U.S. Weekly Financial Notes: More March Madness

More March madness was contained in the government's U.S. nonfarm payrolls data, which reported just a 120,000 jobs gain for that month, the weakest one-month payroll rise since October 2011. The disappointing headline was followed by depressing figures throughout the report. Other economic releases this week include:

• The Automatic Data Processing (ADP) report showed 209,000 private job gains in March.
• Minutes to the Federal Reserve's March 13 policy meeting was mum on further easing, with Fed officials keeping their QE eggs hidden in their basket. If further economic data disappoint, as did the March jobs data, they may soon have to start rifling through that basket.
• February U.S. construction spending fell 1.1% over January.
• U.S. auto sales rose 13% over a year ago to an annualized rate of 14.3 million units in March.
• February U.S. factory orders rebounded 1.3% over January.
• The U.S. ISM manufacturing index rose 1 point to 53.4 in March.
• The U.S. ISM nonmanufacturing index fell to 56 points last month from 57.3 in February.
• U.S. consumer credit rose by $8.7 billion in February, after surging $18.6 billion in January.
• Initial jobless claims fell by 6,000 to 357,000 in the week ended March 31, still below the 400,000 benchmark, signaling that the job market is continuing to heal. Continuing claims fell by 16,000 to 3.338 million during the week ended March 24.
• Oil prices hovered around last week's $103/barrel during the early morning on Friday.

A Chilly Spring For Jobs

The only good news in the Friday report was that it came out when many investors are already on vacation. The Bureau of Labor Statistics' (BLS) nonfarm payrolls report for March provided little comfort to markets as they head into the holiday weekend. The bad news started with the headline figure of just 120,000 new jobs in March, which was the smallest month-over-month gain in five months, and was below the consensus expectation of 210,000. We also didn't get the nice bounce from the expected upward revisions, as we have seen in the past. Revisions for the prior two months added 4,000 net new jobs to the rosters. The mild weather over the last few months in part explains the March disappointment, since some hires were pushed forward. While one month doesn't make a trend, the jobs report reminds us that the risk of the recovery derailing isn't gone. It also helps explain why the Fed remains cautious, with no plans of shelving its stimulus measures any time soon.

Total nonfarm payroll employment is now up by 1.95 million during the past 12 months, or about 162,400 new jobs per month. Private employment is up by 2.13 million--about 177,300 new jobs per month. It is estimated that the U.S. needs between 120,000 to 150,000 monthly job gains to keep up with demographics. With economic growth still soft, unemployment should remain high for some time.

Local governments continue to bleed jobs--in March, they lost a total of 3,000 jobs, which included 2,700 education jobs. Local governments cut 96,000 jobs since last March. State governments, in contrast, gained 2,000 jobs due to a 3,700 jump in education jobs. But other state agencies bled 1,500 jobs. Federal employment, excluding postal service, gained 2,000, while postal jobs dropped by 2,100.

While businesses offset these losses, the 120,000 jobs gain in March was nowhere near the ADP's private payrolls figure of 209,000 jobs. Manufacturing sector gained 37,000 jobs in March, helped by strong auto sales. Construction sector lost 7,000 jobs in March, despite the warm weather, though it gained 57,000 for the year. Private-service producing sector gained 90,000 jobs in March, well below the 204,000 rise in February. Retail trade lost 33,800 jobs, which included 32,300 in general merchandise stores. Leisure and hospitality sector gained 39,000 new jobs in March including 36,900 to the restaurant staff. However, hotels shed 1,300 jobs in March, right before Easter, increasing worries that high gasoline prices are already affecting travel plans. Health care and social services gained 26,100 jobs and 375,000 for the year. Professional and business services sector gained 31,000 jobs, with half in administrative and waste services. Temporary hires, a leading indicator for total employment, shed 7,500 jobs but were up by 187,600 for the year. The number of temporary jobs usually increases before businesses commit to hiring permanently, suggesting more good news down the road. The 34.5 hours worked figure is also well above the trough of 33.8 in October 2009.

The 0.1% decline in the unemployment rate to 8.2% in March gave a more optimistic spin to the report. However, the decline is due to people leaving the jobs market, not new hires. The labor force fell by 164,000 in March, while household employment lost 31,000 jobs. That's not a good combination: weaker participation and less jobs. The unemployment rate is still stubbornly high; we expect it to climb a bit higher through 2012, as people who had previously given up and dropped out of the labor force are expected to come back, encouraged that they'll find a job. However, the disappointing jobs data in March may keep them on the sidelines longer than we earlier thought.

