Quick Takes
- Last week’s economic data was mostly disappointing, but on Friday morning, the Labor Department reported an unexpectedly strong addition of 272,000 new Nonfarm Payrolls in May, as well as higher than expected Wage growth.
- The strong jobs data caused yields to spike and bond prices to drop on Friday, but the Bloomberg U.S. Aggregate Bond Index still finished the week with a +0.44% gain. Likewise, the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) dropped on Friday but held onto gains for the week.
- The S&P 500 Index and Nasdaq Composite were trading at all-time highs around noon on Friday before pulling back in the afternoon and finishing the day down slightly. Still, for the week, the S&P 500 was up +1.3%, and the Nasdaq rose +2.4%. After being the leader the prior week, last week the small-cap Russell 2000 Index was the laggard, falling -2.1%.
Growth rebounds, bond yields fall, and job growth surprises
Going into Friday, last week’s economic data had been mostly disappointing, falling short of Wall Street consensus forecasts for most reports with the exception of service sector economic activity. That had markets more focused on how a weakening economy may mean better prospects for potential rate cuts by the Federal Reserve (the Fed). But hopes for the Fed to cut rates soon were dashed Friday morning when the Labor Department reported that the U.S. economy added 272,000 new Nonfarm Payrolls in May. That far exceeded economists’ expectations for 180,000, and the Wall Street ‘whisper number’ was even lower. Bond yields spiked higher on the news and traded higher for most of the day, with the 10-year U.S. Treasury yield finishing the week at 4.43%. That’s actually down -6 basis points for the week, but the yield was under 4.30% for most of Thursday and Friday morning until the jobs data was released, and it spiked to over 4.40%. For the shorter 2-year U.S. Treasury yield, it ticked up +1 basis point on the week to finish at 4.89%. It, too, was trading much lower most of Thursday and Friday morning, under 4.75%, but surged to over 4.85% on the surprise jobs number and ended the week at 4.89%, its highest close since May 30. Despite falling -0.81% on Friday’s yield surge, the Bloomberg U.S. Aggregate Bond Index finished the week with a +0.44% gain. Likewise, the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) dropped -0.69% on Friday but held onto a +0.20% gain for the week.
The extent that the May Employment Report slammed the door on hopes of a July rate cut was plainly evident in the futures market on Friday. Fed-funds futures fell to just an 8.9% chance that the Fed will cut interest rates by the July meeting, according to the CME FedWatch Tool. That’s down from 21.7% on Thursday. Odds of no rate cuts before the 2024 election were up to 51% from 31.3% on Thursday.
Stocks weren’t quite as bothered by the hot jobs report and the drop in rate cut expectations. The S&P 500 Index and Nasdaq Composite were trading at all-time highs around noon time on Friday before pulling back in the afternoon and finishing the day down slightly. Still, for the week, the S&P 500 was up +1.3%, and the Nasdaq rose +2.4% to lead U.S. indices. After being the leader the prior week, last week the small-cap Russell 2000 Index was the laggard, falling -2.1%.
Overseas stocks also rallied, with developed market international stocks (as measured by the MSCI EAFE Index) climbing +0.6% for the week, while the MSCI Emerging Markets Index jumped +2.3%. Emerging markets were down each of the prior two weeks, trailing developed markets, so it was due for some catching up. Though the Fed was seen as less likely to cut rates in the near future in the U.S., the European Central Bank cut its policy rates by -25 basis points on Thursday, marking its first cut in almost five years. It’s the third major central bank to embark on a new easing cycle, following the Swiss National Bank‘s move in March and the Bank of Canada‘s cut on Wednesday.
