The futures market suggests a very solid open to today’s trading. Early this morning, the U.S. Bureau of Labor Statistics (BLS) rolled out new data for the month of April. Job additions totaled just 175,000, below economists’ outlook for 240,000 and the prior-month gain of 315,000 (revised up from 303,000). The domestic unemployment rate ticked up to 3.9%, compared to 3.8% in March. Hourly wages increased by a modest 0.2% in the month, which was one-tenth of a point shy of both the experts’ estimates and the previous rate. Year over year, wages were up 3.9%, versus the anticipated 4.0% level and less than the 4.1% pace reported one month earlier. The labor participation rate held steady at 62.7%.
These latest employment readings are in line with what was revealed on Wednesday in Automatic Data Processing’s (ADP) April private payroll numbers. ADP measured 192,000 new positions, versus 208,000 one month prior. That same day, the BLS reported about 300,000 fewer available positions, or 8.5 million. It’s also worth noting that, yesterday, data from the Department of Labor showed a modest increase (1,000) in initial jobless claims, to 208,000, for the week ended April 27th. While the job market generally remains healthy, many companies are having difficulty finding the right people for their operations. Too, a majority of workers are staying longer with their employers. Wage inflation does not seem likely to accelerate.
Shortly, the Institute for Supply Management (ISM) will unveil its services sector gauge for last month. It’s widely expected that this gauge will come in at 52.0, indicating continued expansion. This follows the ISM’s April manufacturing sector measure, released on Wednesday, depicting a surprisingly weak level of 49.2, that is, a return to contraction. Another significant surprise, which we don’t anticipate, would have to occur to notably impact today’s trading.
Stocks are trying to score gains for the current trading week. In April, the major market indexes stumbled, giving back a good portion of their year-to-date gains. So far, May prices are showing improvement. Investors weighed Federal Reserve Chairman Jerome Powell’s comments on the economy and central bank rate policy at mid-week. They were cheered that Mr. Powell does not anticipate the need to raise short-term interest rates in the near term. He now seems more focused on the strength of the jobs market. Still, elevated inflation is a concern on Wall Street, in that, if it persists, the Fed might not cut the federal funds rate, now 5.25%-5.50%, at all this year. In the meantime, first-quarter corporate earnings reports are streaming in, influencing stock trading. Thus far, the quarter is shaping up to be a fairly good one, but there are more than a few companies voicing caution about consumers and future sales and earnings.
Economic news to look out for next week include data on consumer credit, consumer sentiment, wholesale inventories, initial jobless claims, and the federal budget deficit. We note that the latter has been gathering much attention recently. The U.S. Congress, in this election year, is allowing heavy spending to continue and is not taking any meaningful action to reduce the deficit via tax hikes and/or budget cuts. There have been substantial Treasury issuances to fill in the financing gap. This has played a role in keeping government bond yields at high levels, affecting linked lending rates and stressing companies and consumers that need to borrow. Banks, especially the regionals, are feeling pressure on their profit margins, exacerbated by the elevated cost of maintaining deposits for loan funding. Too, banks with significant maturing commercial real estate (CRE) loans on their books are feeling the heat of high interest rates. CRE defaults are on the rise.
Stock market volatility might well perk up in the remainder of this year, and share price gains could become more difficult to come by. Index performance will be reliant on interest rate trends and the strength of corporate earnings. It’s best to keep individual portfolios flush with stocks in top-quality companies with consistently good earnings and cash-flow generation. – David M. Reimer
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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