Nonfarm Payrolls February 2024

The good times keep rolling for American workers! February jobs jumped by 275,000 as the official unemployment rate remains moored below 4%. Hiring in the services sector took the cake last month with total new hires of ~204,000. For those keeping score at home, we are tracking at a pace of ~265,000 new jobs per month (3-month average). Moreover, demand for labor among US employers, as measured by JOLTS, is quite strong at ~9M. This means there are SUBSTANTIALLY more jobs available (labor demand) than there are unemployed workers to fill them (labor supply). Wage pressures eased in February with hourly earnings rising 0.1% MoM. BLS made a few revisions to its January figures, so compensation is appreciating at an annualized clip of 3.7% thus far in 2024. After a red-hot start to the year, the most recent figures on inflation and GDP are more in line with our expectations, leaving us in the camp of back half rate cuts in the US (STILL). Our domestic economy is an integral piece of the global economy, but we must also be mindful that economic conditions abroad play a role in determining/ calibrating our monetary policy.  As we discussed at the start of the year, Europe (including Great Britain) and China are struggling from a growth perspective—after all, the UK just entered a technical recession and the Chinese economy is stuck in the doldrums. To a certain extent, “slack” in other major economic blocs affords the Fed time to weigh options regarding rates here in the US (even if inflation remains elevated and sticky). For now, our message to Jay Powell is simple, “Let it be.”

According to the Atlanta Fed, real GDP (inflation-adjusted) is running at 2.5%. For our more fundamentally fixated audience, this figure is both seasonally adjusted and annualized. In other words, this isn’t strictly an estimate of the value of goods and services produced in the US. Rather, it helps us gauge the glidepath of our economy relative to what is theoretically sustainable and in relation to global peers. We outlined some major issues in Europe and China to start the year. China’s recent commitment to a 5% GDP target underscores the difficulties Xi is having managing through the current economic malaise. To put that in perspective, at peak pandemonium during the financial crisis, China’s economy was still running at >6% REAL GDP! We would also note that Chinese CPI and PPI turned negative at the end of last year—not a great rebound from the “Covid- Zero” strategy. Pivoting west, Europe is also enduring a rough patch (aka recession). One of the curiosities about our European friends is that sentiment typically lags real GDP; that is to say, consumers typically feel worse about the economy than it really is. With real GDP hovering around 0% that gives some insight into how the average European feels about his/ her circumstances. Incidentally, the few times that this relationship between sentiment and GDP among Europeans inverts something categorically disastrous occurs… the Great Financial Crisis, Covid-19 pandemic, and War in Ukraine are three quick examples from the past couple of decades. Just to be clear, there is nothing statistically significant about that observation… it’s just an observation! The fact of the matter is that taken together, Europe and China, represent a very large percentage of global GDP. Both are struggling and hotter than expected US inflation prints can be taken in stride by the Federal Reserve so long as the numbers don’t jump off the page. Relative to the end of last year, stateside GDP and inflation have picked up speed, yet the Fed remains insistent it is closer to cutting rates than it is to raising them. The timing of said rate cuts is the key and this is consistent with our global perspective.

Markets seem quite content to price in the probability of rate cuts (frontrunning) and Mr. Powell has done little to deter them. A significant jump in January CPI and PPI (headline and core) failed to prompt a move in longer term 10-yr US Treasuries toward the 4.50% level. Meanwhile, spreads on similarly dated investment grade corporate debt are trading at ~120 bps over treasuries. At the time of writing, this puts the average IG corporate bond rate at 5.28% (10-yr duration). Option- adjusted spreads among corporate issuers in the debt space are closer to 100 bps. Remember what we said last summer? It’s a 5% world that we are living in! Meanwhile, multiples continue to expand for equities and financial conditions by some measures are the loosest in more than 2 years. This translates to a very confident marketplace! Might we see more equity issuance? If the mantra among Fed watchers remains higher for longer, then that could prove prescient.        

News Release: Bureau of Labor Statistics (The Employment Situation- February 2024)

Originally posted on Total Wealth Partners.