Wall Street stumbled from NFP high as techs, Boeing dragged

On Thursday, EURUSD, Wall Street Futures, and Gold surged, while USDJPY plunged despite a less hawkish ECB hold as Fed President Powell sounded less hawkish than his ECB counterpart Lagarde in his 2nd day of Congressional testimony. Lagarde said ECB GC is now initially discussing dialing back of restrictive stance but didn’t discuss rate cuts as it’s still premature. ECB will focus on more/cumulative economic data (primarily core inflation) in June for any decision about rate cuts.

Lagarde said Thursday in the ECB presser/Q&A:

“So first of all, we have not discussed rate cuts at this meeting. What we have done is that we have just begun discussing the dialing back of our restrictive stance. But of course, we need a lot more information coming in in the next few months to be sufficiently confident. Your second question related to the degree of information. Well, when you look at what will be published and what data we will have, in terms of activity, wages and profits, we will have a little in April, and we will have a lot more of that for our June meeting. It matters, because we are data dependent, and we are adamant that we will be data dependent.

Once the data confirms that we are sufficiently confident to reach our 2% target in the medium term and make sure that it will be sustainable, we will act. That's what I can tell you. By the way, I didn’t say that there was no rush. I said that we did not discuss cuts for this meeting, but we are just beginning to discuss the dialing back of our restrictive stance, provided that we have enough and certainly more information to be sufficiently confident.”

On the other side of the Atlantic, Powell also sounded almost similar to Lagarde. Powell said in his 2nd day of Congressional testimony (Senate grilling) that the Fed is not far from feeling confident enough about the ongoing disinflation process to cut policy rates. He stated that rate cuts may begin later this year, while policymakers are well aware of the risks of cutting too late and too fast. Powell also indicated active discussions about QT in the March meeting.

On Thursday, ahead of Nov’24 election, Powell was grilled by U.S. Senators (both Democrats and Republicans) about the higher cost of living (still over 20% higher from pre-COVID-Jan’19 levels) on an average, higher cost of a mortgage, illegal immigration affecting the employability of Native Americans, coupled with corporate greedflation and shrinkflation. Powell was really under pressure from Senators across party lines to ‘do something’ so that ordinary Americans (vote box) could afford a home with food on the table for a decent life. Thus Powell said he thinks the ongoing disinflation trajectory will give him enough confidence in the coming days for the eventual rate cuts, most probably from July’24.

On Friday all focus of the market was on the NFP/BLS job report for February, which may influence the Fed for an early or delayed rate cut stance. The latest BLS establishment survey flash data (seasonally adjusted) shows that the U.S. economy/employers (public and private sectors), i.e., government and private sector jobs excluding the farming/agri industry (Non-Farm Payrolls-NFP) added +275K payroll jobs in February against +229K sequentially (m/m); +287K yearly (y/y), and much higher than the median market expectations of +200K.

As per the establishment survey, the change in total nonfarm payroll (NFP) employment for December was revised down by -43K to +290K, and the change for January was revised down by -124K to +229K. With these revisions, NFP employment in the last two months combined was down by -167K than previously reported (against a 2M revision of +126K in the last report).

With the latest annual and monthly revisions, the US economy added an average of +251K payroll jobs per month in 2023, against +377K in 2022, +604K in 2021, and the pre-COVID (2019) average of +168K (against the Fed’s targeted goldilocks rate of around +200K). The 6M rolling average of NFP job addition is now around +252K

Private nonfarm payrolls in the U.S. (only private establishment/business employees) added +223K payroll jobs in February from +177K sequentially (m/m) and +226K yearly (y/y), higher than the market expectations of +160K, and also way above the ADP figure +140K (released Wednesday). After the latest revisions, the 2023 YTM average is now around +192K vs. the ADP average of +209K in 2023. The 6M rolling average of NFP private job addition is now around +199K vs. +125K ADP survey. The 2022 average of NFP Private Job addition was +352K vs. ADP average of +322K. Overall, the NFP and ADP private payroll job data is still quite divergent as the 6M rolling average is now 100K vs 127K (NFP Private vs ADP Private).

