In an unusual coincidence, the US jobs report was released on a holiday Friday — meaning stock markets were closed when the closely-watched economic data came out.
It was the first monthly payroll report since Silicon Valley Bank and Signature Bank collapsed. It also marked a full year of jobs data since the Federal Reserve began hiking interest rates in March 2022.
While inflation has come down and other economic data point to a cooling economy, the labor market has remained remarkably resilient.
Investors have had a long weekend to chew over the details of the report and will likely skip the typical gut-reaction to headline numbers.
What happened: The US economy added 236,000 jobs in March, showing that hiring remained robust though the pace was slower than in previous months. The unemployment rate currently stands at 3.5%.
Wages increased by 0.3% on the month and 4.2% from a year ago. The three-month wage growth average has dropped to 3.8%. That’s moving closer to what Fed policymakers “believe to be in line with stable wage and inflation expectations,” wrote Joseph Brusuelas, chief economist at RSM in a note.
“That wage data tends to suggest that the risk of a wage price spiral is easing and that will create space in the near term for the Federal Reserve to engage in a strategic pause in its efforts to restore price stability,” he added.
The March jobs report was the last before the Fed’s next policy meeting and announcement in early May. The labor market is cooling but not rapidly or significantly, and further rate hikes can’t be ruled out.
At the same time Wall Street is beginning to see bad news as bad news. A slowing economy could mean a recession is forthcoming.
Markets are still largely expecting the Fed to raise rates by another quarter point. So how will they react to Friday’s report?
Before the Bell spoke with Michael Arone, State Street Global Advisors chief investment strategist, to find out.
This interview has been edited for length and clarity.
Before the Bell: How do you expect markets to react to this report on Monday?
Michael Arone: I think that this has been a nice counterbalance to the weaker labor data earlier last week and all the recession fears. This data suggests that the economy is still in pretty good shape, 10-year Treasury yields increased on Friday indicating there’s less fear about an imminent recession.
There’s this delicate balance between slower job growth and a weaker labor market without economic devastation. I think this report helps that.
As it relates to the stock market, I would expect the cyclical sectors to do well — your industrials, your materials, your energy companies. If interest rates are rising, that’s going to weigh on growth stocks — technology and communication services sectors, for example. Less recession fears will mean investors won’t be as defensively positioned in classic staples like healthcare and utilities.
Could this lead to a reverse in the current trend where tech companies are bolstering markets?
Yes, exactly. It’s difficult to make too much out of any singular data point, but I think this report will hopefully lead to broader participation in the stock market. If those recession fears begin to abate somewhat, and investors recognize that recession isn’t imminent, there will be more investment.
What else are investors looking at in this report?
We’ve seen weakness in the interest rate sensitive parts of the market — areas that are typically the first to weaken as the economy slows down. So things like manufacturing, things like construction. That’s where the weakness in this jobs report is. And the services areas continue to remain strong. That’s where the shortage of qualified skilled workers remains. I think that you’re seeing continued job strength in those areas.
What does this mean for this week’s inflation reports? It seems like the jobs report just pushed the tension forward.
it did. I expect that inflation figures will continue to decelerate — or grow at a slower rate. But I do think that the sticky part of inflation continues to be on the wage front. And so I think, if anything, this helps alleviate some of those inflation pressures, but we’ll see how it flows through into the CPI report next week. And also the PPI report.
Is the Federal Reserve addressing real structural changes to the labor market?
The Fed was confused in February 2020 when we were in full employment and there was no inflation. They’re equally confused today, after raising rates from zero to 5%, that we haven’t had more job losses.
I’m not sure why, but from my perspective, the Fed hasn’t taken into consideration the structural changes in the labor force, and they’re still confused by it. I think the risk here is that they’ll continue to focus on raising rates to stabilize prices, perhaps underestimating the kind of structural changes in the labor economy that haven’t resulted in the type of weakness that they’ve been anticipating. I think that’s a risk for the economy and markets.
More trouble for commercial real estate
A few weeks ago, Before the Bell wrote about big problems brewing in the $20 trillion commercial real estate industry.
After decades of thriving growth bolstered by low interest rates and easy credit, commercial real estate has hit a wall. Office and retail property valuations have been falling since the pandemic brought about lower occupancy rates and changes in where people work and how they shop. The Fed’s efforts to fight inflation by raising interest rates have also hurt the credit-dependent industry.
Recent banking stress will likely add to those woes. Lending to commercial real estate developers and managers largely comes from small and mid-sized banks, where the pressure on liquidity has been most severe. About 80% of all bank loans for commercial properties come from regional banks, according to Goldman Sachs economists.
Since then, things have gotten worse, CNN’s Julia Horowitz reports.
In a worst-case scenario, anxiety about bank lending to commercial real estate could spiral, prompting customers to yank their deposits. A bank run is what toppled Silicon Valley Bank last month, roiling financial markets and raising fears of a recession.
“We’re watching it pretty closely,” said Michael Reynolds, vice president of investment strategy at Glenmede, a wealth manager. While he doesn’t expect office loans to become a problem for all banks, “one or two” institutions could find themselves “caught offside.”
Signs of strain are increasing. The proportion of commercial office mortgages where borrowers are behind with payments is rising, according to Trepp, which provides data on commercial real estate.
High-profile defaults are making headlines. Earlier this year, a landlord owned by asset manager PIMCO defaulted on nearly $2 billion in debt for seven office buildings in San Francisco, New York City, Boston and Jersey City.
What will become of tech earnings?
Tech stocks led market losses in 2022, but seemed to rebound quickly at the start of this year. So as we enter earnings season, what should we expect from Big Tech?
Daniel Ives, an analyst at Wedbush Securities, says that he has high hopes.
“Tech stocks have held up very well so far in 2023 and comfortably outpaced the overall market as we believe the tech sector has become the new ‘safety trade’ in this overall uncertain market,” he wrote in a note on Sunday evening.
Even the recent spate of layoffs in Big Tech has upside, he wrote.
“Significant cost cutting underway in the Valley led by Meta, Microsoft, Amazon, Google and others, conservative guidance already given in the January earnings season ‘rip the band- aid off moment’, and tech fundamentals that are holding up in a shaky macro [environment] are setting up for a green light for tech stocks.”