Nonfarm Payrolls January 2019

Today’s report from the Bureau of Labor Statistics takes a little shine off of the December jobs report, but all-in-all it marks another strong month for the US labor market. The headline figures show substantial payroll expansion to the tune of 304,000 jobs. Unemployment did tick up to 4.0% in January, but this seems more consistent with the thesis that more Americans are coming into the labor force. Speaking of the labor force, labor force participation inched up to 63.2% and the employment to population ratio improved to 60.7%. Both of these measures improved 0.1% from the December reading and 0.5% year over year. I mentioned this report dumped some cold water on BLS’s initial reading on the December employment situation. Well, that 312,000 jump in payrolls was marked down by 90,000 to something closer to 222,000. Not to worry, November was revised up 20,000 for a net reduction of 70,000 jobs previously reported in the final two months of 2018. This means hiring activity over the past three months has been significantly above 200,000. Where did payrolls expand most to start 2019? Leisure and hospitality logged the largest increase with 74,000 jobs and construction came in second with 52,000 new jobs created last month.

Among other things, we are keeping a close eye on global PMI’s for signs of economic expansion or contraction. On that note, China’s manufacturing sector showed signs of continued weakness to start the new year with a PMI reading of 48.3- readings over 50 indicate expansion, while readings below 50 signal contraction. The report illustrates, “subdued overall operating conditions in the Chinese manufacturing sector.” Let’s juxtapose this reading with today’s stateside report on the health of US manufacturing brought to you by the Institute of Supply Management- bearing in mind, of course, the rough report we had to start the year. Here are a few excerpts, “overall the economy grew for the 117th consecutive month…Demand expansion improved with the New Orders Index returning to the high 50’s… Consumption continued to strengthen, with production expanding strongly and employment continuing to expand...” What about those China-US trade talks? Apparently, the final deal will have to be struck between President Donald Trump and President Xi Jinping. Stay tuned.

Delivering some more good to cheer to financial markets this week, was Fed Chairman Jerome “Jay” Powell. Pledging “patience” is a virtue with respect to the path of future rate increases, the Fed opted not to raise rates at this week’s FOMC meeting. Moreover, the balance sheet unwind is not on autopilot. Wow, that’s a relief. Jay even made it through his entire press conference without roiling financial markets. It has been roughly one year since Mr. Powell took the helm at the Federal Reserve and what a year it has been. 2019 will be quite an adventure, as well, and we are looking forward to it. At TWP, we reaffirm our S&P 500 fair value of 2800, while noting that risks remain negatively skewed but to a lesser extent than our 2018 estimates.

Market Outlook: Bullish USD, Neutral Duration, Neutral Equities