Payrolls on Friday: Investors Turn Back to the Employment Picture

(Tuesday Market Open) Despite all the geopolitical, banking, and inflation fears, major U.S. indexes continue to climb and entered Tuesday on a four-day winning streak. In many cases, the worst hasn’t come to pass, so fear has slowly leached out of the market, perhaps raising appetites for risk assets.

A quiet overnight session brought small gains despite the price of crude oil continuing its ascent following OPEC’s surprise production cut announcement. Crude Oil WTI Futures spiked early yesterday but hasn’t extended those gains too much, and the decision caused some head-scratching ahead of what many analysts expect to be rising demand from China as it reopens.

Energy shares led the way Monday as Wall Street began the week on a green note, and many overseas markets followed suit earlier Tuesday. Focus today is likely to be on the Job Openings and Labor Turnover Survey (JOLTS) data due soon after the open (more below).

We’re a few days into Q2 and there’s still a buzz over the S&P 500® index’s (SPX) Q1 strength. It rose 7% in the quarter, and analysts were quick to point out Monday that, in past years when the SPX climbed in Q1 following losses the year before, it ended up extending the positive trend.

Something to keep in mind, though, is that much of the SPX’s gains in Q1 came courtesy of a handful of very large stocks that can have outsized influence on the index due to their heavy weighting. As Schwab Chief Investment Strategist Liz Ann Sonders notes in her latest commentary, the 10 largest stocks in the SPX were responsible for 90% of the index’s Q1 increase, with the triumvirate of Apple (NASDAQ:AAPL) (AAPL), Microsoft (NASDAQ:MSFT) (MSFT), and Nvidia (NASDAQ:NVDA) (NVDA) contributing more than 50%.

• The 10-year Treasury note yield (TNX) rose 3 basis points to 3.46%.
• The U.S. Dollar Index ($DXY) slipped to 102.02.
• The Cboe Volatility Index® (VIX) futures edged up to 18.82.
• WTI Crude Oil (/CL) rose to $81.14 per barrel.

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Volatility popped a bit early yesterday as crude prices soared on news of OPEC’s production cut, but VIX didn’t make it to 20. VIX remains near the March lows, hinting that traders don’t expect dramatic moves in stocks anytime soon.

Perhaps OPEC knows what it’s doing. That could be the takeaway when you consider the cartel’s surprise cut to crude production over the weekend preceded Monday data releases showing continued struggles for two of the world’s key economies. Both U.S. and China manufacturing activity came in below expectations in separate reports, reinforcing ideas that slowing demand for manufactured goods conceivably could also lower crude oil demand.

The March Caixin China General Manufacturing Purchasing Managers’ Index fell to 50.0, right on the cusp of levels that would indicate retraction, and below the consensus view collected by Trading Economics. This raises new questions about how quickly China’s recovering from COVID-19 shutdowns.

Then the U.S. March Institute for Supply Management (ISM) Manufacturing Index fell to 46.3, the lowest since May 2020. Deeper in the report, drops in new orders and prices signaled more weakness, with almost every component declining in March from February’s readings. This is the fifth straight month of declining U.S. manufacturing activity, providing more ammunition to analysts predicting a recession.

How did the stock and Treasury markets react to yesterday’s soft U.S. manufacturing data? By jumping quickly to intraday highs, though stocks quickly gave back their gains. The “bad news is good news” hypothesis still appears to hold water, with investors hoping weak data means less pressure on the Fed to continue tightening. The 2-year Treasury yield—generally seen as quite sensitive to interest rates—fell below 4% right around the time the ISM data hit the tape.

Today’s job openings data could provide more clues for the Treasury markets. Any sign of tightening (fewer job openings) would probably help ease inflation concerns even more, possibly underpinning Treasury note values and lowering yields (which move opposite of the underlying note). That report is due at 10 a.m. ET.

JP Morgan Chase’s (JPM) influential CEO Jamie Dimon said in a letter to shareholders today that while the current U.S. banking crisis is “nothing like 2008,” it isn’t clear when the crisis will end. He thinks it could bring tighter financial conditions as banks get more conservative, but isn’t sure if that will have an impact on consumer spending.

Walmart’s (WMT) investor meeting runs today and tomorrow, putting the focus on any observations company executives have about their current fiscal quarter after they offered soft guidance back in February. Back then, the company said high prices and weak demand for discretionary items were potential headwinds. Other retailers like Home Depot (NYSE:HD) (HD) concurred in their own earnings reports at the time.

One thing in WMT’s favor, however, could be a dynamic where shoppers gravitate toward lower-cost retailers when economic growth slows. Perhaps the company can shed light on whether this is happening, which might offer investors a sense of general consumer sentiment.

Fries with that? If people are trying to save money, you’d think that would help a fast-food outlet like McDonald’s (MCD). Investors seem to think so, anyway, as shares of MCD went on a roll (or should we say a bun) in late March. Now the company is preparing corporate layoffs, according to the Wall Street Journal, though MCD won’t say how many people will receive pink slips. MCD reduced its headcount by about 30,000 between 2017 and 2019, the paper reported. Generally, most recent layoff announcements have been in the tech sector. The question now is whether MCD is the tip of the iceberg for retail sector layoffs.

Recent data, including yesterday’s ISM manufacturing and last Friday’s Personal Consumption Expenditures (PCE) prices both came in below expectations, but this doesn’t necessarily mean the Fed is much less likely to raise rates next month. The next meeting is four weeks away, and a lot can happen between now and then.

• For a pause to start looking more feasible, we’d probably need to see data that doesn’t simply fall short of expectations. It likely needs to be significantly below expectations, considering the Fed’s focus on fighting inflation. Rising gas prices in the wake of the OPEC oil production cut could simply make the Fed even more wary of any data that suggest more price pressure.
• Market participants seem aware of this, as the futures market continues to price in better than 60% probability of a 25-basis-point hike in early May, according to the CME FedWatch Tool, despite recent signs of slowness in the data.
• One wildcard: Layoffs. These aren’t in the realm of “data” per se but can come at any time. Eventually, layoffs do show up in the data, typically in the form of new jobless claims. That number has been very low almost all year, but if layoffs pick up, we could see that change—and the Fed is likely to take notice.

Jobs update: A few days out from the March Nonfarm Payrolls report, here’s how analyst estimates shape up, according to Trading Economics:

• Jobs growth: 240,000, down from 311,000 in February but still historically high.
• Hourly wage growth: 0.3%, up from 0.2% in February.
• Unemployment rate: 3.6%, unchanged from February.
• Participation rate: 62.5%, unchanged from February.

If participation rises, that would likely be read as a positive sign of a tightening labor market that could help cool inflation. It inched up in February and the unemployment rate rose slightly. That may seem contradictory, but the Labor Department doesn’t count non-participants in the job market—those who are neither working nor looking for work—when it calculates the headline unemployment rate.

Out of Breadth: Just 10 large stocks accounted for most of the SPX’s gains in Q1. This isn’t the kind of broad and deep rally that bullish investors like to see. For more insight on Q1 performance, check the most recent update from Schwab chief investment strategist Liz Ann Sonders and senior investment strategist Kevin Gordon.