The increase in average hourly earnings, 0.2% over February, was a bit better than the consensus expectation of 0.1%. Average hourly earnings rose just 2.1% over last year, which is likely not enough to keep up with inflation as workers see their wages eaten by higher prices at the gas pump. The long-term unemployed still can't get jobs. The number of unemployed 27 weeks or longer fell in March by 118,000 to 5.308 million, but they represent 42.5% of the total unemployed. However, the U6 measure of labor underutilization rate slipped to 14.5% in March from 14.9% in February and 16.2% in March 2011. While there is still a lot of slack in the labor market, at least it is shrinking.

Barely A Bounce

February factory orders rebounded 1.3% over the January rate, a bit weaker than the consensus expectation of a 1.5% gain. January orders were revised down to a 1.1% drop from 1.0%. Total orders are still up 10.9%, year to date. Transportation orders rose 3.9% over January, and are up 12.7%, year to date. The year-to-date gain came from both a 32.6% jump in nondefense aircraft orders and a 25.4% increase in auto orders, reflected in the strong auto sales data seen this quarter.

Excluding transportation, orders were up 0.9% month over month, and are up 9.4% year to date. While core capital goods orders (excluding defense and aircraft)--a key leading indicator for business investment--increased 1.7% month over month in February, it still wasn't enough to offset the 3.4% drop the month before. Shipments were up just 0.1% over January, while inventories rose 0.4%, keeping the inventory-shipment ratio steady at 1.33.

This data helps explain why manufacturers were still upbeat. The U.S. ISM manufacturing index rose 1 point to 53.4 in March. It was in line with consensus expectations and remains above the 50-point benchmark, indicating growth in the sector, now for 32 straight months. However, it is still below the 59.9 reading in January 2011. The employment component climbed to 56.1 in March from 53.2 in February, and production rose 3 points to 58.3 in March. New orders edged down 0.4 points to 54.5. The prices paid index edged down to a still-high 61.0 from 61.5 in February, and remains well above the 41.0 reading in October 2011.

The U.S. ISM nonmanufacturing index fell to 56 points last month from 57.3 in February, which was a bit weaker than the consensus expectation of 56.8. It remains above the 50-point benchmark rate for more than two years. Employment rose to 56.7 from 55.7, the second highest level since the recession ended.

Despite the happier moods in manufacturing, some sectors, such as construction, aren't faring so well. U.S. construction spending fell 1.1% month over month in February, which was much weaker than the consensus expectation of a 0.7% increase. Construction spending in January was revised down to a 0.8% drop (previously down 0.1%), making the report even more disappointing. Public spending fell 1.7%, which isn't a surprise considering the ongoing budget cutting and balancing by state and local governments. However, private spending also fell by 0.8% in February. Residential spending was flat in February and nonresidential spending fell 1.6%--both were revised down sharply--to round out an overall disappointing construction spending report.

You Can't Always Get What You Want

Minutes to the March 13 FOMC policy meeting indicated that members said little about further monetary easing. Members agreed to keep interest rates at near zero through late 2014 and retain the existing policy of reinvesting principal payments of Fed holdings. The minutes showed that a "couple of members" indicated that additional stimulus may be needed if "the economy loses momentum" or if inflation goes below target. There also wasn't much discussion on various policy tools available to the Fed. Members "generally agreed that the economic outlook, while a bit stronger overall," was similar to economic outlook at their January meeting. Members generally expected a moderate pace of economic growth over coming quarters, with "gradual further declines in the unemployment rate." Most participants anticipated that once the energy-price related inflation increase "had run its course," it would be at or below the 2% target rate. Bond yields climbed higher after the FOMC offered little mention of further easing in their meeting minutes.

Financial Market Highlights

Below are the financial market highlights for the week ending April 5, 2012.

Treasury yield curve

The 10-year Treasury yield fell to 2.06% on Friday (early afternoon) from 2.15% last week, following a disappointing March nonfarm payrolls report and on speculation that the eurozone debt crisis is worsening. The rate on three-month Treasury bills dropped to 8 basis points (bps) this week. The two-to-10-year spread rose 3 bps to 190 bps over the week and was 78 bps lower than a year ago. The 10-year Treasury spread above inflation-protected bonds (TIPS), a measure of inflation expectations, fell 1 bp to 169 over the past week and was 17 bps below the previous year.