The Government payroll, i.e., employment in Federal and state/local governments, was increased by +52K in February against +52K addition sequentially (m/m); +61K yearly (y/y), and higher than the market expectations of +40K. After the latest revision, the YTM average is now around +59K in 2023 against the 2022 average of +25K and +33K in 2021. The 6M rolling average of NFP government job addition is now around +54K. In the election year of 2023; the government payroll job addition is quite upbeat and now running around the pre-COVID Jan’20 levels of +60K. In 2023, Government payroll addition has been quite upbeat for the last few months including December and consistently beating market expectations.

In Feb’24, notable NFP job gains occurred in health care (+67K), mostly health care services (28K) and hospitals (28K); government (52K), namely local government, excluding education (26K); food services and drinking places (42K), after changing little over the previous three months; social assistance (24K); and transportation and warehousing (20K), as couriers and messengers added 17K jobs, after losing 70K jobs over the prior 3 months. Employment also increased in construction (23K) but changed little in other major industries, including manufacturing (-4K). The January reading was revised sharply lower from an initial 353K which was the highest in a year.

In Feb’24, NFP job gains were boosted by private education & health services (+85K); leisure & hospitality (+58K), government (+52K), construction (+23K), transportation & warehousing (+20K), retail trade (+19K) and professional & business/other services (+18K), while dragged by manufacturing (-4K) and wholesale trade (-1k). For the last 6M, except transportation & warehousing, almost all U.S. sectors added NFP jobs led by private education & health services, government, leisure & hospitality, construction, professional & business/other services, retail/wholesale trade and even manufacturing.

Overall, private education & healthcare services were the biggest employers in the last 12 months, followed by government and leisure & hospitality (travel/tourism & hotels). The U.S. economy is primarily a service sector economy (unlike China) and the service sector is the biggest contributor to the economy, but that too is significantly dependent on millions of students, patients, and tourists from countries like China, India and other major South Asian countries (from rich & wealthy families).

As per the ADP survey, the number of private employees was around 131486K in February against 134628K as per the BLS survey. The difference (3142K) between the two surveys (BLS-ADP) may be the estimated number of multiple job holders/uninsured workers, doing primary jobs full-time and secondary jobs part-time. The divergence between BLS and ADP Private Pay Roll data in the last few months may be explained by the number of multiple private jobholders (as freelancers/gig workers). ADP payroll data may have counted these categories of multiple private payroll job holders as one entity rather than multiple entries in the BLS report. In this way, there was a difference in private payroll workers between the NFP and ADP surveys since the beginning.

The Household survey includes payroll employees and self-employed persons such as gig workers/freelancers, contractors, and agricultural workers. In the household survey, individuals are counted only once, even if they have more than one job (based on unverified answers across 60K household samples). In the establishment survey, employees working at more than one job are counted separately for each payroll.

As per the Household survey, which includes non-farm payroll jobs/employees and self-employed persons (including professionals, contractors, and agri workers), the U.S. economy has deducted -184K employed persons in Feb’24, against the contraction of -31K sequentially (m/m) and addition of +149K yearly (y/y). The U.S. had around 160968K employed persons in Feb’24; eased from the recent life time high around 161866 scaled in Nov’23; i.e. contracted almost -898K jobs in the last 3-months (December +January +February), but it may soon scale 162000K by the next few months (ahead of Nov’24 election) as last 3-months data may be distorted due to seasonal/annual revisions.

After the Dec’23 annual revision (2019-23), the 2023 YTM average of the addition of employed persons (employees and self-employed) is now around +157K, substantially lower than +265K in 2022. The YTM average of the addition of employed persons was +265K in 20222, +511K in 2021 738K in 2020 (COVID distorted), and +169K in 2019 (pre-COVID average). The 6M rolling average is now around -113K.

As per household survey data (after 2023/annual updated population estimate/control revised factor, the nominal number of the civilian labor force decreased by -175K in Jan’24 to 167276K but again increased by +150K in Feb’24 to 167426K.

