March payrolls impress with a solid headline figure and strong internal readings. Jobs increased by 431,000 to round out the first quarter of 2022. Moreover, January and February figures were revised higher to the tune of 95,000 jobs. This brings the average monthly hiring figure to 562,000 thus far in 2022— strength in the labor market is a good thing, folks. The official unemployment rate declined to 3.6% and U6 broke the 7% threshold, falling to 6.9%. Meanwhile, the labor force participation rate increased to 62.4%. It appears the decline in savings from a raft of pandemic-era stimulus checks is creating an impetus to return to the workforce. American workers are also returning to jobs that are paying more with MoM hourly earnings rising 0.4%, which brings us to 5.6% YoY. Payroll expansion was relatively broad-based, so there really isn’t much of a skew to highlight here that biases this particular report. All in all this is yet another strong report for 2022, which ultimately increases the odds of a larger rate hike from the Fed at its next FOMC meeting in May.
Elsewhere the war in Ukraine drags on with little ground gained during a series of negotiations between delegates from Kyiv and Moscow. Importantly, the presidents of Ukraine and Russia have yet to speak, which leaves little room for a breakthrough in our view. The economic situation in Europe has become increasingly fraught with risk. However, flash PMI’s for March suggest growth is still intact for manufacturing and services. Certainly, the war in Eastern Europe carries substantial contagion risk should the situation deteriorate further, which we cannot ignore, but for now the conflict appears largely contained from an economic perspective. Our thoughts are with those defending their freedom.
Pivoting to monetary policy, the war did appear to shave off 25 bps from the Fed’s initial rate hike. That’s right the Fed lifted rates a couple of weeks ago at its March meeting, and we are now looking at 33 bps (0.33%) for Fed funds as of today-- and an even flatter yield curve! Prior to the meeting, there was some speculation of a half point hike, but the Fed opted not to add more uncertainty to an already uncertain marketplace given the Russian invasion of Ukraine. However, Mr. Powell was quick to say following his press conference that he and his colleagues are certainly in favor of keeping larger rate hikes on the table in the event that inflation pressures remain stubbornly above their 2% target. As an aside, it does take some time (i.e. several months) for rate increases to have any measurable effect in the economic data, so this appears to be part of the Fed’s signaling strategy. A strategy which is making 3% fed funds look more and more likely in 2023.
Speaking of rates, the mean investment grade corporate spread over 10-yr US treasuries is ~150 bps, which is historically quite healthy. Moreover, option adjusted spreads in corporate America are also running at ~125 bps (also very healthy). Early in the month spreads widened significantly but have since come back in line with expectations. These readings from the capital markets corroborate what we are seeing fundamentally in the domestic economy. Year to date the pace of growth in the US has slowed relative to last year; however, the underpinnings of growth remain quite resilient in the face of a hawkish Fed, persistent inflationary pressures, and exogenous risk factors stemming from Russia’s invasion of Ukraine (and Putin’s excommunication from the global financial system). The demand side of the equation appears solid (notwithstanding yesterday’s 0.2% MoM personal spending print), however, we do seem hampered by policy errors and miscalculations that have impaired the supply side. If these issues continue to be dismissed in the present, then it is likely that they will grow into larger problems down the road. How much further down the road? That depends. The fact of the matter is that larger problems are always more difficult to manage; the sooner real supply side solutions arrive the better off the economy will be.
Market Outlook: Neutral USD, Neutral Duration, Neutral Equities
News Release: Bureau of Labor Statistics (The Employment Situation- March 2022)