Dow slid on Silvergate crisis despite soft jobless claims

Wall Street Futures, Gold recovered from Powell’s testimony panic low on softer than expected U.S. jobless claims and hopes of similar NFP job report for February to be published Friday. In his semi-annual testimony (Tuesday and Wednesday), Powell signaled a higher terminal rate than previously projected in the December SEP amid hotter-than-expected economic data including inflation and employment. Powell also indicated a faster pace of rate hikes should the overall trend of incoming economic data be warranted.

Fed policy rate future now is pricing almost 75% probability of a +50 bps hike in March against 30% before Powell’s testimony. Fed swaps are also now pricing at a higher terminal rate of 5.75% FFR (5.50-5.75%) by Sep’23 against 5.50% (5.25-5.50%) before Powell’s ultra-hawkish testimony. But Powell also clarified that FOMC will decide on faster tightening (whether +25 bps or +50 bps) on 22nd March (Fed policy day) after seeing NFP job and inflation data on 10th and 14th March. In that sense, Feb’23 NFP job report on 10th March and the inflation report on 14th March may be important for the Mar’23 Fed SEP (dot plots).

On Thursday, some focus was also on U.S. jobless claims (seasonally adjusted), which serves as a proxy for the unemployment trend/overall labor market conditions. The U.S DOL flash data shows the number of Americans filing initial claims for unemployment benefits (UI-under insurance) increased to 211K in the week ending 4th March from 190K in the previous week, above market expectations of 195K. The latest initial weekly jobless claims data pointed to most since Dec’22 and the 1st upside surprise in the 1-month, indicating some softening in the labor market, which Fed is now desperately seeking to bring down inflation.

The 4-week moving average of initial jobless claims, a better indicator to measure underlying data, as it removes week-to-week volatility, increased to 197K on the week ended 4th March from 193K in the previous week, the highest in 6 weeks.

The continuing jobless claims in the U.S., which measure unemployed people who have been receiving unemployment benefits for more than a week or filed for unemployment benefits at least two weeks ago (under UI), increased to 1718K in the week ending 25th February, from 1649K in the previous week, above than the market expectations 1659K and the highest reading since mid-Dec’22.

The continuing jobless claims of all types are also a proxy for the total number of people receiving payments from state unemployment programs; i.e. overall trend of unemployed persons (insured). The latest continuing jobless claims are still elevated which may be an indication of some softening in the labor market amid a difficult macroeconomic and geopolitical (external trade) environment coupled with higher borrowing costs and the deluge of tech layoffs.

Overall, as per seasonally unadjusted continuing jobless claims under all categories (UI) of around 1940K (2-week rolling average) and assuming average uninsured employees/self-employed (not getting any UI benefit) of 4000K, estimated unemployed persons would be around 5940K in Feb’23 against 5694K in Jan’23. Further, if we assume the labor force is around 166000K, the unemployment rate would be around 3.6% in Feb’23 with an estimated number of employed persons around 160138K, a contraction of around -78K sequentially (as per Household survey).; i.e. overall softer labor market for Feb’23 compared to Jan’23.

Americans are now finding it more difficult to find a new job despite elevated job openings (lower supply of labor force and lack of required skills). But it’s also a fact that most of the laid-off tech employees are finding suitable jobs in other tech companies amid the high demand for various tech skills and shortage of labor force. Having said that, the U.S. service industry, the backbone of the U.S. economy is now finding it easier to recruit and fill jobs (in healthcare, education, leisure and hospitality, and other services such as dry cleaning and automotive repair), which account for about 36% of all private-sector payrolls in the country. That compares to 2% of workers in information technology (IT/Tech).

Now, as the pandemic has already turned into endemic, many executives and business owners in services industries say they are finding it easier to recruit and fill jobs; women are flowing back into the labor force with the prime-age women's participation rate back to pre-pandemic level. Restaurants, hotels, and hospitals are finally staffing up, more than making up for losses in tech and other sectors. Driving the jobs boom are large but often overlooked sectors of the old economy. Restaurants, hospitals, nursing homes, and child-care centers are finally staffing up after years of COVID disruptions. In January alone, restaurants and bars added a seasonally adjusted +99,000 jobs. The healthcare industry grew by +58,000, and retailers added 30,000 jobs as fewer holiday-season workers were let go than in past years.

