Note: I will be travelling in Asia until April 24. Limited equipment and different time zones will limit the frequency and depth of my postings.

February Employment: The Devil Is in the Details

Nonfarm payroll growth beat expectations in February, growing by 275K compared to a consensus forecast for a 200K gain. However, downward revisions to job growth in the prior two months lowered past employment gains by 167K, more than offsetting the upside surprise in February.

Encouragingly, the breadth of job growth across industries remained solid in the month. The employment diffusion index, a measure of job growth breadth, posted its second highest reading in the past 13 months. Payroll gains were lead by health care (+67K), government (+52K), leisure and hospitality (+58K) and construction (+23K).

Average hourly earnings (AHE) posted a benign 0.1% increase in the month, a notable deceleration from the downwardly-revised 0.5% reading in January. That said, annualized AHE growth remains about one percentage point faster than the average pace that prevailed in 2018-2019.

The separate household survey offered additional evidence that the headline beat on nonfarm payrolls masks underlying softening in the labor market. Household measures of employment are more volatile on a month-to-month basis than nonfarm payrolls, but the 184K decline in employment and 343K increase in unemployment helped push the unemployment rate up to 3.9%, the highest reading since January 2022.

Solid labor supply growth in 2023 was instrumental in reducing upward pressure on wage growth without a material weakening in job growth. However, the upward trend in labor force participation through much of last year has showed signs of flattening out in recent months. In February, the labor force participation rate held steady at 62.5%, unchanged from both January 2024 and February 2023.

While hiring has remained robust to the start the year, we continue to see a moderation ahead. Underneath the still decent pace of payroll growth are cautionary signs. Demand for workers around the margin continues to weaken with temporary help services falling for a 23^rd consecutive month.

Average weekly hours rebounded after January’s odd plunge but remain below the 2019 average in a sign businesses are using workers less intensely. The drop in household employment was entirely accounted for by a drop in full time employment, continuing the trend of part-time employment comfortably outpacing full-time employment growth over the past year.

Furthermore, the ranks of permanent job losers moved up again—a signal it is taking longer for laid off workers to find reemployment.

These downbeat elements of today’s report come amid other signs of jobs market softening, such as small business hiring plans falling back to the lowest levels since 2016 and a rising number of layoff announcements according to the Challenger data. We expect to see payroll growth downshift in the months ahead as a result, which is likely to put further downward pressure on wages and weigh on household income and spending.

The upshot is that these signs point to a further moderation in inflation as 2024 progresses. (…) there should be enough progress in the months ahead that the FOMC feels comfortable beginning the process of cutting the fed funds rate at some point in the May-July window.

Note, however, how employment growth has picked up since last October:

_{Source: U.S. Department of Labor and Wells Fargo Economics}

But February data and the revisions to prior-month numbers make job growth running at a slower rate than prior data showed. This is particularly true for service-providing jobs which rose 256k, or 93% of all jobs growth. The last 3 months averaged 239k, still faster than the previous 6 months average of 182k, but much slower than the initial 312k for December-January.

The unemployment rate in service occupations declined from 5.2% to 5.1%.

Focusing on the private sector, February came at +223k vs the 3-m average of 205k and the 6-m and 12-m averages of 177k. There are 2 ways to look at this next chart: the dash line shows stability over the past 12 months, but the arrows show a V-shape trend that could become annoying to certain people.

Declining participation means fewer supply:

Source: U.S. Department of Labor and Wells Fargo Economics

Aggregate weekly payrolls are up 5.3% YoY in February, up from 4.8% in January, suggesting continued strong consumer spending and retail sales ahead.

KKR:

What does this mean for markets? We still think that the path of least resistance in equity and credit markets is higher. As we have been signaling, the technical backdrop for stocks and credit is as favorable as we have seen in decades. Key to our thinking is that buybacks are surging and could reach $1 trillion in the SPX this year, compared to $500 billion in 2020.

At the same time, there is no issuance of High Yield, Leverage Loans, and IPOs. In fact, net issuance is at its lowest level since April 2009.

