Markets react to mixed economic signals
Summary
A wave of economic data was released last week, giving investors plenty to ponder. Some data concerned investors, such as a negative GDP print, the continued slide in consumer confidence, and an uptick in jobless claims. However, several items boosted investor sentiment, with a PCE index in line with expectations, a better-than-expected ISM Manufacturing number, and a jobs report still showing resilience. Many braced for a deluge of negative data, given that we are one month past the tariff announcement. However, that has not shown up, and only time will reveal the impact of tariffs. Markets responded favorably, with the S&P 500 up 2.94% on the week, and the 10-year yield up just 7 bps, closing at 4.31%.
Jobs
Last week brought some much-needed clarity on the labor market. The JOLTS report released Tuesday showed a significant decline in the number of job openings, which on the surface may be viewed as a negative. However, job openings are now back to levels seen before the pandemic. This reflects a labor market that is more in balance and supportive of the Fed view that wage growth will not drive inflation. The ADP jobs report followed, giving investors pause as the report showed job growth of just 62,000, well below expectations. However, true to form, this number was well off the official BLS report released Friday.
The BLS report showed non-farm payrolls grew by 177,000 in April, well above expectations. Although the prior month revision showed a decrease of 43,000, investors breathed a sigh of relief that the labor market continues to show strength. Average hourly earnings were up just 0.2%, showing little signs of wage pressure, while the unemployment rate remained steady at 4.2%. Overall, this report was better than expected. However, many of the economic reports, including the jobs reports, are potentially distorted due to the uncertainty around U.S. trade policy. For example, transportation and warehousing added 29,000 in the month, which is not typical in a slowing economy, and may be the result of an influx of goods coming into the ports in Q1. It is still too early to determine the impacts of tariffs, and we expect that many of these reports will continue to show anomalies in the coming months, likely maintaining the elevated levels of market volatility.
Source: BLS
Other key releases/news
Several other key economic indicators were published last week. The trade deficit was released, showing a record deficit of -$162b. Home prices continued to tick higher with the Case-Shiller Home Price index showing a 0.4% increase month-over-month, yet the pending home sales index surged to 6.1%. Consumer confidence came in lower than expected at 86.0, with the expectations index showing its lowest reading in 13 years at 54.4. GDP contracted at annualized -0.3%; however, that was largely affected by the surge in imports because of the front-running of tariffs. The PCE index showed no increase month-over-month in the headline or core index, with year-over-year readings of 2.3% and 2.6%, respectively. Jobless claims ticked higher to 241,000, which should be watched closely in the coming weeks to see if this is the beginning of a trend. Finally, the ISM manufacturing index showed a reading of 48.7, still in contractionary territory, but much better than many economists feared. While the overall economic data remains mixed, even the negative data last week was better than many feared. Investors also embraced the news Friday morning, which signaled that trade tensions between the U.S. and China may be thawing, with China evaluating the possibility of trade talks.
Week ahead
Investors will focus on the FOMC Meeting this week, with the market widely expecting no change in the Fed funds rate.
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