BMA Market Insights: U.S. Jobs Market Remains Resilient, Fed Becomes More Dovish

10-year U.S.Treasury yields opening higher 8/10th of a basis point to 2.736%, extending Friday’s gains. Overnight, equities remain steady ahead of the open as many Asian markets are closed this week for the Lunar New Year holiday. Investors will continue looking for direction throughout the trading week including tomorrow’s State of the Union Address.

“Ask, and it shall be given to you.” Well, the markets asked, and the Federal Reserve delivered.

While the market expected the Fed to leave its policy rate unchanged at 2.25-2.50% at its January 29-30th meeting, the Fed’s more dovish stance surprised investors to the upside. The Fed dropped explicit references to potential future rate hikes in its statement and noted that it may slow the pace of unwinding its balance sheet.

The Fed’s dovish deliberation was welcomed by equity markets rallying (i.e. the Dow Jones Industrial Average had a one day jump of nearly 2%, the best one day move in over three weeks). Conversely, rates fell across the Treasury curve, with the 10-year Treasury yield dropping about 3.5bps to 2.694% post the announcement. FOMC Chairman Powell noted geopolitical risks such as China’s slowing economy and uncertainty regarding a smooth Brexit that could adversely impact the U.S. economy.

Prior to the FOMC meeting, Brexit concerns continued as the U.K. Parliament demanded that PM May go back to Brussels to renegotiate an exit agreement with the EU and after the U.K. Parliament voted against extending the Brexit deadline of March 29th. Separately, weaker manufacturing data out of China also reinforced concerns regarding slowing global growth (see more below).

Notwithstanding the sentiment from the FOMC meeting, the Fed will need to determine how to manage monetary policy on the back of a resilient labor market. After the FOMC meeting, January nonfarm payrolls data was released and surprised to the upside, as employers added to payrolls for the 100th consecutive month. Both the stock market and yields rose on the back of the data, with 10-year Treasury yields rising about six basis point to 2.69%. The DJIA and S&P 500 had their biggest monthly gains in January since October 2015, with both indices closing the week in the green at around 2,706.53 and 25,063.89 respectively. The ten-year Treasury yield hovered around 2.688% at the time of this writing.

The markets also got a boost from China/U.S. trade discussions, as both parties appeared to get one step closer in reaching a trade agreement. After officials from both sides met last week, President Trump indicated an extension to the March 1st deadline of reaching an agreement would likely be unnecessary. Further, China made good on its promise to buy more U.S. soybeans a day after the talks. High-level discussions are scheduled to continue late February when China’s President Xi and President Trump are scheduled to meet.

This week, outside of key domestic manufacturing and trade data, all eyes are across the pond as the Bank of England takes center stage. It is largely expected that the BoE will keep rates unchanged at 0.75% on the back of Brexit uncertainty.

I. U.S. Economic Data/Markets

Federal Reserve unanimously left rates unchanged at 2.25-2.50%. While the Fed called for two rate hikes at its December meeting, a more dovish stance was reflected at its January meeting. The Fed dropped language in its statement that further gradual rate hikes likely would be warranted. Other key takeaways from the FOMC meeting included:
- The Fed re-emphasized a patient approach to policy, given recent global economic developments and muted inflation.
- The expectation of sustained economic expansion given strong labor markets and inflation near its 2% target.
- Ongoing geopolitical concerns including Brexit negotiations and slowing growth in China were among the economic risks cited by FOMC Chairman Powell.
- Depending on economic and financial developments, the Fed indicated that it could adjust the pace of unwinding its $4 trillion bond portfolio.
Q4 GDP/PCE/Personal Spending and Income data releases delayed due to the partial government shutdown, which recently ended.
Non-Farm Payrolls reflected 304k jobs added versus estimates of 170k in January. The number of jobs added last month was higher than the average monthly gain in 2018.
- The unemployment rate inched higher from 3.9% to 4.0%, in part due to the partial government shutdown.
- Wages rose at about 3% y-o-y, and for the sixth straight month.
- Sectors that added the most jobs included: leisure and hospitality, professional service, healthcare and construction.
- While the payroll data surprised the market to the upside, we believe the U.S. jobs market is stronger than the story reflected in the data. The Bureau of Labor Statistics does not include the gig economy in its headline (i.e. the 304k data point) or established survey data. The gig economy refers to the temporary labor force including freelancers and contractors.
  - We believe the jobs market is thereby stronger and will fuel economic growth domestically, which could easily prompt the Fed to have a more hawkish outlook particularly in the second half of the year as a lot of the aforementioned concerns by the Fed such as trade uncertainty (i.e. Brexit, U.S./China trade deadlines) will be no longer.
ISM Manufacturing increased in January to 56.6 up from December’s read of 54.3.
- New orders picked up in January as well as increased production and employment.
S&P Case Shiller Home Prices reflected housing prices rising at a slower pace, increasing by 5.2% in November versus a 5.3% rise in October.
- Gains in prices have slowed the most in large metropolitan areas.

II. Other

China Economics – key manufacturing data reflected continued weakness in the sector in part due to ongoing trade tensions and slowing global growth.
- PMI data indicated manufacturing activity slowed for a second consecutive month, coming in at 49.5 (slightly beating expectations of 49.3).
  - Conversely, non-manufacturing PMI came in strong at 54.7.
- Caixin Manufacturing PMI also declined for a second straight month, coming in lower-than-expected in January at 48.3 versus estimates of 49.5. It was the worst reading since February 2016.
  - New orders, an indication of future manufacturing activity, also declined for the second straight month to 47.3, the lowest reading since September 2015.
Eurozone Data
- GDP increased 1.2% during 4Q2019 largely in line with market expectations on an annualized basis. Economic growth fell short of the 1.6% increase seen by the third quarter.
- Unemployment rate for the region stood at 7.9% in December, unchanged from November and also in line with expectations.
- Retail sales surprised to the downside, falling 2.1% y-o-y versus expectations of a 1.5% gain.
European Central Bank President Draghi noted that the Eurozone’s economy was weaker-than-expected in a speech early in the week. He noted the “persistence of uncertainties, in particular, relating to geopolitical factors and the threat of protectionism [that] is weighing on economic sentiment.”
- Similar to the Fed, despite concerns regarding global growth, Draghi mentioned certain strong financial conditions, including tightening labor markets and growing pressure on wages and thereby inflation. He expects inflation to remain close, but below the 2% level in the medium-term.
- Draghi emphasized the need for significant monetary policy stimulus “to support the further build-up of domestic price pressures and headline inflation developments over the medium term.” The ECB will do this via forward guidance on key ECB interest and through reinvestments of its balance sheet assets.
U.K. Parliament voted not to extend its scheduled March 29th “divorce date” from the EU. Parliament also voted that a “no-Brexit” deal was not an option. The sterling dropped on the back of the votes.
- Prime Minister May is now tasked to go back to the EU to renegotiate terms regarding the North Ireland backstop. Many EU officials, including France’s President Macron, have pushed back on the idea of renegotiating a deal that May and the EU agreed upon last November.
- May is expected to present a revised deal that the U.K. Parliament will vote on to take place on February 13th.
Japanese retail sales were higher-than-expected in December rising by 1.3% y-o-y versus expectations of a 0.8% rise.
- Retail sales serve as an indication of private consumption, which represents about 60% of the Japanese economy.