Bad Labor Market News is Good News for Equities

Bad Labor Market News is Good News for Equities

Equity markets rose last week amid an FOMC rate decision and a softer labor market update. Global equities (represented by the MSCI All Country World Index) were up 0.95%, and domestic stocks (represented by the S&P 500 Index) were up 0.56%.

US Federal Reserve

The US Federal Reserve kept interest rates steady for the sixth consecutive meeting as widely expected. While the Federal Funds rate sits at the highest level in over two decades, the Fed has held off on rate cuts citing “a lack of further progress” in their goal of bringing inflation closer to their long-term target of 2%. However, Federal Reserve Chair Powell also noted that policymakers did not see a need for additional rate hikes as they believe current monetary policy is “sufficiently restrictive”.

US Economy

While the focal point of the Fed and investors has been around the stalling progress of taming inflation, a cooler labor market update for April was received positively by markets on Friday. The US economy generated 175,000 jobs for the month, below consensus estimates of around 240,000 and down from March’s 315,000 print. The unemployment rate ticked up to 3.9%, mainly caused by an uptick in the labor force. While the miss on added jobs showed a cooling in the labor market, the slowdown in wage growth was the big headliner of the report. US Average Hourly Earnings fell to a 3.9% year-over-year rate, down from 4.1% in March and the lowest level since May 2021.

Source: BLS

Manufacturing and Services Gauges

Both the Institute for Supply Management’s (ISM) manufacturing and services gauges fell into contractionary territory in April. For the manufacturing index, the March reading was the first expansionary period (reading above 50) since October 2022 but fell back under 50 in April. The ISM Services PMI was in expansion for 15 straight months until April’s reading fell back into contraction territory.

US Treasury Yields

With the cooler-than-expected labor market update, US Treasury yields fell to snap a four-week streak of rising. The 10-year treasury yield fell to 4.50% from 4.67% the week prior, and the shorter-term 2-year rate dropped to 4.81% from nearly 5%.

Looking Forward

This week’s economic data calendar is relatively light with the University of Michigan’s Consumer Sentiment Index’s preliminary results to be released on Friday. The last reading showed a slight drop as inflation expectations ticked up and views of personal finances softened. The University of Michigan’s survey results come following the Conference Board’s latest Consumer Confidence Index reading this week where the index fell for the third consecutive month citing inflation concerns and the labor market outlook.

I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.