Wall Street surged on softer NFP job data but slid on SVB

Wall Street Futures were already under stress on Thursday despite a softer jobless claims report as big banks & financials plunged on the concern of the spillover effect of the startup funding bank SVB (Silicon Valley Bank). On Friday, the California-based bank has been closed by the Federal Deposit Insurance Corporation (FDIC) which has taken control of its deposits. Earlier, the run-on deposits doomed the tech-focused lender’s share sale to shore up its balance sheet amid losses from HTM bond portfolio (mainly MBS) amid higher Fed reverse repo rate. Unable to raise fresh funds, the SVB promoter is now looking for selling the bank and appointed advisors.

The FDIC said:

·         We will retain all assets from the SVB for later disposition

·         We have created a new bank to protect insured depositors of SVB

·         Silicon Valley Bank's main office and branches will reopen on Monday

·         SVB Bank is this year's first insured institution to fail

·         California regulators closed Silicon Valley Bank today

On Friday, apart from SVF, all focus of the market was on the February NFP job report, as Fed will consider this data along with core inflation (on 14th March) for rate action and SEP on 22nd March.

On Friday, the latest BLS establishment flash data shows that the U.S. economy/employers (public and private sectors); i.e. government and private sector jobs excluding the farming industry (Non-Farm Payrolls-NFP) added +311K payroll jobs in February against +504K sequentially (m/m) and +904K yearly (y/y) and above market expectations of +205K. The YTM average is now around +399K in 2022 against the 2021 average of +562K and the 2019 average of +168K and around +302K average for Jan+Feb’20 (just pre-COVID). The 3M rolling average of NFP job addition is now around +351K.

Private nonfarm payrolls in the U.S. (only private establishment/business employees) added +265K payroll jobs in February from +386K sequentially (m/m) and +897K yearly (y/y), higher than the market expectations of +210K and ADP figure +242K released Wednesday. The YTM average is now around +380K in 2022 against the 2021 average of +524K and the 2019 average of +150K. Overall, as per BLS/NFP survey, U.S. private sector added around 4555K jobs in 2022 against ADP survey data of 3676K jobs. The 3M rolling average of NFP private job addition is now around +307K.

Government payroll; i.e. employment in Federal and state governments increased by +46K in February against -+118K sequentially (m/m); and +7K addition yearly (y/y). The YTM average is now around +20K in 2022 against the 2021 average of +38K and the 2019 average of +18K; the pre-COVID (Jan+Feb’20) average was around +34K. The 3M rolling average of NFP government job addition is now around +45K.

In Feb’23, notable NFP job gains occurred in leisure and hospitality (+105K), namely food services and drinking places (+70K); retail trade (+50K), namely general merchandise retailers (+39K); government (+46K); professional and business services (+45K); health care (+44K); and construction (+24K). On the other hand, employment declined in the information industry (-25K), namely motion picture and sound recording (-9K) and in telecommunications (-3K). Employment in information has decreased by -54K since Nov’22. The transportation and warehousing also lost -22K jobs.

As per the establishment survey, the change in total nonfarm payroll (NFP) employment for Dec’22 was revised down by -21K to +239K, and the change for Jan’23 was revised down by -13K to +504K. With these revisions, NFP employment in the last two months was -34K lower than previously reported.

As per the Household survey, which includes non-farm jobs/employees and self-employed persons (including gig workers, contractors, and farmers), the U.S. economy has added +177K employed persons in Feb’23 against the addition of +894K sequentially (m/m) and +468K yearly (y/y). The U.S. economy has added around 3269K employed persons in 2022 with a monthly average of +272K against 2021 additions of 6145K with an average of +512K. The 3M rolling average of the addition of employed persons is now around +536K.

After Feb’23 data, the number of employed persons in the U.S. (as per the Household survey) reached 160315K against pre-COVID (Feb’20) levels of 158732K; i.e. the U.S. economy is now again above pre-COVID employment levels and most probably in line with Fed’s definition of maximum inclusive and broad-based employment levels (as per expanding real GDP now over $20T).

As per Household survey data, the U.S. unemployment rate edged up to 3.6% in Feb’23 from 3.4% sequentially (lowest since May 1969) and higher than the market consensus of 3.4%. The number of unemployed persons increased by 242K to 5940K. The so-called U-6 unemployment rate, which also includes people who want to work, but have given up searching and those working part-time because they cannot find full-time employment, rose to 6.8% in February from 6.6% in January. The labor force participation rate inched higher to 62.5%, the highest since March 2020.

The nominal number of the civilian labor force increased by +419K in Feb’23 to 166251K against Feb’20 (pre-COVID) levels of 164448K; i.e. now higher than pre-COVID levels by +1583K. The labor force participation rate increased marginally to 62.5% in Feb’23 from 62.4% sequentially. The labor force participation rate was 63.3% in Feb’20 (pre-COVID).

Overall, the U.S. unemployment rate is hovering around a record low but with much-decreased labor force participation due to structural labor shortages amid possible deaths due to COVID, early retirements, unfavorable demography, legal immigration issues, and lack of proper job-matching skills.

The U.S. Average Hourly Earnings (AHE) growth inched up to +4.6%% in Feb’23 from +4.4% sequentially, lower than market expectations of +4.7% gains (y/y). But Fed may be looking for an average annual growth rate of AHE around +3.5% on average for its +2.0% price stability targets (as per the pre-COVID trend).

On a sequential (m/m) basis, the AHE grew by +0.2% in Feb’23 from +0.3% in Dec’22; lower than market expectations of +0.3% and the smallest sequential increase in 12 months. The AHE for all employees on private nonfarm payrolls in the U.S. increased by +$0.08 sequentially to $33.09 in Feb’23, while the AHE of private-sector production and nonsupervisory employees rose by +$0.13 or +0.5% to $28.42.

The Average Weekly Hours (AWH) for all employees on U.S. nonfarm payrolls decreased to 34.5 hours in Feb’23 from 34.6 hours sequentially, lower than market expectations of 34.6 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls was decreased by 0.2 hours to 33.9 hours in Feb’23.

Average Weekly Earnings (AWE=AWE*AWH) surged to $1141.61 in Feb’23 against $1142.15 sequentially (-0.05%) and $1097.56 yearly (+4.01%). This translates to average monthly earnings of around $4566.40 in Feb’23 vs $4568.60 sequentially (-0.05%) and $4386.10 yearly (+4.11%). The average monthly sequential growth of AWE is now around +0.33% against CPI growth of +0.52% in 2022; i.e. there was still now no wage-inflation spirals and real wage growth is negative; monthly wage growth is around +4.0% against headline CPI growth around +8.0% (y/y) on an average in 2022.

Conclusion:

Overall, the February NFP job report may be termed as soft amid higher-than-expected NFP job additions, but negative revisions for the last 2 months, softer than expected wage growths and higher than the expected unemployment rate. But still, the overall NFP job report is hot enough for Fed’s ongoing (calibrated) rate hikes. 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%.