U.S. stocks are nearly unchanged after the April U.S. jobs report. While the S&P 500 index is slightly lower, the Nasdaq tech-heavy index is marginally higher. Several factors drive the markets, including inflation, growth, and employment. Despite the efforts of the Federal Reserve and the U.S. central bank, employment in the United States remains sticky and has not decelerated to the extent that wage inflation has declined. Wage inflation, reported in the jobs report, and shelter, generally called rent equivalent, comprise the bulk of core inflation. U.S. stocks continue to trade sideways and are waiting for information showing that the U.S. economy is headed for a soft or hard landing. A soft landing would indicate that inflation is declining while job and economic growth are slowing but not declining rapidly. The jobs report had a mix of information but not enough to convince market participants that stock prices are undervalued and should move higher.
What is the U.S. Employment Report?
The U.S. Employment Report is a monthly report released by the Bureau of Labour Statistics that provides a comprehensive overview of the U.S. labour market. It includes data on the number of people employed, the unemployment rate, average hourly earnings, and the average workweek. It also provides information on the number of people that have jobs in various industries, the number of people unemployed, and the number of people not in the labour force.
The jobs report shows two different numbers. The non-farm payroll report indicates the monthly number of employees added or subtracted from the workforce. The report is a corporate report that polls businesses. The Labor Department also produces a second report called the unemployment rate report. The unemployment rate is calculated using a household survey.
What are Some of the Key Components
One of the critical components of the report s the hourly average earnings. Average hourly earnings show how much employees earn in a given hour. This figure is often used to measure wage growth and inflation. It can also be used to compare wages across different industries and regions. The average workweek shows the number of hours employees work in a given week. It is typically calculated by taking the total number of hours worked by all employees in a given week and dividing it by the total number of employees. This figure can be used to measure a workforce’s productivity and compare the work hours of different countries.
The Fed will evaluate the average hourly earnings and the average workweek to determine if inflation expectations related to the job market continue to grow without rising productivity.
The April 2023 Jobs Report
On Friday, May 5, 2023, the U.S. Labour Department reported its employment report. According to the Bureau of Labour Statistics, 253,000 jobs were created in April, compared to expectations that job growth would increase by 180,000. The unemployment rate was at 3.4% compared to expectations of 3.6%. The average hourly earnings rose 0.5% in April, increasing by 4.4% yearly and higher than the 4.2% expected.
When you look at the report from the surface, the number reflects robust job growth and rising wage growth. When you dig into the full report, you can see several revisions. In March, the non-farm payroll initial count was decreased by 165,000, and February was reduced by 78,000. The correction of 243,000 jobs nearly wiped out all the gains seen in April. Additionally, the number of people participating in job searches remained steady.
What is the Fed Likely Thinking?
The numbers show that the average across the prior three months indicates that non-farm payrolls are growing at 190,000, which is still robust. Wage growth continues to rise and is not yet showing signs of slowing down. Rising wages have helped pressure prices. People who earn more can afford to pay more for goods and services. The only way the Fed can stop this process is to raise rates making businesses less active and eventually halting employment and wage growth. According to Fed Chair Jerome Powell, a 3% annual wage gain is probably consistent with the Fed’s 2% inflation mandate. With wages growing at 4.4% year over year, there need to be further declines before the Fed is content with inflation expectations.
What Else Is the Fed Evaluating?
The Fed has two mandates, maximum employment, and price stability. With the unemployment rate near the 1969 lows, there is no issue with full work. Wages remain high, and inflation remains above the Feds target of 2%. One of the components that is starting to decline is housing. According to the Zumper national rent report, both one and two bedroom apartments have now fallen by less than 6% year over year. The increase compares to a 12% increase for one and two-bedroom apartments in April 2022.
How Does the Level of Interest Rates Impact Stock Prices?
Interest rates can have a significant impact on stock prices. When interest rates are low, investors tend to move their money out of cash and into stocks, which can increase stock prices. Conversely, when interest rates are high, investors tend to move their money out of equities into cash, which can drive down stock prices. Additionally, higher interest rates can make borrowing more expensive for companies, reducing their profits and, in turn, their stock prices.
Additionally, one way that traders evaluate a stock’s value is to look at the future cash flows and discount those cash flows back to the present using current interest rates.
Discounted cash flow is a method of valuing a company using the time value of money. It is used to estimate the value of an investment by discounting its expected future cash flows to the present. The discount rate used is usually the cost of capital or a rate of return that the investor requires.
The idea is that discounted cash flows decline as rates rise, making stocks less valuable. The reverse is true when interest rates are falling.
What is Happening with Stock Prices
The employment report reflected an overall mixed picture which initially saw positive buying pressure, but that yielded quickly. One of the benchmarks that traders are evaluating is the two-year U.S. treasury yield. With current Fed fund rates at 5-5.25%, the two-year government bond yield implies that the Fed will cut rates by more than 1% within the next two years. The yield has chopped around in a relatively tight range since March 2023 after hitting a multi-year high above 5% in early March 2023. (see chart) One of the impetuses that traders might be evaluating is waiting for the two-year treasury yield to break down below 3.5%, which would signal that the market believes that the U.S. will likely go into recession.
The Fed will have no choice but to reduce the interest rates banks borrow from each other. When yields decline, it makes stocks more attractive relative to bonds. The graph of the two-year treasury yield shows that the 50-day moving average has recently crossed below the 200-day moving average. When this occurs, it’s known as the “Death Cross,” which generally means a long-term downtrend in the asset is now in place.
There is positive momentum occurring in the NASDAQ 100. What is CFD trading momentum on the Nasdaq? The Nasdaq 100 10-week moving average has recently crossed above the 50-week and the 200-week moving average, which means that a medium-term up trend is now in place. Weekly momentum on the QQQ (see chart) is positive as the weekly MACD (moving average convergence divergence) index recently generated a crossover buy signal.
The Bottom Line
The upshot is that stocks have moved sideways since the most recent United States employment report. The report had several positive aspects, including a greater-than-expected non-farm payroll number and a lower-than-expected unemployment rate. Offsetting these better-than-expected numbers as a revision by the BLS to the prior two months showed a combined decline nearly the size of the April employment report.
On the wage front, the hourly average earnings released were higher than expected, which shows that wage inflation remains strong, and the average work week does not indicate that productivity is climbing. Without lower wages, the Fed will unlikely move to an accommodative stance that could keep short-term borrowing rates high. For stocks to rise, rates need to moderate, as the interest rate level helps determine the stock value to some extent.
Since many analysts use a discounted cash flow evaluation to determine the correct stock level or the broader markets, higher rates make the cash flows less valuable. A downward rate trend will provide the impetus that stocks need to move higher. When the two-year treasury yield starts to break below the 3.5% level, it might signal that stocks are on their way higher.