Chart of the Week
The monthly Employment Situation report showed much stronger than expected hiring in May. On Friday, the Labor Department reported that U.S. employers added 272,000 new Non-Farm Payrolls (NFP) during the month, far higher than Wall Street expectations for 180,000, though the prior month was revised lower to 165,000 from the originally reported 175,000. Job gains were concentrated in Health Care, Government, and Leisure and Hospitality, consistent with recent trends. The three sectors, respectively, added 68,000, 43,000, and 42,000 jobs and accounted for more than half the payrolls added in the month. Under the surface, there were some signs for concern. The Unemployment Rate unexpectedly edged back up to 4.0% from 3.9% the prior month where it was expected to stay. That ends a 27 month streak below 4%, which was the longest such streak since the 1960s. Inflation watchers noted that Average Hourly Earnings rose +0.4% for the month, above expectations for +0.3% and the prior month’s +0.2% rate. Year-over-year, Average Hourly Earnings accelerated to +4.1% from +3.9%, which is where it was expected to remain. The Fed would like to see wage growth slow to around +3% annually or less, a level it sees as consistent with low inflation. Average Weekly Hours held steady at 34.3, as expected. Labor-Force Participation slowed to 62.5% from 62.7%, where it was expected to stay. The Fed has been wary of persistently stubborn inflation and wants to see signs of slower economic growth before it cuts rates. The strong job creation in May and higher-than-expected wage gains suggests the economy is still fairly strong and, therefore, likely means that Fed rate cuts are going to have to wait.
A much-better-than-expected 272,000 jobs added in May
Monthly job creation in the U.S. (Jan 2022 – May 2024)
Source: Bureau of Labor Statistics via FRED, CNBC.
Economic Review
- The Institute for Supply Management’s (ISM) Manufacturing PMI fell further in May, hitting a three-month low of 48.7%. That was shy of expectations for a 49.6% reading and down from an unrevised 49.2% the prior month. The manufacturing PMI has been stuck in contraction territory for 18 of the last 19 months (levels below 50 indicate contracting economic activity). New business plunged as the key New Orders component sank to 45.4% from 49.1% the prior month, which is the lowest level since hitting 42.9% one year ago. The Production component fell to 50.2% from 51.3%. On the positive side, the Employment component improved to 51.1% from 48.6%, and the Prices Paid index, a measure of inflation, fell to 57.0% from 60.9%.
- Contrary to the manufacturing sector, the Institute for Supply Management’s (ISM) Services PMI rebounded solidly in May to 53.8% from 49.4% the prior month. That was above expectations for 51.0%. The unexpectedly strong rebound comes after April’s surprisingly weak reading, which was the lowest level since December 2022 and broke a streak of 15 consecutive months of expansion. The New Orders index rose to 54.1% from 52.2%. The Employment index contracted again at 47.1%, its fourth straight month in contraction, but it was an improvement from 45.9% the prior month. The Production index rebounded strongly to 61.2% from 50.9%. On the services inflation front, the Prices Paid index cooled a bit to 58.1% from 59.2%. The services sector makes up more than two-thirds of economic activity, so the report signaled the prior month’s weakness was likely temporary, and service sector economic activity is expected to improve in the second half of the year.
- In contrast to the bleaker ISM Manufacturing PMI, the final reading of the S&P Global U.S. Manufacturing PMI for May rose to 51.3, beating expectations for 50.9 and the 50.0 neutral mark in April. The reading signaled a modest improvement in the health of the manufacturing sector, the fourth in the past five months. May saw a renewed but marginal expansion in New Orders, following a modest reduction in April. Employment increased for the fifth consecutive month and at the fastest pace since July 2023. A rise in Input Purchasing activity in May was the first in three months but only marginal. Inventories of finished goods, on the other hand, increased for the second month running, and to a larger extent than in April. The rate of Input Cost inflation continued to accelerate, quickening for the third consecutive month to the fastest since April 2023. The latest increase was also sharper than the pre-pandemic average. With Input Costs increasing sharply, firms also registered a rise in Selling Prices, although here the pace of inflation eased from April to a five-month low.
- Like the ISM data, the competing S&P Global U.S. Services PMI rebounded sharply in May, up to 54.8 from 51.3 the prior month. The increase in business activity reflected a renewed expansion of new orders, which rose modestly in May following the first reduction in six months during April. However, new export orders decreased for the fourth month running in May. Employment decreased further in May, as higher staff costs were again the key factor behind a sharp rise in overall input prices as wages were raised. The pace of input cost inflation quickened from April and was sharper than the prepandemic average. Likewise, a faster increase in selling prices was recorded in May as companies raised their prices at a solid pace, extending the current sequence of inflation to four years.