On the economic front, the big news is that the Fed is not going to be tightening. Frankly, given the technical backdrop, we don’t need the Fed to ease to have stronger global capital markets. In terms of key themes, we remain very constructive on productivity investments, especially as it relates to automation. We also still favor the intersection of surging data demand with the backdrop of limited power supply and energy transmission. Finally, we are bullish on the ‘security of everything’, including energy, data, transportation, cyber, and water/food.

That said, KKR adds a caveat:

Interestingly, the unemployment rate is now just 10 basis points below the four percent level that would trigger the so-called ‘Sahm rule,’ which signals nearby recession risk when the unemployment rate rises 50 basis points on a sustained basis vs. recent lows (3.5% in the case of this cycle). We remain skeptical of a hard landing narrative, though we do acknowledge the potential for a mild technical recession at some point in coming quarters.

Labor’s “leverage ratio”:

Data: Analysis of Bureau of Labor Statistics by Upjohn Institute; Chart: Axios Visuals

This “labor leverage ratio” is a measure developed by economist Aaron Sojourner, a senior researcher at Upjohn Institute. He uses the JOLTS data from the Labor Department that tracks job turnover — and separates “quits” from “discharges,” or firings and layoffs.

• When more workers are quitting than getting let go, it’s a sign of strong employee bargaining power. Workers feel confident that they have better options (or have already found one).
• When more workers are let go than quit voluntarily — that’s no bueno, a sign that companies are cutting staff and workers aren’t seeing much opportunity. As you can see from the chart above, the number falls during recessions.

The leverage ratio surged to record levels during the Great Resignation — when quit rates were super high.

• Worker leverage has come down from those heady days, but it’s still higher than at any time prior to the pandemic.
• The still-elevated labor leverage helps explain the record levels of strikes.

Labor leverage is still very high in the industries that are doing the most hiring — accommodation and food services (4.9 quits per 1 firing), leisure and hospitality (3.85 to 1), health care (3.79 to 1), and retail (3.48 to 1).

Will the Moderation in Wage Growth Continue?

In this post, we [NY Fed] use our own measure of wage growth persistence – called Trend Wage Inflation (TWIn in short) – to look at these questions. Our main finding is that, after a rapid decline from 7 percent at its peak in late 2021 to around 5 percent in early 2023, TWin has changed little in recent months, indicating that the moderation in nominal wage growth may have stalled. We also show that our measure of trend wage inflation and labor market tightness comove very closely. Hence, the recent behavior of TWIn is consistent with a still-tight labor market. (…)

Importantly, we estimate the persistence of unobserved monthly wage growth from year-over-year wage changes. Our measure therefore tends to lead year-over-year wage changes, which are influenced by wages in the past twelve months by construction. This produces a timely measure of wage growth, useful to detect turning points in real time. 

The chart below shows our estimated trend (solid blue line) together with the realized twelve-month wage growth defined as described above (black line). The shaded area around the trend is a 68 percent confidence band that captures the uncertainty associated with the estimates. We highlight two main takeaways.

Wage Growth as Measured by TWIn Peaked in Late 2021, Then Moderated

Sources: Bureau of Labor Statistics; authors’ estimates. 

(…) The moderation in TWIn flattened out mid-2023 and has remained stagnant since. However, the shaded areas still illustrate considerable uncertainty. The recent slowdown estimated by our model indicates it cannot be ruled out that wage growth will continue to be markedly higher in the near-term than it was before the pandemic. (…)

Our filtering approach to time aggregation delivers a measure of wage inflation that is timelier than alternatives. We show this in the chart below, which compares the recent evolution of our measure (blue), the employment cost index (red), and the Atlanta Fed Wage Growth Tracker (gold). Our measure of Trend Wage Inflation always leads alternative measures of wage growth: importantly, it is better aligned to labor market tightness. We illustrate this point in the chart where the grey line denotes labor market tightness, defined as job openings divided by the labor force.

TWIn and Labor Market Tightness Tend to Move in Tandem

Sources: Bureau of Labor Statistics; authors’ estimates.

