February's jobs report disappointed at the top, but the angels were in the details; China's growth cast a long shadow; Europe's central bank went full dovish.
“In a dark room you move with tiny steps."
U.S. Economy: Odd Jobs, but…
Headline growth in non-farm payrolls was dismal, with a net gain of only 20k – far below the expected level of 180k. That overshadowed the improvement in the unemployment rate to a better-than-anticipated 3.8%, along with a slight improvement in average hourly earnings to 3.4% on a year-over-year basis. Analysts pointed to the lingering effects of the December-January partial federal government shutdown as the culprit for the shortfall, choosing to focus on the three-month average in payroll growth – which was in line with the recent trend of payroll growth of about 180k per month.
There were additional angels in the details. January's massive 304k gain in payrolls was revised upward to 311k; the labor participation rate held steady at 63.2%; and the underemployment rate improved to 7.3% vs. January's 8.1%, the largest percentage-point improvement in decades. The participation rate for workers between ages 25 and 54 was a strong 82.5%, and the unemployment rate for workers with less than a high school diploma, at 5.3% remained in record low relative territory.
Initial reaction in U.S. financial markets appeared to focus on the positives of the report rather than the disappointing top-line news. After a knee-jerk reaction to the headline figure, 10-year Treasury yields were down only slightly from Thursday's level, at 2.632%; the S&P 500 Index was down 21.21 points to 2727.681
China growth: Long shadow
Despite pro-growth policies unveiled at China's National People's Congress, markets elsewhere have chosen to focus on what recent lackluster figures might mean for their own economies. China's exports were off 20.7% in February vs. February the previous year in U.S. dollar terms – the biggest monthly fall since February 2016 and well below a consensus forecast of just under 5%. Imports fell 5.2%, netting out to the smallest trade surplus for China in nearly a year.
Looking at the January and February figures together (to help minimize data distortions stemming from the lunar new year holiday) exports fell 4.6% year on year, while imports fell 3.1%. Trade with the U.S. fell disproportionately; exports to the U.S. fell 14.6% for January-February vs. the equivalent year-ago level, and imports fell 35%; both figures showed the effects of heightened trade tension between the two parties.
Correctly or otherwise, reduced demand from China was cited as a factor in Europe’s slow growth. Germany's factory orders fell -2.6% in January, the most since June, vs. an expected gain of 0.5%. The drop was attributed by Germany's economics ministry to weak demand for investment goods, "particularly from outside the euro area".
ECB: Dove of the Week
The monthly briefing from the European Central Bank (ECB) featured a strongly dovish turn by ECB President Mario Draghi, who announced significant cuts to growth forecasts for the balance of the year (from 1.9% to 1.1%), as well as a new round of long-term loans to banks – and promised that interest rates would remain at their current low level until 2020 at the earliest – an extension of the previous assurances. The loans will have two-year terms vs. the previous set's four years; other terms were not revealed.
Though the ECB's governors were unanimously in favor of the moves and some credit was given for the forthrightness of the changes in the face of its previously more sanguine outlook, some market observers characterized the moves as a face-saving climbdown lacking a resumption of aggressive measures such as asset purchases. That disappointment may have been a factor in the -1.1% fall of the STOXX Europe 600 Index as the press conference unfolded, and the fall of the euro vs. the dollar from $1.1318 to as low as $1.1177.
1 Source: Bloomberg, Friday March 8, 2019, 9:24 AM
All data Source: Bloomberg, March 8, 2019, unless otherwise indicated.
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