The nominal number of the labor force was around 165871 in Jan’23 and 164448 in Feb’20 (pre-COVID). The average number of additions in the labor force was around +204K against an average number of additions of employed persons +157K in 2023 (after the Dec’23 annual revision), which made the overall average in line with pre-COVID (2019) +169K.

The labor force participation rate was unchanged at 62.5% in Feb’24 from 62.5% sequentially, near the highest since Feb’20 (pre-COVID). The labor force participation rate was 63.3% in Feb’20 (pre-COVID). The average labor force participation rate is now around 62.6% in 2023. But the labor force participation rate also eased in Jan’25 from a recent high of 62.80% scaled in Nov’23.

As per Household survey data, the nominal number of unemployed persons increased by +334K to 6458K in January against 6124K sequentially (m/m) and 5962K yearly (y/y). In Feb’24, the U.S. unemployment rate surged to a 24-month high (since Jan 22) at 3.9% from 3.7% sequentially (m/m) and 3.6% yearly (y/y). The market was expecting an unemployment rate of 3.7% in Feb’24 with a higher labor force participation rate at 62.6%.

The U.S. Average Hourly Earnings (AHE) was around $34.57 in Feb’24 vs $34.52 sequentially (+0.14%) and $33.15 yearly (+4.28%); i.e. the U.S. AHE grew +4.3% yearly in Feb’24 against +4.4% sequentially, and lower than the market expectations of +4.4% (y/y). Fed as well as the White House may be looking for an average annual growth rate of AHE around 3.00% on average (for some real wage growth) for its +2.0% price stability targets (as per the pre-COVID trend), whereas the average for 2023 was around +4.40%.

On a sequential (m/m) basis, the AHE grew by +0.1% in Feb’24 from +0.5% in Dec’23, below market expectations of +0.3% and smallest m/m growth. The average hourly earnings (AHE) for all employees on US private nonfarm payrolls rose by +$0.05 sequentially to $34.57 in Feb’24 against $34.52 in Jan’24. The Fed needs an average sequential AHE growth of around +0.2% for its price stability targets, while the 2023 average is now still around +0.35%.

The Average Weekly Hours (AWH) for all employees on U.S. nonfarm payroll edged up to 34.3 hours in Feb’24 from 34.2 hours sequentially (m/m), 34.5 hours yearly (y/y) lower than the market expectations of 34.3 hours. Average Weekly Earnings (AWE=AWE*AWH) increased +0.44% to $1185.75 in Feb’24 from $1180.58 sequentially, while increasing +3.68% yearly from $1143.68. This translates to average monthly earnings (AME) of around $4743.00 in Feb’24 against $4722.34 sequentially (+0.44%) and $4574.70 yearly (+3.68%); i.e. the AME expanded +0.4% sequentially (m/m) and +3.7% yearly (y/y) in Feb’24.

The average monthly growth of U.S. AME for 2023 is now around +3.87% yearly (y/y) against CPI growths +4.14% (y/y); i.e., there were still no wage-inflation spirals and real wage growth is still negative. In Jan’24, real wage growth is almost flat at +0.07% (y/y).

In Feb’24, if we match a number of multiple job holders (employees under non-agri payroll); i.e. the difference between Establishment and H/H survey was around 8487K from around 7792K in Jan’24; i.e. an increase of +695K. The 6M rolling average of increase in multiple job holders is now around +377K against -113K in number of total employed persons. The increasing number of multiple job holders may be the reason behind a drop in the total number of employed persons and an increase in headline unemployment numbers.

 

In brief, the Feb’24 NFP/BLS job report may be termed as mixed/Goldilocks rather than too hot or too cold:

·         A substantial beat in the headline NFP job addition number in Feb’24 came on the back of a substantial 2M negative revision

·         The overall 2023 average is 251K against 377K in 2022 and 252K in 2024 (YTM)

·         As per the Household survey, the overall average number of employed persons for 2023 was around +157K and +108K for multiple job holders; i.e. effective average rate (157+108=265K) got 2023; the same for 2024 (YTD) is now around 335K

·         Overall real Average Monthly Earnings growth is still flat; no real age inflation spiral