Our measure of Trend Wage Inflation therefore represents an additional signal on the current state of the labor market. When labor market conditions are tight – that is, when there are a lot of vacant jobs relative to job seekers – wage growth is high, as firms need to post higher wages to attract and retain workers. (…)

What are the implications of persistent nominal wage growth? First and foremost, TWIn adds to other indicators pointing to a still-tight labor market. Many labor market indicators, such as job vacancies or the rate at which unemployed workers find jobs, are still at or above their pre-pandemic level.

In addition, persistently elevated nominal wage growth may have repercussions for price inflation, although it may also be the result of wages in nominal terms catching up with previously high price inflation. Our approach offers a way to look under the hood of short-run, noisy fluctuations in wage growth. While considerable uncertainty remains, our estimates point to persistent wage growth that is still above its pre-pandemic levels.

BTW:

Nonfarm productivity was unrevised in Q4 at +3.2% (qoq ar) and the year-over-year rate was revised down 0.1pp to +2.6%. Since 2019Q4, labor productivity has grown at an annualized rate of 1.6%, roughly in line with the pre-pandemic trend.

Unit labor costs—compensation divided by output—were revised down by 0.1pp in Q4 to +0.4% (qoq ar), and the year-over-year rate was revised up by 0.1pp to +2.4%.

Compensation per hour was unrevised at +3.7% in Q4 (qoq ar) but the year-on-year rate was revised up by 0.1pp to +5.1%. Our wage tracker now stands at 4.7% year-over-year in Q4 and 4.5% in Q3. (Goldman Sachs)

Canada: Economy adds 41,000 jobs in February, but employment gains lag population growth

Statistics Canada also reported on Friday that the unemployment rate ticked up to 5.8 per cent.

Job gains, which were driven by full-time employment, were spread across several industries in the services-producing sector, with the strongest growth in accommodation and food services.

The February increase comes after similar stronger-than-expected job gains in January. (…)

Over the past year, Canada’s population grew by 1,031,200 people while employment rose by 368,000 jobs. (…)

The federal agency noted Friday that the employment rate – which represents the proportion of Canadians aged 15 years and older who are employed – fell for a fifth consecutive month in February.

That’s the longest period of consecutive decreases since the six-month period ending in April, 2009. (…)

Meanwhile, wages continue to grow rapidly in Canada. Average hourly wages were up 5 per cent from a year ago, down from a rate of 5.3 per cent in January. (…)

NBF shows that the Canadian labor market is rather weak:

Particularly private employment:

China’s Consumer Prices Rise for First Time Since August

The consumer price index increased 0.7% in February from a year earlier, according to the National Bureau of Statistics on Saturday, rebounding from the biggest drop since 2009 in January. The gain was higher than analysts’ estimates of a 0.3% gain in a Bloomberg survey.

Producer prices fell 2.7%, continuing the longest string of declines since 2016.

A boom in travel during the holidays drove most of the growth in consumer prices, according to Dong Lijuan, chief statistician at the NBS. The decline in producer prices is in part due to slower industrial activities during the holiday period, Dong said.

Consumer prices on a core basis, which strips out volatile food and energy costs, rose 1.2% from the prior year, the government data showed. That’s the highest in more than two years and compares with a just 0.4% gain in January.

EARNINGS WATCH

From LSEG/IBES:

494 companies in the S&P 500 Index have reported earnings for Q4 2023. Of these companies, 76.3 reported earnings above analyst expectations and 18.6% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 76% of companies beat the estimates and 19% missed estimates.

In aggregate, companies are reporting earnings that are 6.3% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.2% and the average surprise factor over the prior four quarters of 5.7%.

Of these companies, 63.4% reported revenue above analyst expectations and 36.6% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 66% of companies beat the estimates and 34% missed estimates.

In aggregate, companies are reporting revenues that are 1.3% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.6%.

The estimated earnings growth rate for the S&P 500 for 23Q4 is 10.0%. If the energy sector is excluded, the growth
rate improves to 13.6%.

The estimated revenue growth rate for the S&P 500 for 23Q4 is 3.7%. If the energy sector is excluded, the growth rate improves to 5.1%.

The estimated earnings growth rate for the S&P 500 for 24Q1 is 5.3%. If the energy sector is excluded, the growth rate improves to 8.3%.

