The March US labour market report was full of surprises – Non Farm Payrolls came in at 98k, nearly 50% less than the market expected, while the unemployment rate unexpectedly dropped to 4.5%, the lowest level since 2007. Wage growth was in line with expectations at 2.7%.
The initial market reaction was a major drop in US Treasury yields, a slight moderation in the US dollar and a drop in US equity futures, which point to a lower open for US indices at the end of this week. Overall, the market is taking this report as a sign that the US economy may not be as strong as initially thought and the Fed will ease off hiking interest rates. We think that this is incorrect for a few reasons.
Expect a bounce back in April
Firstly, the last time jobs growth was this low was in May 2016, when NFP’s grew by 43k; this was followed by a stellar month for jobs in June, when payrolls expanded by close to 300k. Thus, we should expect a bounce back in job growth for April.
Secondly, the drop in the unemployment rate to 4.5% was the lowest level since 2007, which suggests that the US labour market is finally getting back to normal and one month of moderate jobs growth is to be expected and nothing to fear.
Wages suggest US labour market doing ok
Lastly, wage growth expanded by 2.7%, down a touch from February’s figure of 2.8%. If March’s weak NFP reading were a sign that the US economy had abruptly started to slow then we would expect wage growth to also have been sharply lower. Because wage growth mostly held up, we think that this month’s NFP report was a blip, and we expect jobs growth to bounce back next month.
City Index NFP model: must try harder
Overall, this was a bad month to publish the inaugural City Index proprietary NFP model, which had predicted an above-consensus reading of 236k. However, we take heart that we were not alone in over-predicting payroll data for last month, not one economist polled by Bloomberg looked for a reading below 100k. So, back to the drawing board for April’s figure!
Payrolls and Syria weigh on Treasury yields
We mentioned the sharp fall in Treasury yields on the back of this report, and the 10-year yield fell below the critical 2.3% support zone. At the time of writing it has managed to meekly climb back above this level, but it still looks vulnerable. The Treasury yield had been slipping all morning after the US airstrikes in Syria overnight, combined with the weak payrolls report, it is hard to see how bond yields can recover in the short-term. This may weigh on the dollar and could put to bed expectations for a bond bear market to develop in the first half of this year.
Why such a large reaction in the Treasury market?
We believe that the US labour market is stronger than the headline NFP report predicts, so why has there been such a large reaction in the Treasury market? We think the NFP report was the straw that broke the camel’s back, nervousness has been circling for a while and a drop in Treasury yields was inevitable. Fears that US stocks are over-valued, concerns that Trump won’t deliver on his fiscal spending programme and now growing tensions between the US and Russia over Syria could all keep a lid on Treasury yields for some time, even if the fundamentals of the US economy are generally looking good.
Equities still at risk
US stock market futures also pointed to a lower open on Friday, however, we only expect modest declines on the back of this report, as weaker treasury yields should cushion any decline in the US stock markets. However, a break below the key 50-day sma at 2,345 on Friday, would be a bearish signal and could open the door to further losses as we lead up to Easter, when volume could be lower than normal. Overall, we have noted this week that stocks are trading in tight ranges and key support levels are on the horizon. If we break below these support levels then we would expect further losses in the coming days.