Mon, 04/05/2021 – 09:48
Last Week’s Close
E-mini S&P 500 Futures (June): Settled at 4010, up 42.50 on Thursday and 45.25 on the week
E-mini Nasdaq-100 Futures (June): Settled at 13,316, up 226.25 on Thursday and 349.25 on the week
U.S. benchmarks finished Q1 and started Q2 with fireworks before Friday’s Nonfarm Payroll report brought added tailwinds. We now view the next 2-3 sessions as critical in solidifying investors’ appetite for the next 3-week narrative and defining a very bullish technical breakout.
Friday’s report showed 916,000 jobs being added in March: for all intents and purposes, a blowout number. As expected, leisure and hospitality led the gains with 280,000 new hires. Across the board, education added 190,000 and construction posted 110,000. This is what a reopening looks like, but it’s the report in its entirety that may be most bullish.
Average Hourly Earnings fell shy of expectations at -0.1% MoM versus +0.1% and 4.2% YoY versus 4.5%. Lower paying jobs are coming back to the workforce and that’s watering down wage growth: this is the Goldilocks scenario the Federal Reserve has been expecting.
Remember, they’ve steadfastly called for an uptick in inflation this summer to only be transitory. By their metrics, we haven’t even begun to see that uptick, and for February, Core PCE was 1.4% YoY and Core CPI 1.3%. It won’t so much be the March “Year over Year” reads in April, as those remained steady in 2020, but beginning with the April reads in May expectations are for unusually high comparisons.
At the end of the day, the Fed is focused on full employment, and 21.6 million jobs were lost at the onset of the pandemic 1 year ago. We’ve since recouped 13.6 million, but this leaves 8 million to go. Even with heightened expectations over the next 4 months given reopenings and seasonal jobs being added, that number is only cut in half, still leaving 4 million.
Those last 4 million jobs may be most important, because that’s the Fed’s emphasis: those jobs that are never coming back, and those in parts of the country that were hardest hit by the pandemic. This, coupled with only transitory inflation, is why they’ll be extremely patient in removing accommodations.
Of course, markets like to price in expectations far ahead of time. We believe the Goldilocks report from Friday is enough to create the next bull leg higher in equities if the next 2-3 sessions hold such technical construction.
Another thing to account for is that the velocity at which rates rose has now likely been digested. Strength across risk assets over the next 3 weeks will bring buoyancy to rates, but within a much more contained environment— at least, that’s our expectation through the bulk of April. However, we may find ourselves at another inflection point come May.
Services sector data was in focus this morning with final March Services PMI released at 8:45 a.m. CT, followed by the more closely-watched ISM Non-Manufacturing at 9:00 a.m. CT. Factory Orders also came due at that time. Much of the globe is still on holiday for Easter Monday and the economic calendar is a bit quieter this week, but this Wednesday we look to the Minutes from the latest Fed meeting.
President Biden’s $2.25 trillion infrastructure spending plan will remain in focus, as well. Last week, rates retreated on the notion that tax hikes will account for much of the cost. As the week unfolds, traders must keep a close eye on rates and the GOP reception of the price tag of this plan.
Lastly, fears of a 3rd or 4th wave are very relevant. Through the holiday, the closely watched 7-day moving average of U.S. cases tapered off from its March 30th peak. Will this continue? On the other hand, India hit a high of 100,000 new daily cases for the first time, France extended their lockdown, and there are fears that other parts of the world may have to do the same.
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