Trailing earnings are now $222.97. Full year 2024: $243.36e. Full year 2025: $276.00

There were only 2 pre-announcements last week, 1 positive and 1 in-line.

FYI:

Ed Yardeni: https://youtu.be/S4OjgWd-rxU?si=hwmuCXjSvPeaA1La

Earnings Yield vs Cash Rate: This one is interesting because in its simplicity is relative efficacy. Buy when it’s high, reduce exposure when it’s low/negative. And it makes intuitive sense (higher cash rates = higher opportunity cost to holding risky equities, also higher cash rates = tighter monetary policy; headwind to economy, macro downside risks). Interesting then to note that all 3 measures of the earnings yield are now lower than the 3-month T-Bill rate. (Callum Thomas)

Source: 16 Different Stockmarket Valuation Indicators

US Consumer Borrowing Exceeds Forecast on Non-Revolving Credit

Total credit rose $19.5 billion after a revised $919 million gain in December, according to Federal Reserve data released Thursday. The median estimate in a Bloomberg survey of economists called for a $10 billion increase.

Non-revolving credit, such as loans for vehicle purchases and school tuition, increased $11.1 billion. Revolving credit, which includes credit cards, climbed $8.4 billion in January.

Simply back on trend (as of Feb. 21):

Powell: Fed Is ‘Not Far’ From Gaining Confidence Needed to Cut Rates The Fed chair said that rates were far above levels that might be anticipated during periods of mild inflation and moderate growth.

Powell repeated his view Thursday that the central bank was looking for greater confidence that inflation was returning to its 2% target, but he went one step further during his second day of testimony on Capitol Hill by qualifying how soon the Fed might get there.

“When we do get that confidence, and we’re not far from it, it will be appropriate to dial back” interest rates to avoid tipping the economy into a recession, he said.

Powell had signaled earlier that the Fed wasn’t considering a rate cut at its next meeting, March 19-20, which has shifted attention to whether the central bank might be in a position to cut rates around the middle of the year. (…)

Rates are “well above neutral,” he said. “We’re far from neutral now.” (…)

But some officials have voiced doubts recently, given the strength of economic activity despite higher interest rates, over whether the neutral rate might be higher right now, diluting the impact of tighter policy.

“We thought we had two feet on the brakes, but maybe we have only one foot on the brakes,” said Neel Kashkari, president of the Minneapolis Fed, at The Wall Street Journal’s CFO Network Summit on Wednesday.

ECB Holds Rates as Central Bankers Weigh Timing of Cuts Officials signaled they would likely wait until June to be confident enough to start cutting rates, as policymakers around the world consider the risk of moving too fast.

At a news conference on Thursday, ECB President Christine Lagarde surprised investors by signaling that officials expect to gather fresh data through June before deciding on any rate cuts, pushing back against some market expectations of an earlier April move.

While inflation in the eurozone is heading in the right direction, “we clearly need more evidence, more data,” Lagarde said. “We will know a little more in April but we will know a lot more in June.” (…)

The bank also published fresh economic forecasts that signaled the possibility of earlier rate cuts. Its staff now expects inflation to average 2.3% this year and 2% next year, compared with December forecasts of 2.7% and 2.1%, respectively. It also expects economic growth of 0.6% for the eurozone this year compared with a December forecast of 0.8%. (…)

State of the Union: Biden vows to raise taxes on wealthy, corporations

U.S. President Joe Biden vowed Thursday to raise taxes on wealthy Americans and large companies, announcing plans in his State of the Union address to hike corporate minimum taxes and cut deductions for executive pay and corporate jets.

Biden previewed the steps that will be part of a proposed fiscal 2025 budget released next week that aims to decrease the federal deficit by $3 trillion over 10 years while cutting taxes for low-income Americans and aiding middle-class homebuyers.

He proposed a new tax credit that would help Americans buy first homes or trade up to larger ones by providing the equivalent of $400 per month for the next two years to offset high mortgage rates. Biden also called for the elimination of title insurance on refinancings of federally backed mortgages, a move that can save homeowners $1,000 or more. (…)

Most of Biden’s tax proposals have little chance of enactment unless Democrats win strong majorities in both chambers of Congress in November, a sweep that polls suggest is unlikely.