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Chart 1

Credit markets

Risk aversion rose in all market segments this week as renewed concerns in Europe dampened investor sentiment. The equity market volatility index (VIX), a measure of the market's uncertainty, increased slightly to 15.74 from 15.48 the previous week. The T-bill-to-eurodollar (TED) spread, a measure of banks' willingness to lend, remained stable at 39 bps this week and was up 16 bps from a year ago. Fixed mortgage rates slipped to 3.98% from 3.99% last week. Mortgage applications fell 7.2% in the week ended March 30, after falling 2.7% in the previous week. The refinance index rose 4%, after falling 4.6% the prior week. The purchase index rose 7.2%, after rising 3.3% the previous week.

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Fed policy and interest rate outlook

The U.S. Federal Reserve's March 13 FOMC meeting statement said that the Committee had decided to keep the federal funds rate at near-zero, and that economic conditions "are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014." It noted that the "economy has been expanding moderately" and--although labor conditions have improved-- the unemployment rate "remains elevated." The Fed said that "strains in global financial markets have eased" though they still pose "significant downside risks to the economic outlook". The Fed noted that "inflation has been subdued in recent months", and "although crude and gasoline prices have increased lately, longer-term inflation expectations remain stable". The FOMC anticipates inflation to trend down to at-or-below the rate "most consistent with its dual mandate." In December, the Fed released its new economic projections, which were weaker than the June forecasts. The Fed cut the "central tendency" projection of 2012 GDP growth to 2.2%-2.7% from 2.5%-2.9%, with the core consumer deflator forecast up 1.5%-1.8% (from 1.5%-2.0%). Previously, policymakers were split on what type of accommodative monetary tools the central bank should use to try to kick start the economy. While there were a number of opinions on the inflation outlook, most judged that inflation risks were roughly balanced with little risk of deflation. The Fed decided to extend the maturities on its balance sheet (this is called Operation Twist), although two officials wanted to do more and others wanted to hold open the option for QE3. However, the members generally anticipated a pickup in the pace of the recovery although they saw "significant" risks to growth, with the recovery more vulnerable to shocks. The Feb. 29 Beige Book compendium of reports from the 12 Federal Reserve district banks reiterated that economic activity is advancing "at a modest to moderate pace," which was expected. The report noted that regional economies in Philadelphia and Atlanta are expanding faster than other regions. Overall, the report highlighted slight improvement in labor markets, banking conditions, and housing, while retailers reported that warm winter weather had hurt seasonal sales.

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Global interest rates

Government long-term bond yields were largely up this week. Key central banks remain cautious in their outlook. Recent trends include:

• The European Central Bank (ECB) maintained its benchmark refinancing rate at a low of 1% on April 4, on rising inflation worries, while some eurozone nations battle economic contractions amid the ongoing debt crisis.
• The Bank of England held its bank rate at 0.5% at its April 4 meeting on concerns over higher energy prices and the continuing debt crisis in the eurozone.
• The Bank of Japan kept its monetary policy on hold on March 13. It expanded a loan scheme targeting growth industries by 2 trillion yen ($24 billion) to 5.5 trillion yen, but overruled further monetary easing.
• The People's Bank of China lowered the required reserve ratio by 50 bps, effective February 24 because Europe's debt crisis and a cooling property market threaten China's economic growth. The ratio for large banks was thus reduced to 20.5%.
• The Bank of Canada held its target overnight rate at 1% on March 8 because of signs of improvement in the global economic recovery and underlying momentum in the Canadian economy (that remained around trend).
• The Norges Bank reduced the deposit rate by 50 bps to 1.75% during its meeting on December 14 in order to guard the economy against deteriorating global growth.
• Sweden's Riksbank reduced its seven-day repo rate by 25 bps to 1.50% on February 14, hoping to prevent the Swedish economy from falling into a recession as Europe's debt crisis erodes export demand.
• The Swiss National Bank cut its interest rate target band to 0.00%-0.25% from 0.00%-0.75% to stem the rise of the Swiss franc.
• On April 4, Poland's central bank left its seven-day reference rate at 4.50% for the 10th month, but warned that rates might rise if inflation remains elevated and the domestic economy avoids a steeper downturn.
• The Reserve Bank of Australia (RBA) kept its official cash rate target at 4.25% on April 4, as global and domestic economies continue to grow less than expected, and inflation expectations remain contained.
• The Reserve Bank of New Zealand left its key rate unchanged at 2.5% on March 7, citing slower-than-expected domestic economic growth in 2012 due to delays in the earthquake reconstruction process and easing in inflation.
• South Korea's central bank left its key interest rate unchanged at 3.25% on March 7 for the ninth straight month, to balance the risk of a possible spike in inflation against the still-sluggish global economic recovery.
• The Bank of Thailand held its benchmark overnight rate at 3.00% on March 21, pausing after two consecutive rate cuts on rising inflationary pressures.

