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Job Gains Suggest A Shift To Cyclicals?

05/06/2013

Job Gains Suggest A Shift To Cyclicals?

On Friday morning, May 3, the Department of Labor released the nonfarm payroll report for the month of April. Over the past few days, a disappointing construction spending figure and a weaker than forecast ADP private payroll report reduced consensus estimates for monthly job gains. However, the surprise this past Friday morning was to the upside as a much stronger than forecast report was released.

  •  April nonfarm payrolls increased 165,000, ahead of last month’s +138,000 and consensus estimates for +140,000
  • April private payrolls increased 176,000, ahead of last month’s +154,000 and consensus estimates for +150,000
  • The April unemployment rate (Figure 1.1) fell once again, to 7.5% from 7.6% last month, the lowest level since December 2008

 

  • The April underemployment rate rose to 13.9% from 13.8% last month
  • March’s nonfarm payroll figure was revised from +88,000 to +138,000
  • March’s private payroll figure was revised from +95,000 to +154,000
  • The labor force participation rate (Figure 1.2) was unchanged at 63.3, its lowest level since July 1978

 

  • Temporary workers increased 31,000, the most since February 2012   
  • April average hourly earnings increased 1.9% year on year to $23.87
  • April average work week fell to 34.4 hours from 34.6 hours in March

 COMMENTARY

 In the wake of the labor report release the S&P 500® Index (SPX) (Figure 1.3) advanced 1.05% to close at 1614.42, a new all-time high. Year to date, the SPX has now advanced 13.2%. I suspect near-term short positioning, in anticipation of a weak labor report, contributed to Friday’s outsized advance as those speculative short positions were covered. Investors should keep a watchful eye on SPX level 1576.09, the previous all-time high from October 2007. That prior secular level of resistance will be used extensively as near-term support, especially by algorithmic trading models.

Additionally, the conversation once again seems focused on whether this report will signal an earlier moderation of FOMC monthly purchases than current estimates for Q1 2014. I expect that is an incorrect focus. The next FOMC meeting is not until June 18, and a growth surge would need to be evident. The collective economic evidence does not suggest a significant surge in economic growth.  

The real investor question, or focus, is whether Friday’s report will initiate a shift away from market leading defensive sectors toward economically sensitive cyclicals. That possibility does exist. However, please understand to date “it remains a bond friendly world!” Therefore, the very first catalyst for that shift would be a rise in U.S. Treasury yields (Figure 1.4), not a massive rise, just enough to re-challenge this year’s 2.08% high. That is indicator number one; the world must appear less bond friendly.

The next question would be what economically sensitive assets would be favored. I expect the recent price action in energy (Figure 1.5) places it in a position of prominence amongst cyclicals. Consider energy first and foremost should the next few weeks present confirming evidence that a shift toward cyclicals is warranted.


Figure 1.1 U.S. Unemployment Rate, November 2008 to May 2013

 

Source: Bloomberg

 

Figure 1.2 U.S. Labor Force Participation Rate, 1978 to 2013

 

Source: Bloomberg

 

Figure 1.3 S&P 500 Index (SPX) Monthly Performance, 1998 to Present

 

Source: Bloomberg

 

Figure 1.4 U.S. 10-Year Treasury, Year to Date

 

Source: Bloomberg

 

Figure 1.5 XLE (SPDR Energy ETF), Year to Date

 

Source: Bloomberg

 

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