On Wednesday, ADP flash data shows private businesses in the U.S. added +242K jobs in Feb’23 from -119K sequentially and above market consensus of +200K. The services sector added 190K jobs, led by leisure and hospitality (83K), financial activities (62K), education/health services (35K), information (9K), and trade/transportation and utilities (3K) while the professional/business industry shed 36K jobs. Meanwhile, the goods-producing industry added 52K jobs due to manufacturing (43K) and mining (25K) while construction lost 16K. Large establishments created 160K jobs and medium ones 148K while small-sized companies shed 61K jobs, a declining trend seen since Aug’22. Annual pay growth for those remaining in their jobs slowed slightly to +7.2%, the slowest in 12 months, from 7.3% in January.

ADP noted that there is a tradeoff in the labor market right now as hiring remains robust but pay growth is still quite elevated: “There is a tradeoff in the labor market right now. We're seeing robust hiring, which is good for the economy and workers, but pay growth remains quite elevated. There is a tradeoff in the labor market right now. We're seeing robust hiring, which is good for the economy and workers, but pay growth remains quite elevated. The modest slowdown in pay increases, on its own, is unlikely to drive down inflation rapidly in the near term.”

After hotter than expected ADP report, the market is now expecting NFP Private job addition of around +215K against +443K sequentially. But often there is significant divergence between ADP and NFP/BLS data. The market is now also expecting an unemployment rate of 3.4%, +225K headline NFP job addition (including government jobs at +10K) and wage growth of +4.7% (y/y) and +0.3% sequentially (m/m).

On Wednesday, BLS/JOLTS flash data shows the number of job openings in the U.S. slips to 10824K in Jan’23 from 11234K sequentially, higher than market expectations of 10500K and 5694K unemployed persons (Jan’23). The ratio of job openings/unemployed persons continues to be elevated at around 1.90, substantially higher than pre-COVID levels of 1.20.

Over the month, the largest decreases in JOLTS job openings were in construction (-240K), accommodation and food services (-204K), and finance and insurance (-100K). On the other hand, the number of available positions increased in transportation, warehousing, and utilities (+94K) and nondurable goods manufacturing (+50K). Meanwhile, the number of hires and total separations changed little at 6400K and 5900K, respectively. Within separations, quits decreased to 3884K, the lowest level since May’21, while layoffs and discharges went up to 170K.

On Thursday, Challenger data shows US-based employers announced 77.77K job cuts in Feb’23, the most for February since 2009 and compared to 102.943K in January which was the highest reading since September of 2020. Job cuts occurred in all 30 industries, led by technology companies (21,387) and the health care/products space (9,749). So far this year, employers announced plans to cut 180,713 jobs, up 427% from the 34,309 cuts announced in the first two months of 2022 and the highest January-February total since 2009. The tech sector has announced 35% of all job cuts in 2023.

Challenger said: “Certainly, employers are paying attention to rate increase plans from the Fed. Many have been planning for a downturn for months, cutting costs elsewhere. If things continue to cool, layoffs are typically the last piece in company cost-cutting strategies”.

Conclusion:

Overall, the U.S. labor market may be cooling down, but Fed may not take any rate action decision simply based on 1-2 months of data. Fed will look into average core inflation, which is still now hovering around +5.80% (~6%). The sequential core PCE inflation comes around +0.6% in Jan’23; i.e. an annualized rate of +7.2%. Fed will not take any rate decision based on one month's data, which may be seasonally distorted. Fed will wait for at least a 3M/6M rolling average. As per continuing jobless claims of all types (seasonally unadjusted), the U.S. labor market may be softer in February than in January.

Depending on various inflation and employment data/scenarios, Fed may keep the terminal rate between 5.50-6.00% (against average core PCE/CPI around 5.50-6.00%); i.e. real rate is at least zero/positive and not negative. For March, Fed may go for a +25 bps rate hike rather than +50 bps as Fed may not go by only January data, which is seasonally distorted. Fed may consider at least Q1CY23 or 3M/6M rolling average date and outlook thereof for any higher pace of hikes for May and June (front loading). If the overall trend of core inflation remains on the downside, Fed may also go for calibrated hikes at a +25 bps place from March to June/September’23 for a terminal rate of 5.50-6.00%.

On Thursday, Wall Street Futures stumbled from softer jobless claims high ahead of the NFP job report Friday as Fed will eventually take its rate action decision on this report and inflation data (14th March). But Wall Street tumbled as banks & financials plunged after Crypto Bank Silvergate Capital went bankrupt overnight. Also, the market is concerned about the higher regulatory capital of large U.S. Banks.