The markets will be digesting and reacting to Friday's blow-out March Employment Report early this week, with the stock market pitting strong growth against higher long-term yields. Some of the March strength was one-off, reflecting re-openings and a weather bounce. But, there was still underlying strength. The solid recovery supports the consensus expectation of a large y/y increase in Q120 corporate earnings. These expectations and then the releases, themselves, should help sustain the stock market rally.
Arguably, about half of the +916k jump in Payrolls can be explained as one-off -- seen in Construction, Leisure and Hospitality, and State & Local Government Education jobs. Taking away about 450k from the headline print still leaves an extraordinary increase, nonetheless. The rebound in the Nonfarm Workweek to a high 34.9 Hours also signals a speedup in business activity. This week's reports on March Non-Mfg Purchasing Managers Surveys should reaffirm this improvement.
The inflation-related components of the March Employment Report were benign. /1/ Average Hourly Earnings fell 0.1% m/m, with half the major sectors down. Compositional shifts toward lower-paid workers could have contributed to the decline, however. /2/ While the Unemployment Rate fell 0.2% pt to 6.0% it remains above the old 5.5% estimate of the inflation threshold and well above the current estimate of 4.0-4.5%. /3/ A 0.1% pt increase in the Labor Force Participation Rate prevented the Unemployment Rate from falling by more. If the LFP Rate were steady, the UR would have rounded up to 5.9%. An increase in the LFP Rate provides the economy more room to grow in a non-inflationary way.
Consensus expects +20% (y/y) in the S&P 500 earnings for Q121. Most of the macroeconomic evidence suggests a large gain. Real GDP could have turned positive on a y/y basis in Q121. And, the rebound in oil prices should lift profits in this industry. Similarly, the further weakening the dollar increased the dollar value of earnings abroad. Although the relationship between the Core CPI and Average Hourly Earnings suggests a squeeze on profit margins, this is probably overstated -- the relatively high pace of AHE on a y/y basis reflects compositional shifts away from low-paid workers rather than a significant speedup in labor costs. The Employment Cost Index (for private sector) shows no speedup over the past 3 years, essentially steady at 2.6% (Q4/Q4).
Markit
Eurozone Real GDP Oil Prices Trade-Weighted
Dollar AHE Core CPI PMI
[ y/y percent
change ] (level)
Q119 3.2 -12.8 +7.9
3.2 2.1 51.9
Q219 2.7
-12.2 +5.9 3.1 2.1 47.8
Q319 2.1 -19.2 +3.6 3.2 2.3 46.4
Q419 2.4 -3.6 +1.7 3.2 2.3 46.2
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