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Stocks Lose Steam on Surge in Job Openings: May 31, 2023

Stocks Lose Steam on Surge in Job Openings: May 31, 2023

Posted May 31, 2023 at 12:30 pm
Jose Torres
IBKR Macroeconomics

Stocks are losing steam today even as concerns regarding the debt ceiling wane. A surge in job openings in the U.S. and weak economic data from China are serving to hurt investor sentiment during the last day of the month. Still, the S&P 500 Index is on track for its third consecutive month of gains as it conquers worries of slowing global demand amidst continued tightness from central banks.

Optimism about the U.S. avoiding a catastrophic default on debt is growing following the House Rules Committee approving a bill based on a debt ceiling compromise spearheaded by Democratic President Joe Biden and House Speaker Kevin McCarthy. During a hearing yesterday, the more conservative committee members tried to block the legislation because they believe the bill doesn’t cut spending enough while Democrats criticized its various concessions made to win McCarthy’s approval. The Biden Administration says it believes the deal would lower spending by about $1 trillion over a decade, while some Republican negotiators argue the deal cuts spending by $2 trillion.

While committee members said the bill, which suspends the debt cap for two years, is far from being perfect, they voted 7-6 in favor of sending it to the full House of Representatives for approval. Members from both parties say they expect the legislation to pass both chambers of Congress prior to the June 5 X date, or the date at which a failure to increase the current debt ceiling would result in the U.S. defaulting on debt and failing to meet other financial commitments.

On the economic front, U.S. job openings surged in April, an unwelcome development for a Federal Reserve (Fed) that has remained steadfast in its goal of cooling inflation. The Fed’s goal is to lower job openings which will reduce wage gains as workers’ bargaining power declines due to dwindling job opportunities. The hope is that an easing labor market can reduce inflationary pressures without a sharp increase in the unemployment rate, generating a historically challenging soft-landing.

Today’s 10:00 am eastern time data release from the U.S. Bureau of Labor Statistics went the opposite way of the Fed’s goals, however, with job openings rising to 10.1 million in the month of April, exceeding expectations calling for 9.38 million by a wide margin. Perhaps even more stark, April’s total exceeded the previous month’s level of 9.74 million. The rise in job openings offers more opportunities and increased negotiating leverage for workers, which conflicts with slower wage pressures and decelerating price growth. Industries with the largest gainers included retail, health care and social assistance and transportation, warehousing and utilities with gains of 209,000, 185,000 and 154,000, respectively.

The long awaited powerful Chinese economic reopening hasn’t been as robust as market spectators would have liked. The Manufacturing Purchasing Manager’s Index (PMI) released by the nation’s statistical bureau reflected the second consecutive month of contraction, with May’s 48.8 read contracting faster than April’s 49.2. Export demand remained weak this month, with higher interest rates and spending shifts towards services hurting Chinese manufacturing. Activity in services has also declined for the second consecutive month to the weakest level in four, as the Services PMI declined to 54.4 this month from 56.4 last month. Fresh headwinds exist as well, with reports concerning a second wave of Covid-19 surfacing amidst a historic downturn in the nation’s property market.

Equities are down this morning in response to slowing global demand alongside a persistently tight labor market. Leading the way lower is the small-cap Russel 2000 Index, which is down 1.6% while the S&P 500 Index is off 0.9%. All other major U.S. indices are declining roughly 1%. Bond yields are down across the curve, with the 2- and 10-year Treasury yields lower by 4 and 6 basis points (bps) to 4.41% and 3.66%, respectively. A slower-than-expected inflation reading from the Eurozone has led to a weaker Euro as well as Great Britain’s Pound Sterling. They are propping up the dollar, with the Dollar Index up 35 bps to 104.53. Weaker data from China has also led to a weaker Yuan, also underpinning the dollar, while also pointing to reduced oil consumption in the country, which is the world’s second-largest oil consumer. China economic weakness is therefore hampering energy markets. WTI crude oil is continuing its downtrend and is down 1.1% to $68.69 per barrel. 

