Labor Data Boosts Soft-Landing Hopes as Equity Markets Wobble

UST yields drop after February labor data. Today’s labor data showed a strong but cooling economy, pushing policy-sensitive 2-year UST yields down nearly 10bps after the release, while the 10-year declined ~5 bps. UST yields climbed throughout the rest of the day, ending ~1-3 bps lower on the long-end of the curve. Equities declined on the day, with the NASDAQ down 1.16% and the S&P down 0.65%, as markets continue to grapple with warnings that the market may be overbought following a YTD rally that has seen multiple record-breaking closing levels for major indices. Bank of America strategist Michael Harnett said equities are showing “abnormal gains” in “abnormal times” leaving positions “stretched and extended.”

Employment conditions loosen, but hiring remains strong. Hiring was elevated in February, but today’s data pointed to overall cooling in labor conditions during the month. Nonfarm payrolls increased 275,000, more than the 200,000 estimate and last month’s downwardly revised figures (229,000 vs. 353,000 initial reading). The climb was driven by hiring in service sectors such as health care, hospitality, and government employment. Wages grew, but at a slower pace than expected (0.1% vs. 0.2% estimate), and significantly lower than last month’s 0.5% growth. The unemployment rate climbed from 3.7% to 3.9%, largely driven by the downward revisions to payrolls growth in December and January. The results were largely interpreted as another favorable development toward a soft landing, and generally supported Chair Powell’s comments to Congress Wednesday, where he said, “We’re seeing a labor market that is still tight, still strong, wages are moving up.”

President Biden highlights U.S. economic strength in State of the Union address. Yesterday, President Biden delivered his State of the Union address, and spent a great deal of time discussing the economy and inflation. He said, “I inherited an economy that was on the brink. Now our economy is the envy of the world.” On inflation, he acknowledged the impact it has had on housing affordability and announced his plan to provide an annual tax credit to incentivize home buying for the next two years. He also addressed “shrinkflation” whereby companies charge more for less, and indicated he plans to better monitor and address the trend. According to a February NBC news poll, ~36% of voters approve of President Biden’s economic management.