Hiring Still Strong, But Some Flab Surfaces in Downward Revisions to Recent Jobs

Stock futures generally kept their earlier premarket gains after the jobs report, perhaps a sign that investors are becoming more worried about a possible recession than they are about the Fed. This report, which beat analysts’ expectations as every jobs report has over the last year, suggests continued resilience in the economy. However, services-related businesses, not goods-producing ones, dominated jobs growth.

Morning rush

• The 10-year Treasury note yield (TNX) jumped 5 basis points to 3.4% ahead of the jobs report.
• The U.S. Dollar Index ($DXY) inched up to 101.36.
• The Cboe Volatility Index® () futures eased to 18.94 from yesterday’s nearly one-month high.
• WTI (/CL) climbed to $70.48 per barrel.

Treasury yields and crude both clawed back from recent losses early Friday—often a sign of improved investor sentiment about the economy. These remain helpful barometers.

Just In

Today’s robust jobs report comes two days after the latest Fed rate hike, which increased interest rates to more than 5%—their highest level in 16 years. The Fed’s been trying to slow economic growth, but the jobs market continues to gallop ahead. This raises the question of whether “good news is bad news.” Will this data cause the Fed to hike again next month?

For now, the market is reacting positively to the solid economic news. Beyond the headline number and revisions to the prior two reports, things pretty much stayed in place. Labor market participation remained at 62.6%—about where it was before the pandemic. Unemployment of 3.4% was little changed from 3.5% in March and remains at historic lows.

Also, a sharp downward revision to March jobs growth is catching some eyes this morning. It now stands at 165,000, down from the original 236,000.

One worry on the inflation front is a 0.5% rise in hourly wages, which is above the 0.3% analysts had expected. Sectors that added the most jobs in April include business and professional services, health care, leisure and hospitality, and government. Manufacturing and construction employment were little changed.

Stocks in the Spotlight

Apple (NASDAQ:) (AAPL) beat analysts’ estimates for earnings per share (EPS) and revenue in its quarterly report released late yesterday, and the stock initially popped about 2%.

• The positive market response might have had more to do with AAPL’s announcement of a dividend increase and a $90 billion stock buyback than with quarterly results, which, with some exceptions, weren’t incredibly powerful and surpassed a relatively low bar from Wall Street. A miss of analysts’ expectations for the Services unit disappointed, but iPhone sales were a hit and helped buoy the quarter. Overall, it was the second straight quarter of declining year-over-year revenue for the tech giant.
• iPhone sales beat analysts’ expectations by more than $2 billion, though analysts say some of that may reflect pull-through from a weak holiday quarter as China reopened. In other words, the growth could be due to one-time circumstances.
• Services sales rose, but growth was below 6% in that key category for AAPL’s margin, and revenue came in under analysts’ expectations. Growth in Services, which includes the App store, Apple Music, and Apple Pay, has slowed significantly over the last year. Mac sales fell and looked weak, as many on Wall Street had expected, and iPad sales also declined.

Sales in the closely watched China market continued to drop, offering another sign that perhaps the economy there isn’t recovering as quickly as expected. Qualcomm (NASDAQ:) (QCOM) said earlier this week that it hadn’t seen evidence of a China recovery in the smartphone business, which is one reason AAPL’s better iPhone sales came as a bit of a surprise.

Earnings Lull: The next phase of earnings season is a few weeks off when major retailers get their turns in the spotlight. Next week is a definite reprieve after two weeks of frenzied earnings releases, as most of the best-known companies in banking, tech, industrials and other closely watched sectors are done reporting. In normal times, this might represent a welcome easing in volatility, but with banking concerns front and center, that seems unlikely this time around.

There are some high-profile companies reporting next week, including PayPal (NASDAQ:) (PYPL), Duke Energy (NYSE:), (DUK), and UnderArmour (UAA). But none are more notable than Disney (DIS), which is expected to open its books on Wednesday after the close.

Eye on the Fed

The market sees a high likelihood that rates will be lower by the end of the year. The question is how do we get from where we are now to there? It would likely take a major disruption in banking or a severe downturn in economic prospects, or both, yet it’s still priced in. This could help explain why bearish market sentiment remains extremely elevated. The probability of a rate pause in June is 90%, according to the CME’s FedWatch Tool. That’s down from 98% before the jobs report, and there’s now a 9% chance of a rate hike next month, up from 0% before the jobs report.

