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Weak employment numbers sow doubt

Weekly market commentary
Courtesy of Ken Armstrong, Shane Fleury and Steve Shanley of The Northwestern Mutual Wealth Management Company — Vail Valley

Over the past few weeks, investors and analysts have parsed lackluster news about, among other things, fourth quarter GDP, retail sales and business investment, but there has been one consolation: jobs.

On Friday, however, an unexpectedly weak employment report sowed seeds of doubt about the current state of the United States economy, while probably pushing the date for the Federal Reserve’s first rate hike since 2008 back to September, if not later. With the stock market closed for Good Friday, investors had the weekend to digest the report, but the bond market was open on Friday and the yield on the 10-year Treasury fell to 1.84 percent, its lowest point in two months.

The Labor Department said that only 126,000 jobs were added to the economy in March, about half of what was forecasted, and the fewest positions created since December 2013. The low total put an end to a streak during which at least 200,000 jobs were added for 12 months straight, the longest run since the 1990s. With the estimates for January and February lowered by a total of 69,000 jobs, the average for the first quarter was 197,000 a month compared to 324,000 in the last three months of 2014. In addition, the labor force participation rate fell from 62.8 percent to 62.7 percent, matching its lowest level since 1978. The separately calculated household rate was unchanged at 5.5 percent.

Around the eurozone

The eurozone’s annual rate of inflation climbed to -0.1 percent in March from -0.3 percent in February but it was still the fourth consecutive reading below zero. Unemployment fell to 11.3 percent in February from a revised 11.4 percent in January — Germany’s jobless rate hit a record low of 6.4 percent. The European Commission said that consumer sentiment rose to 103.9 in March, its highest point since July 2011, while eurozone manufacturing expanded faster than first estimated in March, with Markit’s Purchasing Managers’ Indices climbing to a 10-month high of 52.2. Lastly, the minutes of the European Central Bank’s (ECB) March 5 meeting, released on Thursday, indicated that the bank intends to stick to its target of $1.2 trillion in stimulus through September 2016 despite the recent upturn in the eurozone, with “all the members” agreeing there was “no room for complacency.”

Greeks tweak the troika

As if relations with the eurozone weren’t bad enough, Greek Prime Minister Alexis Tsipras ruffled feathers anew by announcing that he would meet with Russia’s President Vladimir Putin Wednesday. Earlier in the week, the troika, (Greece’s creditors), rejected that nation’s latest plan to unlock the $7.6 billion payout it needs to stay solvent. On Sunday, Greek Finance Minister Yanis Varofakis met in Washington, D.C., with Christine Lagarde, head of the International Monetary Fund, and assured her that Greece would be able to avoid default by making the $503 billion debt payment due this Thursday.

Japan, the lone holdout

Japan said it would not join China’s Asian Infrastructure investment Bank (AIIB), but 46 nations have signed on as charter members, including allies the U.S. urged to steer clear. Last week it was, of all countries, Taiwan, not even recognized by China as an independent nation, asking to join. Expected to open later this year, the AIIB will be bankrolled with $50 billion from China and is seen by the U.S. as a rival to the World Bank.

Trade gap narrows, car sales stay on track

The Commerce Department said the trade deficit fell 16.9 percent to $35.4 billion in February, the lowest total since October 2009. As a result, some analysts pushed their estimates for first quarter GDP growth back above 1 percent. Vehicle sales were 1.55 million in March, up 0.6 percent from last year, according to Autodata, and automakers expect to top the banner performance of 2014 when 16.6 vehicles were sold. Toyota’s sales rose 4.9 percent, Ford’s 3.5 percent and Chrysler’s 1.7 percent, while GM’s sales dipped 2.4 percent.

Consumer spending rebound

The stock market began the week on a strong note after the government announced that consumer spending was up 0.1 percent in February following declines in December and January (real PCE, adjusted for inflation, fell 0.1 percent). Even better, income gained 0.4 percent, meaning consumers may have money to spend down the road. The Commerce Department said that orders for manufactured goods were up 0.2 percent in March, snapping a six-month losing streak; excluding transportation, orders improved 0.8 percent. The government also reported that construction spending dipped 0.1 percent in February. The ISM’s Manufacturing Index declined from 52.9 to 51.5 in March, but Markit’s manufacturing PMI rose to 55.7 from 55.1 in February. In the housing sector, the National Association of Realtors reported that its index of pending home sales hit its highest level since June 2013, rising 3.1 percent to 106.9 in March. The S&P/Case-Shiller Home Price Index for 20 major metro areas increased 4.6 percent in January from a year earlier, though it was flat on a month-to-month basis.

A look ahead

This week will be a quiet one for releases, with the short list including Markit’s composite and services PMIs, wholesale inventories and the minutes of the Fed’s March 17 and 18 meeting. The coming week will also mark the beginning of the second quarter earnings season.

This commentary was prepared by Northwestern Mutual Wealth Management Company.

The opinions expressed are as of the date stated on this material and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Information and opinions are derived from proprietary and non-proprietary sources. Sources may include Bloomberg, Morningstar, FactSet and Standard & Poors.

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