U.S. stocks erased half of the day’s gains in the final hour of trading on Friday, but by holding on the broad market recorded its ninth advance in 12.  I’m not sure what caused the reversal for sure as there are so many things, some suggested indexers were raising cash to purchase Blackrock , which got added to the S&P 500 after the close. 

There were also a couple of late-day develops that could have driven a little concern.  Such as reports that Pakistani radicals stormed a UN complex beheading two and killing another 10. Then there was ECB (European Central Bank) President Trichet freaking out after Ireland floated a plan that would have bondholders take some losses on senior bank debt as the backstopping game is breaking the back of that government – Trichet offered to provide ongoing funding to the banks as he knows they’ll be short-term crippled if forced to take losses on these securities; that’s how bad the situation really is.  On top of that, crude lifted beyond $108/barrel and wholesale gasoline to $3.15/gallon, which means retail national average goes to $3.75.  

The big economic news of the day was a 216K pick up in payrolls during March…more on that below. 

Industrials, financials, consumer discretionary and utilities led the market higher.  Telecoms and tech closed lower for the session.    

Regarding our own central bank, we’ve talked about the hawkish comments of late as FOMC members Plosser, Fischer and to a lesser extent Bullard expressed that QE may be coming to a close.  Thursday night a new voice entered the mix as Minnesota Fed Res Bank President Kocherlakota stated he doesn’t “foresee an extension of the LSAP” (another term for QE, it stands for Large Scale Assets Purchases) and that his inflation outlook would justify a 50 basis point hike in fed funds by year end. 

Well, these comments were immediately smacked down as NY Fed Bank President Dudley stated he sees no reason to pull back from monetary stimulus as “we must not be overly optimistic about the growth outlook.”  While dissent within the FOMC is clearly building, the real “deciders” (Bernanke, Yellen and Dudley) are not even close to engaging in actual tightening.   The Dollar Index, which had been up in early trading, got hammered on those comments.  

Market Activity for April 1, 2011

Sector Activity for April 1, 2011

March Jobs Report

The Labor Department reported that payrolls rose 216,000 (beating the +190K expected) as private-sector payrolls gained 230K (besting the +206K expected).  The prior two months were revised up by 7,000, which brings the three-month average to 159,000/month – up from the +138K/month in the prior three-month period. 

Both goods-producing and service-sector payrolls posted improvement, but the education/health-care and leisure/hospitality segment still account for too much of the service-sector growth (accounting for 41% of the 199K in service sector payroll gains). 

Goods-producing industries increased payrolls by 31,000 (shy of the +47K/month three-month avg) as manufacturing added 17,000 positions; construction cut another 1,000.  Factory payrolls have increased 34K/month over the past three months, so they have yet to show the robust job growth the regional factory surveys have suggested. 

Service-providing industries created 199,000 jobs (nicely above the three-month average of +141K/month) as business services payrolls led the charge with a 78K increase – 40% of which were temporary jobs.  Trade and transport added 32K, retail added 18K, and financial services increased payrolls by 6K. 

Now, on those education/health-care (EH) and leisure/hospitality (LH) segments, EH added another 45K and LH another 37K.  Not only did these two areas account for 41% of the service-sector job gains for March, but they accounted for 53% in February.  EH is going to come under big pressure when the new fiscal years for the states begin in June as these governments won’t have increased federal assistance to fall back on for the first time in two years.  And LH consists of the lowest wages in the service sector, so that’s not exactly where you want to see the growth coming from either.

The official unemployment rate ticked down to 8.8% in March from 8.9% in February as the household survey (this is the survey used to calculate the jobless rate) showed an increase of 291,000 jobs (up 238K/month over the past four months), while the civilian labor force increased only 160,000.  Nearly 940,000 workers removed themselves from the labor force in the four months ended January. Over the past two months, just 220,000 have come back in so the jobless rate will have big increases to deal with in the months ahead. 

The long-term unemployment figures deteriorated on balance as both measures pertaining to the duration of unemployment continue to rise, while the U6 jobless rate improved.  The average duration of unemployment (in weeks) jumped to 39.0 from 37.1 in February.

The percentage of those unemployed that have been out of work for at least six months rose for a third-straight month to 45.5% (6.1 million people), just a tick away from the record high hit in May of 45.6%.

The U6 unemployment rate, which measures both joblessness and underemployment, improved for a fourth-straight month to 15.7% from 15.9% in February.

Average hourly earnings were unchanged in March, flat for four of the past five months.  As a result, earnings are quickly eroding in real terms as energy and food prices have jumped over this time.  Further, average weekly hours worked held at 34.3 -- flat since October. 

Bottom line:

The increase in payrolls to the 200K range over the past two months is helpful and welcome as we’ve waited (ex-census period) a long time for this level of job creation to materialize. 

However, while gains of this magnitude are very solid, they are insufficient for the current environment; we need to see evidence that payroll growth will increase to 300k/month – at the current rate we wouldn’t return to the long-term average of 6.3% unemployment until 2016.  And too much of the gains are coming from a segment that has been levitated by federal government assistance to the states (what happens to education and health-care jobs when states are left to balance budgets on their own come June?), and the lowest-wage segment (leisure/hospitality). 

Further, the long-term unemployment problem does not only persist, it’s getting worse.  And flat wages are getting whipped by rising commodity costs over the past several months. 

Finally, while the official unemployment rate has improved from 9.8% to 8.8% since November, we still have a lot of workers that will be re-entering the workforce.  That will put upward pressure on the rate again if we don’t see increased payroll growth in the months ahead. 

This is a very negative tone and I’m sorry for that, but it is the reality.

ISM Manufacturing

The Institute for Supply Management’s gauge of manufacturing activity decelerated a bit but remained at a hot level for March.  The measure printed 61.2 (in line with expectations) after the 61.4 for February. 

While the headline reading remains at a robust level, the internals of the report showed weakness as seven of the 10 sub-indices declined – of course the prices paid measure wasn’t one of them.

The prices paid measure motored to 85.0, up three points for the month and has surged from a reading of 57 since July.  A reading of 85 has been hit only 1% of the time over the past 60 years, outside of the high-inflation period of the 1970s. 

Sign up to receive the Daily Insight and other Acropolis publications here.

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900