Employment Report Emboldens the Bulls

February’s Employment Report provided investors with confirmation that though we have continued to see robust employment growth thus far in 2018, inflation has remained in check. That combination fueled enthusiasm for expectations of continued economic expansion while also keeping fears of hotter than modeled inflation and the subsequent rise in rates at bay.

The principle takeaways from February’s Employment Report:

-Well above Bloomberg consensus job growth at 313K versus 205K.
-Revision higher for January’s non-farm payrolls to 239k from the prior 200k.
-The unemployment rate dropped to 4% from 4.1%
-The manufacturing sector continued to contribute to job growth.
-January’s manufacturing payrolls were revised up to 25k from 15k
-February’s manufacturing payrolls jumped to 31k.
-Average hourly Y/Y earnings came in at a cooler than expected 2.6%.
-Bloomberg consensus had been calling for 2.9%.
-Record low unemployment results for both African Americans and Hispanics

Given all the themes at work in the market currently and given the skittishness that was clearly present in markets leading up to Friday’s February Employment Report, the report was exactly what investors needed to see in order to re-engage the market from the long side. At a minimum, Friday’s price action in US equities did reset the landscape in a meaningfully positive way.

Last week was another instance of headline-fueled misdirection, highlighted by the resignation of President Trump’s Senior Economic Advisor Gary Cohn, the official signing of the previously announced tariffs on steel and aluminum, the announcement of President Trump’s willingness to meet with North Korea’s leader Kim Jong-un and a blockbuster February Employment Report. Net/net, though US equity prices did wilt mid-week, confirming the negative bias that we closed out the previous week with, they finished on a very positive note on Friday. Additionally and importantly, interest rates on US Treasuries remained relatively range-bound through the week. In fact, the 10-year yield closed out the week unchanged at 2.89%.

As discussed last week, my cautious outlook for US equities over the near term was largely informed by the technical weakness, present in markets, combined with the shared apprehension that the February Employment Report may fuel further weakness in treasuries and equities – if inflation was running at a hotter rate than consensus was calling for. As I have argued over the past four weeks, my sense is that inflation has not yet warranted any additional run-up in yields. We received that confirmation on Friday.

Flickr photo: Noel Reynolds

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