PERFECT PAYROLL PROVIDES PATHWAY FOR PROACTIVE ROTATION
Hello and welcome again to the No Straight Lines Investments blog, I appreciate you investing a few minutes to read my take on this week’s market action.
Monthly payrolls hit the sweet spot from my perspective (and I will dive in further below) but seemed to serve as an excuse to take some $$ out of the big winners YTD. Have a look at the action in NVDA on Friday if you don’t believe me:
I actually think this is a healthy development. Most critically, the market overall held in despite the rather large intraday reversal to the downside in NVDA and other market leading stocks.
This suggests that $$ are rotating out of the big winners and into other areas of the market that look to be undervalued given the increasingly likely soft landing.
If you doubt this point, how about the outperformance of the IWM this week, up 0.3% against a 0.3% decline in the SPX and a 1.6% decline in the NAS 100.
I will talk about how this manifested in flow data this week later in this post.
The final high level observation is that the correlation between yields and the index seems to have declined, 10-year treasury was down 10bps this week to 4.08% and the SPX was lower. I’m not sure if this is because the market pricing of rate cuts is now in-line with the Fed’s own plot; regardless, further analysis is needed to see if the trend is broken:
Let’s dig in to the week’s critical releases shall we?
US PAYROLLS - ACHIEVING A DELICATE BALANCE
The biggest questions in front of the February payrolls release were:
Will January strength be revised down? Yes, but the revisions (along with December) still point to a healthy 3-month moving average of 265k jobs added.
Was the spike in AHE’s an hours driven head fake? It would appear so with February’s number at 0.1%, and the annual wage increase at 4.3%.
Graph from Krishna Guha, EvercoreISI
February payrolls seem to have landed in the sweet spot of decent labour demand without increasing scarcity of supply, evidenced by the lessening in wage inflation.
The revisions did result in an uptick in overall hiring from Gov’t/Healthcare/Hospitality to 73% in January (from previous 43% reading). I am mentioning as this group is disproportionately driving payroll gains.
Graph from Krishna Guha, EvercoreISI
The health of the labour market is the backbone of the soft landing narrative.
The February payrolls report reflects an ongoing needed slowdown in the jobs market without sounding any alarms.
It is a tailwind to equities.
CANADA JOBS - OVERALL OK
The Canadian economy added 41k jobs in February, which was 2x the consensus, so far so good.
In contrast to January’s tally, the new jobs were all full time. Also a positive.
As has been the case for the past few years, the labour force grew more (76k) than did the number of new jobs. Hence the U rate clocked in a tick higher to 5.8%.
Taking a further step back, according to Douglas Porter at BMO, the labour force has increased 550k over the past year, whilst the economy created 368k jobs.
The news on wages was slightly helpful, with y/y wage gains registering 5%, down from January’s 5.3%.
Again, with a nod to Mr. Porter, the 10-year pre-pandemic wage growth trend was 2.25%, so we are far from achieving THAT level of disinflation in wages.
Here’s a helpful matrix that summarizes the data, courtesy of BMO’s Porter:
The good news is that the Canadian jobs market is still churning out gains.
In the context of population growth, it is obvious that there is excess labour supply, which should lead to cooler wage growth going forward.
I don’t think it changes the BofC’s expected rate cut path (more on that below), which currently suggests June will be the first meeting where we see a reduction in interest rates.
The soft landing has reemerged in Canada and appears achievable.
ISM SERVICES - THE ENGINE OF THE US ECONOMY IS DOING JUST FINE
It was interesting to watch the reaction to this report in real time.
Investor focus on Employment, which declined to 48 from 50.5 was surprising, if only because this particular data series has been volatile (it was 43.8 in December).
My takeaway is that there appears to be a genuine slowdown happening in services employment. At this stage, a moderate slowdown is just fine.
There was also a notable decline in Prices Paid to 58.6 from January’s reading of 64. Again, looking forward, the investment community sees this as a leading indicator of inflation.
I would have to think that members of the FOMC were mostly pleased with the details of this survey on the health of the services economy.
Remains a tailwind for equities.
A few other Services PMI readings from last week I wanted to highlight:
China Caixin - 52.5, which is down from January’s 52.7. Fine given low expectations.
Eurozone - 50.2 from 48.4 January tally. This is the 1st expansionary reading since July of last year.
Canada - 46.6 from 45.8 in January. Moving in the proper direction. Precisely why I think an early rate cut makes sense.
So the general trend is steady to improving services economies around the globe.
BANK OF CANADA - NO BIAS TO CUTS AT THIS STAGE
We need to give higher interest rates more time to do their work…..Governing council needs to see further and sustained easing of core inflation. Tiff Macklem, March 6, 2024
There is no ambiguity to Mr. Macklem’s statements, nor was there any doubt as to the BofC’s intentions from the interest rate decision statement.
The decision statement was a virtual carbon copy of January.
In terms of communication, I do think it is helpful that Macklem and company have suggested that they expect inflation to remain around 3% for the 1H of 2024.
To me this sets up for a potential surprise (likely downside but one never knows) in the coming few months. The Fed gives no such interim target, just for perspective.
Interest rate futures continue to suggest a June rate cut is anticipated by the market.
I see no reason at this point to question that future pricing.
FED - UNLIKE BofC, MODERATELY TIPS IT’S HAND
I wasn’t going to do any write up on JPow’s testimony, but I wanted to offer it as a bit of a contrast to the “no lean” stance of the Bank of Canada.
Here’s Krishna Guha of EvercoreISI’s comment:
Powell said the Fed is “not far from” accumulating the extra confidence it requires to confirm inflation is moving durably to 2 percent, at which point it would be “appropriate to begin to dial back the level of restriction”.
We read this as confirming the Fed has not been swayed much by hot inflation data for January, policymakers continue to judge that disinflation is on track subject to a bit more checks, and they want to cut as soon as it is responsible to do so. Krishna Guha, EvercoreISI March 7, 2024
One could argue we are one hot CPI print (data released Tuesday) away from the Fed taking a more hawkish lean, but this is where we stand today.
So the Fed is close and the BofC needs to see more to be convinced.
ECB - BRIEF HEADFAKE, JUNE IS THE MEETING FOR FIRST CUT
I understand how central bank gazing has become a full time gig.
This week, the ECB released dovish staff projections of both core and headline CPI, and immediately the market began to discount the possibility of an April rate cut.
They did also lower projected growth to 0.6%, but that received less fanfare.
During the press conference, Lagarde acknowledged that council had discussed cuts, but also made it crystal clear that more confirming data is needed before they will be sufficiently confident to cut.
It’s like the ECB/Fed and BofC simply exchanged a private text!
The takeaway is that June has been hardened as the meeting for first interest rate relief in the Eurozone.
Here ends the free portion of the blog. If you continue reading here’s where the rest of the blog will take you:
Flows Deep Dive - stocks move as a consequence of money flow, it is that simple. Some really interesting rotations that may surprise you this week.
Charts of the Week - a super efficient method to take a broad cross section of market action, and potentially uncover emerging themes.
In Depth on My Stocks - this week I highlight further signs of a resurgence in M&A which supports one of my core positions as well as my energy royalty play which reported a rock solid quarter.
If this is it for you, thanks for reading this week’s blog. Please share with anyone you think would appreciate my work!
And as always, reach out if you have any questions or want to debate/discuss anything I have written.
You can follow me on X (@NSLInvestments), or on LinkedIn and I also post regularly on the Substack Chat.
Best of luck this week!