Stocks slumpedand investors sought the safety of bonds after April’s disappointing jobs report signaled weak economic growth, which will keep the Fed open to more easing.
The U.S. economy created just 115,000 jobs in April, well below the consensus which was reported between 163,000 and 170,000. Revisions to payrolls data for the past two months, however, added another 53,000 jobs.
Retail employment increased by 29,000 after a 21,000 decline in March, but construction declined again by 2,000, and leisure and hospitality, usually growing at this time of year, rose by 12,000 after rising by 52,000 last month.
“It’s not bad. It’s just not good enough to satisfy those who think we’re going to take off in the economy, and it’s not bad enough to get the Fed to do more. If you include the revision, it was just in line with estimates,” said Peter Boockvar, market strategist with Miller Tabak. “In line with expectations was a lame mediocre number. Middle of the road is not good enough in terms of the economy and that’s why the market is down.”
Traders were hoping the jobs report would dispel the concernthat the economy is unable to gain traction and break out of its slow growth pattern. The number also did not paint a picture of an economy that was stalled quite enough to force the Fed’s hand on a new round of quantitative easing, which has been a positive catalyst for stocks.
“The bottom-line from this report is that the momentum in the labor market is slowing, but not enough to bring the Fed off the sidelines for an additional round of asset purchases,” wrote Bank of America Merrill Lynch analyst Neil Dutta.
Economists had expected to see some level of payback in the April number, as employers added seasonal workers during the winter months due to unseasonably warm weather. Goldman Sachs economist had predicted weather-related payback would reduce the jobs number, and they were anticipating 125,000 ,well below many other economists.
“We expect that a “payback” from winter weather partly explains the deceleration in employment growth in April. This would be consistent with the industry mix of job gains, for example, with weakness in some weather-sensitive sectors such as construction and leisure/hospitality,” wrote Goldman Sachs economists Friday. “Our best guess at this would be that the weather payback effect in April was a little larger than in March, and may have subtracted 20-40k from nonfarm payroll growth.”
The breakdown of numbers inside the report also showed weakness, even though the unemployment rate fell to 8.1 percent, below the unchanged 8.2 percent economists expected. The labor participation rate declined 0.2 percent to 63.6, and the number of discouraged workers rose 103,000, the first in increase in three months.
Stocks initially fluctuated but then sold off sharply.
“The headline was disappointing, even with the lowered whisper numbers at 130,000s and 140,000s….I think people were quick to dismiss the improvement in the unemployment rate given the direction in the participation rate to its lowest levels since 1981, so on net I think that when we first got the release, because of the offsetting revisions the market really didn’t know what to do with it. We traded around sideways for a few minutes then we reverted to the conclusion that it was bad for stocks and good for bonds,” said said Ian Lyngen, senior Treasury strategist at CRT Capital. The yield on the 10-year Treasurydipped to 1.88 percent.
“I think the equity market is reading this as a number that’s not going to spur the Fed into action but does signal weak global growth,” he said. He added that some in the market had expected a strong number would quash the idea of a third round of quantitative easing (QE3), but that option now remains on the table.
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