Recent corporate earnings show that the strong trend of Americans relocating during the Covid-19 pandemic has subsided while both consumers and businesses are cutting back on technology spending. Consider the following examples:

  • U-Haul, which provides rental trucks, self-storage units, life insurance and insurance for other needs, reported net earnings available to shareholders of $37.7 million for the company’s fiscal fourth quarter ended March 31 of this year compared to $86.7 million in the year-ago quarter. The company’s earnings per share (EPS) of $0.16 declined year-over-year (y/y) from $0.44 and missed the analyst consensus estimate of $0.50.

For the quarter, total revenue fell y/y from $1.19 billion to $1.18 billion. Analysts expected $1.22 billion in revenue. Revenue for self-moving equipment rentals declined from $768.8 million to $726.3 million y/y as the total mileage driven by customers in rental equipment fell. U-Haul Chairman Joe Shoen says the decline is attributable to moving activity returning to more normal historic levels following increased activity during the Covid-19 pandemic. At the same time, the previous high levels of rentals combined with the company slowing its pace of replacing older equipment increased U-Haul’s fleet maintenance costs during its fiscal fourth quarter. On a positive note, revenue for self-storage facilities increased from $166.8 million to $195.2 million y/y. U-Haul’s occupancy rate declined slightly from 82.6% to 81.2% y/y, but the company increased its number of storage units from 601,000 to 673,000 during the period. 

  • HP Inc., formerly Hewlett Packard, posted GAAP earnings of $1.07 billion, up y/y from $1 billion. The manufacturer of printers and personal computers generated diluted EPS of $1.07, up y/y from $0.94. On an adjusted basis, the EPS was $0.80, beating the consensus expectation of $0.76 but declining from $1.08 in the year-ago quarter. The manufacturer of printers and personal computers generated revenues of $12.91 billion, down 21.7% y/y and missing the analyst consensus expectation of $13.07 billion. HP’s $8.2 billion in sales of PCs and laptops tanked 29% y/y and missed analyst estimates of $8.4 billion. Printing revenues also declined y/y by 5%, dropping to $4.7 billion. While Best Buy last week said it expects sales of personal technology goods to increase next year, HP Chief Executive Enrique Lores says he believes PC sales could bounce back during the second half of this year and into 2024. He also believes the addition of artificial intelligence to PCs will help boost sales.
  • Hewlett Packard Enterprise Co., which provides computing services to businesses and other organizations, reported net earnings of $685 million or an adjusted EPS of $0.52 compared to $583 million in net earnings or $0.44 a share in the year-ago quarter. The results for the quarter ended April 30 of this year exceeded the consensus expectation of $0.48. The company’s revenue of $6.97 billion climbed 4% y/y but missed the analyst consensus expectation of $7.31 billion. Revenues for edge computing, which helps improve data transmission by placing data servers closer to users, climbed 50% y/y while the company’s artificial intelligence service revenue climbed 18%. However, revenues for cloud computing and data storage declined as the company’s business customers have curtailed spending. Additionally, Hewlett Packard Enterprise faces strong cloud competition from Microsoft, Amazon.com and Oracle.

Consumer demand remains strong, but not without consequences, however, as the Fed is likely to remain committed to reaching its inflation objective of 2%. In fact, the Fed is likely to continue to pressure consumers and the labor market alike, as the unprecedented levels of liquidity from the pandemic continue to linger on, generating imbalances and disruptions. 

Investors are dealing with a confluence of economic and political information this morning, which is harming investor sentiment in aggregate. While debt ceiling progress is likely to strain liquidity conditions in the coming months, declining global demand is likely to weigh on corporate revenues. Consumer demand remains strong, but not without consequences, however, as the Fed is likely to remain committed to reaching its inflation objective of 2%. In fact, the Fed is likely to continue to pressure consumers and the labor market alike, as the unprecedented levels of liquidity from the pandemic continue to linger on, generating imbalances and disruptions. 

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