Morning Report: More workers are re-entering the labor force

Vital Statistics:

S&P futures4,124-7.25
Oil (WTI)80.46-0.15
10 year government bond yield 3.37%
30 year fixed rate mortgage 6.21%

The stock market is closed today, and the bond market closes early. Bonds and MBS are down on the jobs report.

The economy added 236,000 jobs in March, according to BLS. The unemployment rate ticked down 0.1% to 3.5%. Average hourly earnings rose 0.3% MOM and 4.2% YOY. Overall, the report was more or less in line with expectations. The labor force participation rate and the employment-population ratio rose, which shows that more workers are re-entering the labor market.

Bonds are selling off on the report given that unemployment ticked down again. That said, I think on balance the report should be good news for the Fed / bond market given that the employment-population ratio rose from 60.2% to 60.4%. Pre-pandemic the employment-population ratio was 61.1%, so we are still not back to normalcy, but we are getting closer. To put these numbers into perspective, the EP ratio was 57.4% at the end of 2020 and 59.5% at the end of 2021.

The Fed would like to see labor supply and demand more in balance. By raising interest rates, the Fed is trying to reduce demand for labor. If supply increases, that would accomplish the same thing, and that is much less painful than a recession-induced spike in unemployment.

As we saw in Wednesday’s ADP report, wages are rising smartly (and some of the lowest-paid jobs like leisure / hospitality) are seeing high single-digit annual gains. Wage increases are drawing workers back into the labor force, and that will go a long way towards balancing the market. Workers are not only coming back into the market, but job openings are falling as well. Ultimately the labor supply-demand situation is working itself out in the least painful way. This gives the Fed ammo to halt the tightening cycle.

The Atlanta Fed’s GDP Now Index has declined sharply over the past few weeks, with the index now seeing 1.5% growth in Q1. The index was at 3.5% just a few weeks ago. It looks like the ISM reports, along with weaker consumption numbers pulled down the index, not the banking issues.

The jobs report did put some starch in the May Fed Funds futures, which are now handicapping a 2/3 chance of another 25 basis point hike. A day ago, they saw a 50% chance.


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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