Nonfarm Payrolls August 2019

Though this week was shortened by the Labor Day holiday, it has been action-packed on many fronts. Before we begin, we would like to take a moment to extend our prayers to those battling Dorian. We can draw upon our recent past with hurricane Harvey here in Houston, as we direct our thoughts to those in harm’s way on the East Coast. While our workweek began with a caustic warning from the Institute of Supply Management (ISM) on the state of US manufacturing, the economic tides of worry have receded a bit. Reassuring global services data and a more measured approach to the Sino-US trade tiff have helped markets trade back to our fair value estimate of 2975… for now.

Here comes the data. The ISM shows US factories in the throes of contraction if not in recession already. August figures highlighted particular weakness in new orders; the index slipped to a reading of 47.2. Meanwhile, the factory employment index fell to 47.4. Overall, the August PMI reading for US manufacturing dipped to 49.1.  For purposes of clarity, index values greater than 50 suggest expansion, while those below 50 indicate contraction. The weakness in new orders and employment foreshadowed a relatively weak August payrolls report, which brings me to my next point.

The Bureau Labor of Statistics (BLS) released a rather underwhelming report on the state of the US labor market. The US generated a mere 130,000 jobs in August of which 25,000 can be attributed to hiring in preparation for the 2020 Census. Unemployment remains at 3.7%, but the U-6 rate ticked back up to 7.2% from last month’s reading of 7.0%. August’s labor force participation rate and employment to population ratio registered at 63.2% and 60.9% respectively. For some additional color on where the US job market stands today relative to one year ago, we note that the rolling 3-month average of hiring activity stands at 156,000 new jobs today relative to 241,000 last August. Furthermore, the brunt of this deceleration has been felt in the private sector as total private jobs created have plunged from a 3-month average of 218,000 jobs per month in August 2018 to 129,000 in 2019. Importantly, the American jobs machine is not grinding to a halt; it is just grinding along. And speaking of grinding along… what about those trade talks?

Well, there is still no resolution in sight on the trade front, but talks are back on again. Delegates from China will visit their US counterparts in Washington, barring another display of belligerence which roiled markets over the past month. Interestingly, the S&P 500 is trading at the same level as it was before trade-related hostilities broke out in late July. The backdrop is also a bit different as protests in Hong Kong have simmered down and China has been stimulating their domestic economy using one of their favorite instruments, the required reserve ratio. Essentially, this form of stimulus gives banks more flexibility to lend. This financial maneuver equates to a “stimulus package” of roughly $126B. Simultaneously, it has also reduced the mounting pressure on the yuan. In early August, the People’s Bank of China (PBOC) allowed the yuan to depreciate through 7 per US dollar. The yuan continued to slide throughout the month and traded as low 7.2 this past Monday, while US markets were closed. The yuan’s rapid depreciation in concert with retaliatory trade measures from Beijing prompted discussions within the US administration regarding the possibility of intervention in currency markets. Treasury Secretary, Steven Mnuchin, has since dismissed the idea of US currency intervention as unnecessary.

Market Outlook: Bullish USD, Neutral Duration, Neutral Equities