Stocks Plummet, Yields Surge Despite Positive Payroll Data

Wage Growth is Back!

Today the Labor Department’s January employment report provided a better than expected outlook of the jobs market in the US.  The number of new nonfarm payrolls totaled a seasonally adjusted 200,000 (+180,000 expected) while the unemployment rate held at a 17-year low of 4.1%.  Employment growth was broad across most industries, highlighted by payroll additions in construction (+36,0000) and manufacturing (+15,000), which were largely a result of the recent uptick in factory activity and the housing market.  Perhaps the largest positive in the report was the growth in average hourly earnings, which climbed 0.34% MoM (+0.2% expected) and 2.9% YoY (+2.6% expected), representing the biggest annual increases in wages since June 2009.  Weekly hours worked represented one of the few disappointments in the data, as the average workweek decline 0.2 hours to 34.3.  Also a negative, underemployment (U6) ticked up from 8.1% to 8.2%.

 

 

Can’t Stop the Selloff

February has not been kind to US equities thus far, with major indices trading 1.75%-2.50% lower in the final trading session of the week.  The DJIA finished 666 points lower on the day, the largest daily decline in more than a year and worst weekly performance since early 2016.  Stock prices continue to be impacted by rising interest rates and investor profit-taking, and were not helped by the political turmoil in Washington resulting from President Trump’s declassifying of a memo which challenges the investigation procedures used in the Russian probe.  The energy sector recorded some of the largest losses after the earnings releases from major participants Exxon and Chevron failed to match analyst expectations.  Crude oil futures also weighed on the sector as WTI fell more than 1% on the day to $65/barrel.

 

 

US Treasurys also experienced a steep selloff, as yields/swap rates rose 1-7bps across the curve in a bear-steepening pattern, reflecting the growing expectations for the Fed to accelerate its rate-hiking plans.  In support of this, today Dallas Fed President Robert Kaplan (non-voter) stated his view that the base case for 2018 should be three removals of accommodation, and we’ll see — it could be more than that, we’ll have to see.”  The yield on the 10-year Treasury note is now 2.84%, and the spread between 2- and 10-year Treasury yields is now near 70bps after touching as low as 49bps in early January.  The US dollar was one of the few positive performers on the day, rising 0.8% against major currencies – its largest daily gain in more than two months.