March 2024 Jobs Report Preview: 5 Things To Look For

seekingalpha04-01

S&P 500 index gained 10% in the first quarter, dispelling uncertainty of interest rate cuts.Since the last jobs report, regional banks benefited from Federal Reserve's dovish stance on interest rates....

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Khaosai WongnatthakanAhead of February’s non-farm payroll report, investors braced for a potential rise in volatility. Instead, markets dispelled the uncertainty of interest rate cuts by sending the S&P 500 (SP500) higher. The index gained 10% in the first quarter. Since the last NFP report, the U.S. dollar (UUP) added over 1% while the 20+ year Treasury Bond ETF (TLT) yield gained 1.2%. Regional banks, the weakest sector most sensitive to interest changes, gained 5.87% as measured by the SPDR S&P 500 Regional Banking ETF (KRE). The sector benefited from the Federal Reserve’s plan to slow the shrinking of its $7.5 trillion balance sheet “fairly soon.” The Fed’s dovish stance weakens the importance of the job report set for release on Friday, April 5, 2024. When the Bureau of Labor Statistics posts the NFP report, what impact will it have on stock markets? Loose monetary policy boosted stocks since last September. Investors strongly believe that the Fed will cut rates three times this year. The exact timing and the extent of rate cuts are unknown. Friday’s NFP report will give investors a clue. Fed’s Dovish Statement The Fed wrote in its statement that “recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.” The U.S. Department of Commerce posted a final Q4 estimate of gross domestic product rising by 3.4%. Additionally, the core personal consumption expenditures (“PCE”), which excludes food and energy, was 2.0%. PCE was 3.3%, compared to the 3.0% prior estimate. Investors have five things to look for in the upcoming report. 1/ Non-farm Payrolls to Rise 198,000 According to the median forecast compiled by The Wall Street Journal, nonfarm payrolls will increase by 198,000 in March. This is down from 275,000 in February. The March unemployment rate of 3.7% is a decline from February’s 3.9%. On Thursday, jobless claims of 217,000 are 2,000 above the previous consensus estimate. Revised labor costs will rise by 0.6%, while average hourly wages will increase.   DATE TIME RELEASE PERIOD CONSENSUS PREVIOUS   Thursday 0830 Jobless Claims Mar 2 217K 215K     0830 Unit Labor Costs (Revised) 4Q +0.60% +0.5%   Friday 0830 Nonfarm Payrolls Feb +198K +353K     0830 Unemployment Rate Feb 3.70% 3.70%     0830 Avg. Hourly Wages M/M Feb +0.20% 0.55%     0830 Avg. Hourly Wages Y/Y Feb +4.40% 4.48%   Click to enlarge Data from Dow Jones Newswires 2/ Revisions to February Report In the February NFP report, the BLS revised December’s total employment figure by 43,000. This lowers the 333,000 figure to 290,000. It revised January 2024 figures down by an even bigger 124,000. This lowers the 353,000 headline figure down to 229,000. Employment in December 2023 through January 2024 is 167,000 lower than previously reported. In Friday’s March NFP report, readers cannot estimate the magnitude of the revision for that month. The data collection has a sampling error. It has about a 90% level of confidence “that an estimate based on a sample will differ by no more than 1.6 standard errors from the true population value because of sampling error.” 3/ March Job Growth Prediction In February’s NFP report, the healthcare sector added 67,000 new jobs, governments hired 52,000 people, and restaurants and bars benefited from a 42,000 increase in employment. In the upcoming report, expect jobs to rise for the former two sectors. Jobs in the food services industry, however, may weaken. McDonald’s (MCD), whose shares fell by 4.49% in the month, is facing a backlash in price hikes at the drive-thru. Starbucks (SBUX) is stuck trading in a range of between $90 - $94 in the last month. The firm is forecasting operating margin and earnings per share at its lowest in its second quarter. Until those metrics rebound, the popular brand may limit hiring more staff. 4/ Job Decline Expectations In the previous NFP report, jobs in building material and garden equipment and supplies dealers fell by 6,000. As the spring season approaches, expect jobs rebounding there. Strength in shares of Lowe’s (LOW) and Home Depot (HD), both of which trade near 52-week highs, suggests that the garden equipment market will rebound. Electronics and appliance retailers cut 2,000 jobs. Persistently high inflation continued to hurt the consumer’s disposable income. They are cutting back on the purchase of highly-priced items. Instead of buying new things, people are buying used electronic items. eBay (EBAY) stock, which closed at a 52-week high, is thriving in this new economic reality. Temu, run by PDD (PDD), sells