Are job growth & wages starting to slow?
Job growth was largely in-line with expectations in March, but the pace of labor market growth slowed from the prior month. U.S. employers added 236,000 new jobs to the economy in March, down from February’s upwardly revised pace of 326,000 jobs. The unemployment rate ticked lower to 3.5%, against market expectations that it would hold at 3.6%. The decrease came as labor force participation increased to its highest level since before the Covid pandemic. March job growth was the lowest level since December 2020, but perhaps of greater importance was the trend lower in wages. Average hourly earnings increased 0.3% month-over-month (M/M) or 4.2% year-over-year (Y/Y), the lowest annual rate since June 2021. An alternative measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons edged lower to 6.7%. In separate reports this month, companies reported that layoffs surged in March, up nearly 400% Y/Y, while jobless claims rose and private payroll growth slowed.
March was highlighted by the collapse of Silicon Valley Bank, Signature Bank, and Credit Suisse, along with the subsequent regional banking crisis and tightening credit lending standards. Much of the economic data in the U.S. came in soft, increasing the probability for a near-term recession later in 2023.
Headline inflation cools, core inflation remains sticky
Headline CPI came in lighter than expected with a M/M gain of just 0.1% or 5.0% Y/Y. Core CPI, which excludes volatile food and energy, increased 0.4% M/M or 5.6% Y/Y. The annual headline rate of inflation dropped sharply, but core inflation proved to be sticky. A 3.5% drop in energy costs and an unchanged food index helped keep headline inflation in check. A 0.6% increase in shelter costs was the smallest gain since November, but still resulted in prices rising 8.2% Y/Y. Although CPI is showing signs of decelerating, the headline and core readings are still well above the Fed’s 2% target. A slowdown in economic growth should lead to further demand destruction, job losses, and decelerating prices. Markets still expect the Fed to raise rates by another 25 basis points at its May meeting.
Source: Bureau of Labor Statistics, CNBC
Economic data show signs of weakening last month
The March ISM Manufacturing PMI came in below expectations at 46.3 (down from 47.7 in February). New orders, employment, and prices all weakened while production strengthened slightly. U.S. service sector activity also weakened in March, as the ISM Services PMI fell to 51.2 in March from 55.1 in February. New orders and prices plummeted along with broad weakness in production and employment. Survey respondents cited caution and economic uncertainty.
The latest reading on retail sales was mixed, with weakness in the headline number but strength in the so-called “core” number. Retail sales fell 0.4% in February, largely due to declines in motor vehicle, furniture, and food/beverage sales. Core retail sales (which excludes automobiles, gasoline, building materials, and food services) rose 0.5% after jumping 2.3% in January. Durable good orders fell for the second consecutive month in February, declining 1% after falling 5% in January. The decline was driven by the volatile transportation sector; when excluding that component, core durable goods orders grew 0.2%.
Earnings are revised sharply lower in Q1, economic slowdown/recession remain major risks
As we embark on the Q1 earnings season, the analyst community has been busy revising its estimates lower. Earnings are forecast to decline 6.8% in Q1, well below the -0.3% figure from the end of 2022. Estimates and guidance have a negative tone for 2023 and 10 of 11 sectors have seen downward revisions for Q1. Consumer discretionary, industrials, and energy are projected to report the strongest EPS growth in Q1 compared to materials, healthcare and IT that are forecast to report the biggest declines. Analysts only expect 1.2% EPS growth in 2023 with contractions in Q1 and Q2. They do expect earnings to grow starting in Q4, but economic weakness and a possible recession could have an impact.
Eurozone economy shows life in March, but inflation & ECB tightening are still headwinds
Eurozone economic growth accelerated to a ten-month high in March according to the latest PMI survey data (53.7 vs. 52.0 in February), adding to signs that the economy is reviving after falling into decline late last year. Inflationary pressures have continued to moderate, with manufacturing input prices falling sharply. Jobs growth has accelerated, and business confidence has remained resilient despite concerns stemming from recent banking sector stress and higher borrowing costs. However, the overall rate of growth remains modest and driven solely by services. Manufacturing suffered a further loss of new orders, meaning current output is only being sustained via backlogs of previously placed orders.
Euro area headline CPI fell from 8.5% in February to 6.9% in March, the largest deceleration on record. The decline was mostly driven by a drop in energy prices relative to March of last year when prices surged following Russia’s invasion of Ukraine. On the other hand, core CPI accelerated to an all-time high of 5.7%, potentially strengthening the case for further monetary policy tightening in the Euro area.
Japan’s annual inflation rate fell to 3.3% in February 2023 from January’s 41-year high of 4.3%. The recent 3.3% reading was also the lowest since September 2022. Core inflation increased 3.1% Y/Y, the lowest reading in five months. While the headline number fell for the first time since October 2021, the current level of inflation is well above the BOJ’s 2% policy target.
A very mixed picture coming out of China following its COVID reopening
China’s economy showed signs of a recovery in the first two months of the year, led by a pickup in services after the end of three years of strict COVID policies that had disrupted commerce and stifled domestic demand. While the service sector has fueled growth and economic activity during the COVID reopening, the manufacturing sector has been more muted. The latest small company focused Caixin/S&P Manufacturing PMI fell to 50 in March from February’s reading of 51.6. The official manufacturing PMI held above 50 in March, but the level of strength declined from February. The Chinese government has pegged growth for 2023 at “around” 5%, but most economists expect slower growth for the year and an increase of only 3.5-4.0% in the first quarter. The official services PMI was particularly strong in March at 58.2, supporting a positive backdrop for domestic demand and household consumption. The manufacturing sector continues to face headwinds from lackluster global growth and weak external demand.
Is commercial real estate next?
Banks with under $100B in assets have 50%+ exposure to commercial real estate (CRE) loans, while the largest banks (>$700B of assets) have around 10% exposure. The largest banks have their greatest exposure to corporate loans. Any deposit flight from smaller banks may have a more pronounced impact on the CRE market.
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