The disappointing March employment number announced last Friday adds to the uncertainty surrounding the economy, the Fed and the markets.
The change in non-farm payrolls was 126,000 in March, versus an expected 245,000. Adding to the weakness was the two-month downward revision of 69,000 jobs. However, the economic release wasn't all negative, with the unemployment rate holding steady at 5.5% and average hourly earnings up 0.3%. Historically, the employment number is volatile even when growth is strong, and given that we have had a string of strong numbers for a few months in a row, it is not a surprise the number is now soft.
The market has discounted the strong employment to offset other economic indicators showing weakness in recent months as a result of the strong dollar and weather-related concerns. The Fed had indicated a few weeks ago that employment had room to improve, an analysis confirmed by this report.
Despite the stock market being closed on Friday, the initial reaction to the employment number has been an approximately 1% decline in equity futures and a five to ten basis point drop in bond yields. Many markets are still range-bound for the year, but the employment report does add to pressure for a break out of the range on the downside for the stock market and bond yields. A close below 1980 on the S&P 500 Index would be a negative technical indicator for the equity market, with downside potential to 1850. The 1.86% level (October 15th intraday low) on 10-year bonds has been a key technical level on the 10 year Treasury, and we broke back below that level after the report. The January low yield for 10 year Treasury bonds should serve as solid support at 1.64%. A break below this level would most likely require weaker economic data and significant softness in equity prices.
This week should be an interesting one for the market, as Wednesday's release of the minutes from the March 17 to 18 Federal Open Market Committee (FOMC) meeting, upcoming first-quarter earnings, and economic data will all be examined closely.
< Go to Monday Morning Perspectives
This blog post is for informational use only. The views expressed are those of the author(s), and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Any statements about financial and company performance of The Penn Mutual Life Insurance Company or its insurance subsidiaries (each, “Client”) made by the author is provided with a written consent from the Client. Penn Mutual Asset Management is a wholly owned subsidiary of The Penn Mutual Life Insurance Company.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.