highly inexpensive goods in U.S. markets. The firm posted a non-GAAP earnings per ADS share of $2.40. Revenue grew by 123% Y/Y to $12.52 billion in the fourth quarter. Data by YChartsAbove: retailers that sell low-priced goods are up. Home Depot (HD), discussed below, benefits from a rise in sales of garden equipment. Just as jobs increased in the automotive parts and tire retail sector in February, it will do so again in March. Consumers will repair and maintain their vehicle instead of buying a new one. Automotive manufacturers added so much new technology and features that they refuse to cut prices. Demand for electric vehicles is even worse. Ford (F) will cut thousands of jobs at its F-150 Lightning factory in Michigan. General Motors (GM) laid off around 1,000 workers at its Orion Assembly facility in Michigan. Stellantis (STLA), whose shares are up by 87.8% from a 52-week low, announced a ‘mass firing’ during a remote workday on March 22. While Stellantis said the 400 job cut is to protect its competitive advantage, one worker said this is a result of outsourcing to India, Mexico, and Brazil. Data by YChartsAbove: Ford trails its peers. It is shifting from the money-losing EV production to hybrid. In the technology manufacturing sector, jobs fell in February. Expect the trend to continue in the March data.  Table B-1. Employees on non-farm payrolls by industry sector and selected industry detail [In thousands]  Industry Seasonally adjusted   Feb. Dec. Jan. Feb. Change from:   2023 2023 2024(P) 2024(P) Jan.2024 - Feb.2024(P)   Computer and electronic product manufacturing 1,109.70 1,107.90 1,107.60 1,105.90 -1.7   Computer and peripheral equipment manufacturing 163.7 163.2 162.6 161.3 -1.3   Communications equipment manufacturing 85.1 86.9 86.7 86.6 -0.1   Semiconductor and other electronic component manufacturing 400.5 392.8 393.3 392.6 -0.7   Click to enlarge According to layoffs.fyi, the 7,262 job cuts occurred in the month, compared to 5,714 the year before. This is trending lower after technology firms reduced more staff in January. layoffs.fyiSome of the job cuts are not related to the economy. For example, Apple (AAPL) reorganized its engineering staff after ending its project to develop microLED displays internally. Conversely, Dell (DELL), whose shares topped $131 before closing at $114.11, cut 6,650 jobs, or 5% of its global workforce. The firm previously imposed cost-cut efforts, such as a hiring freeze and limits on business travel. However, weak demand for PCs and a potential recession forced Dell to take more aggressive staff reductions. Data by YChartsAbove: Apple is one of the magnificent seven. A lack of AI development and the Department of Justice's anti-trust case against Apple weighed on the stock. In the AI software segment, IBM (IBM) offered a voluntary redundancy package. Additionally, it cut some staff in its marketing and communications division. CFO James Kavanaugh has a $3 billion annualized rate of savings target by the end of 2024. This is one-third bigger than the initial target. IBM shares peaked at $199.18 earlier this month. Data by YChartsAbove: IBM shares broke out to decade highs after posting strong quarterly results. Below: IBM has strong grades in all but valuation and growth. Its industry rank is below that of its peers, Infosys (INFY), Capgemini (OTCPK:CGEMY), and Cognizant Technology (CTSH). Seeking Alpha 5/ Market Reaction to the NFP Report Although market timing is an impossible task, readers will inherently want to predict the market’s reaction to another strong job report. Yet after the S&P 500 (SP500) and Russell 2000 (IWM) closed up by 10% and 4.78% in the year-to-date period, markets could drop afterward. Long-term investors should watch the Treasury bond yields closely. Year-to-date, the 30-year (US30Y), 10-year (US10Y), 2-year (US2Y), and 12-month yield all rose the most. Bond Trades and Your Takeaway The bond market is skeptical that the Fed would cut rates too soon. Debt investors who expect several cuts this year may buy the 7-10 Year Treasury Bond ETF (IEF) and the 20+ Year ETF. They rise in value when interest rates fall. Seeking AlphaThe weak performance in TLT shares suggests that investors should not bet yet on an implied Fed rate cut. Data by YChartsAbove: the three year chart shows the distortion in TLT prices during ZIRP - zero interest rate policy. Japan recently ended ZIRP. The bond yields 3.62% and is down by 4.31% in 2024. Investors should instead hold the 0-3 month Treasury ETF (SGOV). At worst, the yield will remain at 5.04%:   Seeking AlphaThe iShares Treasury Floating Rate Bond (TFLO) yields 5.06%. As rates fall, the yield on the iShares 1-3 Year ETF (SHY) at 3.97% will not fall as fast.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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