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Foreign exchange rates

The dollar was mixed this week against other major currencies after Fed's FOMC minutes reduced expectations for further monetary stimulus and disappointing U.S. March nonfarm jobs data. The euro fell to $1.308/€1 on Friday (early afternoon) from $1.334/€1 last week, as Spanish and Italian bonds slumped and borrowing costs increased at a French auction, adding to concerns that the region's debt crisis is spreading. The yen rose to ¥81.52/$1 on Friday (early afternoon) from ¥82.39/$1 the previous week. The U.S. trade deficit widened to $52.6 billion in January, up from a revised $50.4 billion deficit in December (was $48.8 billion), the widest since October 2008. Imports rose by $4.7 billion to $233.4 billion in January, while exports rose by $2.6 billion to $180.8 billion. Excluding petroleum, the deficit was $22.9 billion, narrower than December's $23.2 billion.

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Commodity price indices

Commodity prices tumbled this week after the U.S. central bank's recent meeting minutes dented hopes for more economic stimulus and as a Spanish debt auction drew weak results. Oil prices remained stable at $103.26/ barrel on Friday (early afternoon) amid news that Saudi Arabia is likely to keep output high in the near future, and after the weekly EIA report noted crude inventories increased almost five times larger than forecasts. Brent crude oil price slipped marginally to $123.03/barrel from $123.34/barrel and remains high relative to West Texas Intermediate (WTI). Natural gas prices edged down this week to $3.325/mbtu from $3.343/mbtu last week. Gold prices fell to $1,632/ounce on Friday (early afternoon) from $1,666/ounce last week on a rise in the dollar and fading hopes for more U.S. monetary stimulus. Livestock prices fell by 3.1% this week and are down 11.5% over the past year.

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U.S. equity market

Stocks traded in and out of positive territory this week, as renewed eurozone debt worries and weak U.S. March nonfarm payrolls data weighed on investor sentiment. The S&P 500, Dow, and Nasdaq were mixed and trading at 1,398, 13,060, and 3,081 respectively, on Thursday. Stocks were in a bear market from October 2007 until March 2009. Despite recent losses, they have now recovered much of those losses. All market indices have been up during the past year. The S&P 500 is now up 11.2% from the end of 2012 level of 1,258 and is up 106.95% from its March 9, 2009, low of 676.

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U.S. equity market by sector

Equity sectors remained mixed this past week, through Wednesday. Health care stocks led the gainers, up 1.6%, followed by utility stocks, up 0.9%. Telecommunications stocks, down 1%, led the decliners. Information technology and consumer discretionary stocks saw the largest 12-month gains, up 19.7% and 14.6%, respectively. Energy stocks, burdened by supply concerns, posted the largest 12-month decline (down 9.1%).

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Global Standard & Poor's stock indices

World equity markets fell this week through Wednesday, except Australian and U.S. markets (up 1.1% and 0.3%, respectively), after a dismal Spanish bond sale raised concerns about funding difficulties for weaker eurozone countries. Canadian and European markets led the decliners, down 2.1% and 1.4%, respectively. All major global equity markets, except the U.S. markets, have now turned negative for the 12-month period, led by Asia-Pacific (down 14.5%).

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Global equity market performance by sector

International sectors slipped this week, through Wednesday. Renewed Eurozone debt crisis fears weighed on financial stocks, which fell 3.4%, followed by industrial stocks, which dropped 1.9%. During the past year, information technology and consumer staples stocks posted the largest gains (up 12.7% and 9.5%, respectively). In contrast, material stocks dropped the most during the past year (down 19.8%), followed by financial stocks (down 15.3%).

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Data tables and text provided by Kaustubh Pandey at Standard & Poor's/CRISIL.