- U.S. Factory Orders rose in April, up +0.7% for the month, above expectations for +0.6% and matching the prior month, though that was revised sharply lower from the originally reported +1.6%. Factory Orders Ex-Transportation were up +0.7%, more than expectations for +0.5% and up +0.4% the prior month (revised down from +0.5%). Meanwhile, Durable Goods Orders were up +0.6%, a tick below expectations for +0.7%, which was also the prior month’s level. The important Core Capital Goods Orders (Nondefense Capital Goods Excluding Aircraft), a proxy for business spending, were up a mere +0.2% versus +0.3% the prior month, which is where they were expected to come in. Shipments of Core Capital Goods Orders, which feeds into Gross Domestic Product (GDP), were flat for the month versus a +0.4% rise the prior month.
- U.S. Consumer Credit rose by $6.4 billion in April, far below expectations for $10.0 billion, though it was up from a -1.1 billion decline the prior month (which was revised sharply lower from $6.3 billion). That’s a +1.5% annual growth rate, up from the -0.3% annualized growth rate the prior month. Growth for revolving credit, such as credit cards, fell by -0.4% after a +1.5% rise prior month. That was the first monthly decline since April 2021. Nonrevolving credit, which tends to be much less volatile than revolving credit and includes auto as well as school loans, increased +2.2% following the prior month’s -0.9% drop. The data from the Federal Reserve is not adjusted for inflation and does not include mortgage loans, which is the largest category of household debt.
- The Census Bureau reported Wholesale Inventories for April rose just +0.1%, up from -0.4% the prior month, but short of expectations to come in at +0.2%. Year-over-Year (YoY) inventories were down -1.6%, the ninth negative YoY reading in a row. Inventories are goods produced for sale that have not been sold yet. The depletion of private inventories subtracted from the U.S. GDP in the first quarter. Inventories have only added to GDP growth once in the past five quarters. Wholesale Trade Sales were also up +0.1%, an improvement from the -1.3% the previous month but well short of an expected +0.5% rise. Wholesale inventories data isn’t adjusted for inflation. Year-over-Year Wholesale Trade Sales were up +1.4%. The Inventory-to-Sales Ratio was unchanged at 1.35 months and down from 1.39 a year ago. The ratio reflects how long it would take a company to sell all the goods sitting on warehouse shelves. The lower readings vs. last year suggests it’s taking less time for companies to sell their goods.
- The April Job Openings Labor Turnover Survey (JOLTS) showed Job Openings sink to 8.059 million, the lowest level in three years and down from 8.355 million the prior month (revised down from 8.488 million). That was below expectations for 8.350 million and far off the peak of 12 million in 2022. Job openings are an indication of the health of the labor market and the broader U.S. economy. Job openings decreased in health care and social assistance and in state and local government education but increased in private educational services. The ratio of Job Openings to Unemployed Workers slipped to 1.24 from 1.32, still above prepandemic levels of 1.2 but down from a peak of 2.0 in 2022. The Fed is watching the ratio closely and wants to see it fall back to prepandemic norms. The Number of People Quitting Jobs rose a bit to 3.5 million from 3.4 million, and far off the record, of 4.5 million job quitters reached in late 2021. The Quits Rate held steady at 2.2%. People tend to quit less often when the economy softens, and jobs become harder to find. The Number of People Hired in the month inched up to 5.6 million from 5.5 million the month before, which was the smallest increase since the pandemic in early 2020. The Hiring Rate held steady at 3.9%.
- U.S. Household Net Worth surged to another record high in the first quarter, fueled by stock prices that are also near all-time highs, as well as modest gains in real estate equity. Wealth was up $5.1 trillion to $161 trillion following a $4.0 trillion gain in the fourth quarter (revised down from $4.8 trillion). Household Net Worth increased on a year-over-year basis by +8.8% after a +7.6% gain in the third quarter (revised down from +8.0%). Housing wealth fully recovered from the prior quarter’s decline as the components of wealth tied to the stock market rose sharply. Household liabilities rose by the smallest amount in a year.