·         Overall, although the headline unemployment number surged from 3.7% to 3.9%, if we consider the increasing number of multiple job holders, it was almost equivalent to the decrease in the headline number of employed persons

·         Thus overall US BLS job report for Feb’24 is still hot enough  if we consider increasing the number of multiple job holders, although cooling in various parameters

·         But the Fed will not take any rate action based on a single month BLS/NFP job report; the Fed will take into consideration the 6M rolling average of core inflation and employment data before taking any rate action                                                       

Conclusions:

Fed may announce a plan for QT tapering in the March meeting and close the same by June before going for rate cuts from July’24. Fed, the world’s most important central bank, may not continue QT and rate cuts at the same time, which are contradictory.

Ahead of the Nov’23 U.S. Presidential election, White House/Biden/Fed/Powell is more concerned about elevated inflation rather than the labor market; prices of essential goods & services are still significantly higher than pre-COVID levels, which is creating some incumbency wave (dissatisfaction) among general voters against Biden admin (Democrats).

Thus Fed is now giving more priority to price stability than employment (which is quite robust) and not ready to cut rates early as it may again cause higher inflation just ahead of the election. Fed may hike only from July’24, which will ensure no inflation spike just ahead of the Nov’24 election (as any rate action usually takes 6-12 months to transmit in the real economy), while boosting up both Wall and Real/Main Street.

Overall, the Fed’s mandate is to ensure price stability (2% core inflation), and maximum employment (below 4% unemployment rate) along with financial/Wall Street stability as well as lower borrowing costs for the government. As the US is now paying almost 15% of its tax revenue as interest on debt, the Fed will now not allow the 10Y US bond yield above 4.50-5.00%. Thus some Fed policymakers like Goolsbee are trying to balance hawkish talks by sounding less hawkish /dovish in conjunction with overall less dovish/hawkish Fed talks to control the overall market (Wall Street), inflation expectations, and the most vital bond yield. It’s a well-planned jawboning strategy by the Fed in synchronization with ECB, BOE, and BOC to control the overall financial market and bring down inflation towards targets without causing an outright recession; i.e. soft & safe landing.

Fed may cut rates from July’24; i.e. in H2CY24 for a cumulative 75-100 bps; every major central bank including ECB, BOE, and BOC has to follow ‘King Fed/USD’, whatever may be the narrative (synchronized global rate cuts amid a synchronized easing in core inflation). In any way, as the Fed is not in a hurry to cut rates in H1CY24, expect generally hotter than expected US labor market data and gradual easing of core inflation data to suit the Fed narrative. The White House/Biden admin will also be happy going for the election supported by a strong economy, robust labor market, and cooling inflation almost at the 2% target.

Market wrap:

On Friday, Wall Street Futures wobbled after hotter than expected NFP headline job addition, higher than expected headline unemployment rate and in line with expectations for wage growth. But eventually, Wall Street Futures surged along with Gold on hopes of Fed rate cuts from June’24, the end of QT and deeper rate cuts in 2025. On early Monday, Wall Street Futures, and Gold were almost flat; Boeing and NVIDIA/Techs dragged.

Technical trading levels: DJ-30, NQ-100 Future, and Gold

Whatever may be the narrative, technically Dow Future (39100), now has to sustain over 39500 levels for a further rally to 39700/39900-40200/40500 and even 42600  levels in the coming days; otherwise, sustaining below 39450/39400-39300/39200 may again fall to 39000-38600 and  38400/38200*-38000*/37300 levels in the coming days.

Similarly, NQ-100 Future (18220) now has to sustain over 18400 levels for a further rally towards 18500/18675-18975/19200 and 19450/19775-2000/20200 in the coming days; otherwise, sustaining below 18350/300-18250/200 may fall to and 17300-16830-16750-16550 in the coming days.

Also, technically Gold (XAU/USD: 2185) now has to sustain over 2210 for any further rally to 2225/2250-2275/2300; otherwise sustaining below 2205/2200-2195/2190, may again fall to 2160/2130-2100/2080-2060/2039 and 2020/2010-2000-1995/1985-1975 and even 1950 may be on the card.