, with imports growing by 7.5 percent and exports only growing by 6.3 percent.
Fortune Magazine breaks down the further reasons for the increased trade deficit such as the Federal Reserve increasing rates four times in 2018 thus decreasing the strength of the dollar, and President Trump’s tax cuts forced the government to borrow money from foreign investors to pay for the cut.
A related, and also not surprising, outcome is China’s trade numbers were much weaker in February. The country’s exports fell by more than 20 percent when they were expected to fall by closer to 5 percent. Perhaps the most telling numbers show China’s trade surplus coming in at $4.12 billion. It was expected that the trade surplus would come in above $26 billion.
This is all fuel that is apparently encouraging a resolution to trade talks between the United States and China. According to CNBC, the negotiations could end as early as this month.
US MARKETS REACT TO EUROPEAN DECISION
A couple of key moves by the European Central Bank caused markets to stumble this week, with the Dow dropping more than 200 points while the S&P 500 and Nasdaq both went below their 200-day moving averages.
First, the ECB cut its economic growth forecast from 1.7 percent down to 1.1 percent. Then, the ECB announced economic stimulus measures that will start in September of this year. The program is called targeted longer-term refinancing operations (TLRTO-III) and is meant to stimulate the economy by lowering rates to make it easier for banks to loan money to consumers. This is the third time since 2014 that the ECB has enacted a stimulus program.
The expected slowdown of world economies helped the dollar surge this week while Treasuries fell once again. As of this morning, the benchmark 10-year Treasury note yield was sitting at 2.64 percent pushing mortgage rates to the lowest level this year.
FED’S PATIENCE HAS CONSEQUENCES
While many are cheering the Federal Reserve’s patient stance on rates, there are analysts who aren’t as confident in the decision as it relates to equities. Some wonder if the Fed is being too responsive to market changes, arguing that the asset prices driving markets are largely sentiment-based and can diverge from economic fundamentals.
In a recent newsletter, Goldman Sachs Chief Economist John Hatzius argues against that notion, saying instead it is definitely the responsibility of the Fed to lean against any sentiment-driven changes. He notes, “even fleeting sentiment-driven shifts in financial conditions can have significant economic effects if left unchecked.”
Hatzius, along with BlackRock Global Fixed Income CIO Rick Rieder, also agree that even if we see the same financial conditions come around again, the Fed shouldn’t necessarily revert back to their planned tightening because the underlying issues have also changed. Think how much slower the economy is growing now versus a year ago. The overall conditions are far different.
Rieder also points out that the issue at the end of 2018 was the financing markets weren’t functioning correctly, not the fact that the stock market was taking a dive. He adds that “while supporting equity prices isn’t in the Fed’s mandate, maintaining financial stability, at least implicitly, is.”
Both Hatzius and Rieder believe that growth will continue to stabilize and there is a much lower risk of recession than many people think. Hatzius continues to predict one rate hike in the fourth quarter of 2019 and more potential for rate hikes, not cuts, into 2020.
HOUSING MARKET SEES MORE SIGNS OF REBOUND
New home sales in December went sharply against predictions, rising by 3.7 percent instead of falling by an estimated 8.7 percent. December’s numbers showed a seasonally adjusted 621,000 units sold which was the highest level since May of that same year.
The spring buying season will be interesting to watch as new home sales in January slumped along with home prices. That allowed for more inventory to build up on the market. With rates holding mostly steady, below rates this time a year ago, that could provide a boost for the housing market in the second quarter.
In a press release this week, Freddie Mac Chief Economist Sam Khater said, “In late 2018, mortgage rates rose over a full percentage point from the prior year, which was one of the main reasons that weakness in home sales continued into early 2019. However, the impact of recent lower rates and a strong labor market has led to a rise in purchase mortgage demand as we start the spring home buying season.”
Another impact of lower rates right now is the potential for a thriving refinance market. According to data released on Thursday by Black Knight, there are more than three million homeowners out there who could refinance their mortgage and lower their rates by 0.75 percent. That’s the highest number of potential candidates in more than a year.