Hiring Still Strong, But Some Flab Surfaces in Downward Revisions to Recent Jobs

 | May 05, 2023 09:38AM ET

(Friday market open) Despite recession talk, the U.S. labor market continues to flex its muscle, with 253,000 jobs added in April. However, downward revisions to the last two jobs report mean the labor market might not be quite as well-toned as today’s number suggests.

Today’s April Nonfarm Payrolls report from the Bureau of Labor Statistics showed job growth well above analysts’ expectations for around 180,000 and up sharply from a downwardly revised 165,000 in March. In fact, the government now says February and March jobs growth was a combined 149,000 less than it previously reported. This could ease worries that today’s higher number might lead the Federal Reserve to consider more interest rate hikes.

Major indexes enter Friday in a four-day tailspin following this week’s Federal Open Market Committee (FOMC) rate hike, banking system worries, and rising volatility. The Dow Jones Industrial Average® ($DJI) turned negative for 2023 yesterday, though the S&P 500® index (SPX) and the Nasdaq 100® (NDX) remain in positive territory for now. Regional bank shares rebounded a bit this morning after getting crushed yesterday.

Stock futures generally kept their earlier premarket gains after the jobs report, perhaps a sign that investors are becoming more worried about a possible recession than they are about the Fed. This report, which beat analysts’ expectations as every jobs report has over the last year, suggests continued resilience in the economy. However, services-related businesses, not goods-producing ones, dominated jobs growth.

h2 Morning rush/h2
  • The 10-year Treasury note yield (TNX) jumped 5 basis points to 3.4% ahead of the jobs report.
  • The U.S. Dollar Index ($DXY) inched up to 101.36.
  • The Cboe Volatility Index® (VIX) futures eased to 18.94 from yesterday’s nearly one-month high.
  • WTI Crude Oil (/CL) climbed to $70.48 per barrel.
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Treasury yields and crude both clawed back from recent losses early Friday—often a sign of improved investor sentiment about the economy. These remain helpful barometers.

h2 Just In/h2

Today’s robust jobs report comes two days after the latest Fed rate hike, which increased interest rates to more than 5%—their highest level in 16 years. The Fed’s been trying to slow economic growth, but the jobs market continues to gallop ahead. This raises the question of whether “good news is bad news.” Will this data cause the Fed to hike again next month?

For now, the market is reacting positively to the solid economic news. Beyond the headline number and revisions to the prior two reports, things pretty much stayed in place. Labor market participation remained at 62.6%—about where it was before the pandemic. Unemployment of 3.4% was little changed from 3.5% in March and remains at historic lows.

Also, a sharp downward revision to March jobs growth is catching some eyes this morning. It now stands at 165,000, down from the original 236,000.

One worry on the inflation front is a 0.5% rise in hourly wages, which is above the 0.3% analysts had expected. Sectors that added the most jobs in April include business and professional services, health care, leisure and hospitality, and government. Manufacturing and construction employment were little changed.

h2 Stocks in the Spotlight/h2

Apple (NASDAQ:AAPL) (AAPL) beat analysts’ estimates for earnings per share (EPS) and revenue in its quarterly report released late yesterday, and the stock initially popped about 2%.

  • The positive market response might have had more to do with AAPL’s announcement of a dividend increase and a $90 billion stock buyback than with quarterly results, which, with some exceptions, weren’t incredibly powerful and surpassed a relatively low bar from Wall Street. A miss of analysts’ expectations for the Services unit disappointed, but iPhone sales were a hit and helped buoy the quarter. Overall, it was the second straight quarter of declining year-over-year revenue for the tech giant.
  • iPhone sales beat analysts’ expectations by more than $2 billion, though analysts say some of that may reflect pull-through from a weak holiday quarter as China reopened. In other words, the growth could be due to one-time circumstances.
  • Services sales rose, but growth was below 6% in that key category for AAPL’s margin, and revenue came in under analysts’ expectations. Growth in Services, which includes the App store, Apple Music, and Apple Pay, has slowed significantly over the last year. Mac sales fell and looked weak, as many on Wall Street had expected, and iPad sales also declined.

Sales in the closely watched China market continued to drop, offering another sign that perhaps the economy there isn’t recovering as quickly as expected. Qualcomm (NASDAQ:QCOM) (QCOM) said earlier this week that it hadn’t seen evidence of a China recovery in the smartphone business, which is one reason AAPL’s better iPhone sales came as a bit of a surprise.

Earnings Lull: The next phase of earnings season is a few weeks off when major retailers get their turns in the spotlight. Next week is a definite reprieve after two weeks of frenzied earnings releases, as most of the best-known companies in banking, tech, industrials and other closely watched sectors are done reporting. In normal times, this might represent a welcome easing in volatility, but with banking concerns front and center, that seems unlikely this time around.

There are some high-profile companies reporting next week, including PayPal (NASDAQ:PYPL) (PYPL), Duke Energy (NYSE:DUK), (DUK), and UnderArmour (UAA). But none are more notable than Disney (DIS), which is expected to open its books on Wednesday after the close.

h2 Eye on the Fed/h2

The market sees a high likelihood that rates will be lower by the end of the year. The question is how do we get from where we are now to there? It would likely take a major disruption in banking or a severe downturn in economic prospects, or both, yet it’s still priced in. This could help explain why bearish market sentiment remains extremely elevated. The probability of a rate pause in June is 90%, according to the CME’s FedWatch Tool. That’s down from 98% before the jobs report, and there’s now a 9% chance of a rate hike next month, up from 0% before the jobs report.

The Fed’s quiet period around the FOMC meeting is over, so get ready for Fed speakers to make the rounds once more. Regional banking stocks plunged again yesterday after Canada’s Toronto-Dominion Bank Group called off its $13.4 billion takeover of First Horizon (NYSE:FHN) Corp (FHN). There’s talk on Wall Street about how to stop the sell-off in regional banks, including higher government deposit insurance guarantees or even a moratorium on the short selling of banking stocks, though this appears to be just talk for now.

h2 What to Watch/h2

Inflation alert: Investors likely want to steel themselves for April Consumer Price Index (CPI) and Producer Price Index (PPI) data next week. They’re due out Wednesday and Thursday, respectively. Expectations on Wall Street are for CPI to rise 0.4% month-over-month and core CPI (which strips out energy and food) to climb 0.3%, according to Trading Economics. That’s compared with 0.1% and 0.4% in March. The core CPI is the one to watch most closely, keeping in mind that pricier gasoline in April likely influenced the headline number.

Talking technicals: The SPX is closing in on what may be a key technical support point at 4,039, the 50-day moving average. The index came within a whisker of that intraday Thursday before rebounding slightly. Selling pressure could potentially pick up if that level gets breached.