The Fed’s quiet period around the FOMC meeting is over, so get ready for Fed speakers to make the rounds once more. Regional banking stocks plunged again yesterday after Canada’s Toronto-Dominion Bank Group called off its $13.4 billion takeover of First Horizon (NYSE:) Corp (FHN). There’s talk on Wall Street about how to stop the sell-off in regional banks, including higher government deposit insurance guarantees or even a moratorium on the short selling of banking stocks, though this appears to be just talk for now.

What to Watch

Inflation alert: Investors likely want to steel themselves for April Consumer Price Index (CPI) and Producer Price Index (PPI) data next week. They’re due out Wednesday and Thursday, respectively. Expectations on Wall Street are for CPI to rise 0.4% month-over-month and core CPI (which strips out energy and food) to climb 0.3%, according to Trading Economics. That’s compared with 0.1% and 0.4% in March. The core CPI is the one to watch most closely, keeping in mind that pricier gasoline in April likely influenced the headline number.

Talking technicals: The SPX is closing in on what may be a key technical support point at 4,039, the 50-day moving average. The index came within a whisker of that intraday Thursday before rebounding slightly. Selling pressure could potentially pick up if that level gets breached.

CHART OF THE DAY: A long-term chart of the KBW Nasdaq Bank Index (BKX—candlesticks), suggests that bank stocks may have another big drop in them. A 10-year graph reinforces that idea. If it hit the support level on the chart, the index would be down about 60% from its January 2022 high. Data source: Nasdaq. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Oracle (NYSE:) time: Not the company, the one in in Omaha. This weekend’s Nebraska retreat features the latest views from Berkshire Hathaway (NYSE:) (BRK.B) CEO Warren Buffett and Vice Chairman Charlie Munger. With all the bank jitters lately, investors might want to hear their thoughts on the regional banking industry. The two nonagenarians will also likely face questions about the Fed’s policy and the economy in general, as well as their company’s portfolio. A major holding of theirs, Apple (AAPL) could be in the spotlight after its earnings report yesterday, as well as oil companies, which Buffett recently built a heavy stake in only to see crude fall to late-2021 lows this week. It’s already been a wild two weeks for the market, but Buffett and Munger’s gathering may be one reason to put off your golf game this weekend.

Shining on: While Fed Chairman Jerome Powell strongly hinted this week that he has no plans to cut rates absent an economic crisis, the gold market tells a different story. (/GC) rose more than 1% Thursday and came within shouting distance of the metal’s all-time high of $2,089 an ounce, set back in August 2020. Gold isn’t just benefitting from hopes of lower U.S. rates; it’s also getting a lift from the , which continues to trade near 2023 lows. It’s still holding on to the 101 handle, but that’s down from nearly 115 last fall. Watch the dollar following today’s jobs report and next week’s U.S. inflation data to see if it gets a lift or not from economic activity.

Earnings season update: Today brings the latest update on Q1 earnings from research firm FactSet, which comes amid generally better-than-expected Q1 results. The last FactSet estimate was for a 3.7% drop in year-over-year S&P 500 earnings, but some analysts now expect less than a 3% decline. What’s problematic is estimates coming down for later this year. Widespread hopes for earnings to rebound in the second half of the year have been fading, with some on Wall Street now penciling in overall S&P 500 earnings to drop slightly in 2023. With the S&P 500 index (SPX) still trading at a historically elevated forward multiple above 18, it may be hard for investors to get enthusiastic if it looks like earnings can’t at least slightly recover by year’s end.

Calendar

May 8: March Wholesale Inventories and expected earnings from Tyson Foods (NYSE:) and PayPal (PYPL).

May 9: Expected earnings from UnderArmour (UAA).

May 10: April Consumer Price Index (CPI) and core CPI, and expected earnings from Disney (DIS).

May 11: April Producer Price Index (PPI) and core PPI and expected earnings from JD.com (NASDAQ:).

May 12: Preliminary May University of Michigan Consumer Sentiment

Happy trading,

Disclosure: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

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