February's U.S. jobs report: Cause for concern?

On the latest edition of Market Week in Review, filmed on International Women’s Day, Senior Quantitative Investment Strategy Analyst Dr. Kara Ng and Sophie Antal Gilbert, head of AIS business solutions, discussed the recent downward movements in U.S. equity markets. They also chatted about February’s U.S. employment report and key takeaways from the European Central Bank (ECB)’s latest policy meeting.

U.S. equities slide as markets face new headwinds

Markets have largely been on an upward trajectory since the start of the new year, but the week beginning the 4th of March saw stocks slide as concerns about a global economic slowdown resurfaced, Ng said. The two big catalysts for the recent downturn appear to be the ECB’s meeting on the 7th of March and the U.S. jobs report for February, released on the 8th of March, she explained.

"The market has interpreted both of these events in a negative light, but it’s important to take a step back and look at the bigger picture," Ng said. For example, while the S&P 500® Index was down approximately 3% in the week of the 4th of March (as of mid-morning Pacific time), the benchmark index is up roughly 9% in 2019, she noted.

Ng emphasised that markets have already priced in a fair amount of positivity over the past two months. In addition, the strong rally has also sparked new headwinds, such as more expensive valuations and the elimination of oversold sentiment, she stated. That said, Ng explained that a little bit of volatility and some repricing is perfectly normal. "Looking ahead, our baseline expectation at Russell Investments is that the world economy will stabilise to at-trend levels — in other words, it’s unlikely to fall off a cliff," she remarked, adding that she sees no signs of a need for extreme de-risking in the short term.

The polar vortex: The culprit behind February’s weak job gains?

The U.S. Labor Department announced on the 8th of March 8 that the U.S. added only 20,000 non-farm payrolls during the month of February — drastically below consensus expectations, Ng noted. “In a vacuum, such a low number might cause us to become concerned about a slowdown in hiring or a turn in the economic cycle, but we don’t see that as the case this time,” she stated. Why?

Much of the weakness in job growth can probably be attributed to severe winter weather across a majority of the U.S. last month, Ng said. “This becomes readily apparent when looking at the industries that were impacted the most i.e. construction, leisure and retail, which are all weather-sensitive,” she explained.  

In Ng’s opinion, a better snapshot of the U.S. labour market can be gained by concentrating on the three-month employment trend instead. “Doing this suggests that while job growth may be moderating, it’s nowhere near any kind of doom stage,” she said, pointing out that the U.S. added over 300,000 jobs in January.

The nation’s low unemployment rate for February — just 3.8% — coupled with a sharp increase in year-over-year wage inflation, may have also spooked markets at week’s end, Ng noted. “Historically, numbers like these might have prompted the U.S. Federal Reserve (the Fed) to adopt a more hawkish stance, but that’s not going to happen this time around,” she stated. The central bank will likely need to see evidence of price inflation before considering any tightening of monetary policy, Ng said. “Ultimately, February’s jobs report doesn’t change our view that the Fed will refrain from any interest-rate increases until at least this summer,” she concluded.

ECB lowers growth and inflation outlooks for the year

Shifting to the ECB, Ng noted that markets also reacted in negative fashion to the central bank's downgrade of its inflation and growth forecasts on the 7th of March. Notably, the ECB slashed its growth outlook for 2019 to 1.1% — the lowest level since 2013, and the largest forecast cut since the start of quantitative easing, she said. Why? “ECB President Mario Draghi cited a host of concerns, including pervasive uncertainty, continued economic weakness, worries over global trade and the Brexit saga,” Ng explained.

As a result, the central bank announced that interest rates will remain unchanged through the end of 2019. The bank also introduced a third round of targeted long-term refinancing, she said. “Ultimately, the actions of the ECB are very consistent with the recent shift among central banks to a more dovish stance — a shift that began with the Fed back in January,” Ng noted. This transition will likely help global growth stabilise, she said, adding that for Europe in particular, she expects recent economic headwinds to fade. “Overall, European stocks still look relatively attractive in comparison to U.S. stocks,” she concluded.

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.