In addition to previous calls to raise the corporate income tax rate to 28% from 21% currently, he called for an increase to “at least 21%” for the 15% corporate minimum tax that he won as part of 2022 clean energy legislation. The tax applies to firms reporting over $1 billion in profits.

Biden administration officials also told reporters he wants to quadruple the 1% tax on corporate stock buybacks approved in 2022. (…)

ABOUT CONCENTRATION

Excerpts from a Goldman Sachs analysis.

In contrast with record concentration, the valuations of the largest stocks remain well below previous highs. Today’s 10 largest stocks trade at a collective forward P/E multiple of 25x today, substantially below the peak valuations carried by the largest stocks in 2000, 2020, or even in the middle of 2023.

Likewise, the 35% valuation premium carried by the largest stocks relative to the rest of the S&P 500 ranks in the 70th percentile since 1985, well below the 80% premium registered in the middle of 2023 or the 100% premium carried in 2000. (…)

The degree of market cap concentration today is higher than the peak reached in either of the episodes of 2000 and 1973. However, compared with the peak of the Tech Bubble, the largest stocks today carry much lower multiples. The valuations of the largest stocks today are similar to those carried by the largest stocks in 1973. However, today’s leaders generally have higher profit margins and returns on equity than the top stocks in either 1973 or 2000. (…)

While the episodes in 1973 and 2000 preceded large market downturns, equities continued to rally following most other instances of extreme concentration. The relatively recent episodes of elevated concentration that occurred in 2009 and 2020, for example, coincided with sharp positive shifts in the macroeconomic outlook. Like those episodes, peak concentration in 1932 marked the bottom of a major economic downturn, with the S&P 500 rising sharply in the subsequent months.

There are some clear similarities between the macro backdrops of the episodes in 1973 and 2000 and conditions today, with unemployment low and concentration rising alongside strong equity market returns. In each of those episodes, the peak of equity market concentration also marked the peak of a bull market, and the economy entered recession with the subsequent year.

However, the 1964 experience shows that an ongoing bull market can continue to move higher even as market concentration declines. Like in 1973 and 2000, the peak of equity market concentration in 1964 coincided with low unemployment and a strong equity market backdrop. But after market concentration peaked in 1964, both share prices and the US economy remained healthy for an extended period. (…)

Today’s combination of elevated market concentration and recent Momentum outperformance has furthered investor concern that a sharp drop in the largest stocks will lead to a market downturn. But history shows that “catch up” episodes are much more common than “catch down” experiences. (…) While the performance of the high Momentum market leaders during these reversals was mixed, in every instance the low Momentum laggards appreciated in absolute terms.

Most of the sharpest Momentum reversals occurred following market sell-offs. As the S&P 500 declined, investors fled the stocks perceived to be most vulnerable to the cause of the market downturn and crowded in stocks perceived to be safe havens, boosting the long/short performance of Momentum. When the outlook improved and the market rebounded, investors then rotated out of those leaders and back to laggards. Of the 26 episodes, 17 took place during or within 3 months of a recession. (…)

Momentum feeds itself from the macro backdrop and profit trends. In the chart below, the black line provides a valuation reading but look also at the yellow line which plots the “Rule of 20 Fair Value”. It shows where the S&P 500 would be at a R20 P/E of 20, its long-term median.

The trend in the yellow line is dictated by profit growth and inflation. Trailing profits are unchanged since October 2022, but core inflation dropped from 6.6% to 3.9%. Profits are up 3.7% from their July 2023 trough and inflation is down 1 pp since.

BUYBACKS

While share buyback activity remains well below the levels seen last year when excluding Chevron’s massive buyback from the previous year’s data, the current figures align more closely with last year’s trend. (The Daily Shot)

Source: Goldman Sachs; @MikeZaccardi

The above chart shows “announcements”. Ed Yardeni plots actual buybacks on the second pane through Q4’23. Dividends are now about equal with buybacks, and much less volatile.

But nobody cares. The S&P 500 dividend yield is 1.35%. Since 1968, it only got lower in mid-2000 (1.1% in August), at the market peak.

(gurufocus)