- According to the U.S. Bureau of Economic Analysis, the U.S. Trade Deficit surged by almost +9% in April to an 18-month high because of an increase in imports–a sign of solid demand in a growing economy. The deficit expanded to -74.6 billion from -$68.6 billion the prior month (which was revised wider from the originally reported -$69.4 billion). That was narrower than the expected -$76.5 billion. Smaller trade deficits help contribute to economic growth, while larger deficits inhibit growth. The increase in the deficit in April was largely tied to greater demand for cars and industrial supplies, which would be a positive sign for the U.S. economy. Imports rose +2.4% to $338.2 billion in April, which is the highest level since imports set a record in mid-2022. Exports rose +0.8% to $263.7 billion, just shy of an all-time high. The U.S. shipped more pharmaceutical drugs.
- The Commerce Department reported that Construction Spending fell for the second straight month in April, down -0.1%, far short of expectations for an increase of +0.2% and below the prior month’s unrevised -0.2% decline. Over the past year, construction spending is up +10.0%, versus an annual rate of +9.6% the previous month. Total Private Construction was down -0.1% compared to -0.6% the prior month, and total Public Construction was down -0.2% versus +1.1% the prior month. Total Residential Spending increased +0.1% month-over-month while total Nonresidential Spending fell -0.3% month-over-month. The report shows that nonresidential spending was down in both private and public construction markets, which will be a drag on Q2 GDP growth.
- Weekly MBA Mortgage Applications sank for a second straight week, falling -5.2% for the week ended May 31, following the prior week’s -5.7% drop. The Purchase Index was down -4.4% following a -1.1% decrease the prior week. The Refinance Index fell -6.8% following the -13.6% plunge the prior week, which was the worst week since December 29. The average 30-Year Mortgage Rate inched up to 7.07%, compared to 7.05% the week before. According to the Mortgage Banker Association, the 30-year fixed-rate mortgage has now been above 7% since the end of March.
- Weekly Initial Jobless Claims rose +3,000 to 219,000 for the week ended May 25, above expectations for 217,000. The prior week was revised up to 216,000 from 215,0000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose to 1,791,000 in the week ended May 18, below consensus estimates for 1,791,000. Last week’s reading of 1,794,000 was revised down to 1,787,000.
The Week Ahead
Inflation data dominates this week’s economic releases. The Bureau of Labor Statistics will report the Consumer Price Index (CPI) for May before the bell on Wednesday morning and the Producer Price Index (PPI) on Thursday morning. Any significantly hotter or cooler inflation numbers could bring some volatility as investors adjust their expectations for rate cuts, especially in bonds. A decision on monetary policy is due on Wednesday afternoon, followed by a press conference with Fed Chairman Jerome Powell. Markets are overwhelmingly pricing in no chance of a change in the federal-funds rate target, currently set at 5.25% to 5.5%. Other closely watched central banks will be the Bank of Japan, which publishes its monetary-policy decision on Friday. It is expected to taper bond buying and keep interest rates unchanged.
Not many companies are left to report earnings, but Adobe, Broadcom, and Oracle are on the calendar. Other notable events during the week include Apple’s annual developers’ conference on Monday and Tesla’s shareholder meeting on Thursday, with twelve proposals to be voted on, including the high-profile proposal of ratifying CEO Elon Musk‘s pay package that was previously approved at a special meeting in 2018.
Did You Know?
DON’T JUST LISTEN TO ANYONE – Over half of Gen Z and Millennial investors rely on social media for investing information, but a study from the Swiss Finance Institute found that 56% of ‘fin-fluencers’ show “negative skill” and underperform peers by -2.3% monthly (Source: Investment News, MFS).
WEAK BREADTH – As of May 30, even though the S&P 500 was trading +1.7% above its 50-day moving average (DMA), just 36% of the index’s members were trading above their 50-DMAs. This indicator is suggestive of weak market breadth (Source: Bespoke Investment Group, MFS).
RECORD AIR TRAVEL – TSA screened 2.951 million travelers at U.S. airports on the Friday before Memorial Day Weekend (5/24), surpassing the prior record of 2.909 million from 11/26/23. Of the ten busiest travel days on record, five occurred in May (Source: TSA, MFS).
This Week in History
A DEBT IS BORN – On June 3, 1775, the national debt of the U.S. was born, as the Continental Congress authorized a loan of 6 million pounds sterling to buy gunpowder (Source: The Wall Street Journal).
Asset Class Performance
Source: Bloomberg.
Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.