February 2 – It’s all about jobs today, as traders digest the latest monthly jobs report from the Department of Labor, considering how that might impact the Federal Reserve’s confidence level in its current monetary policy being able to get us down to the 2% inflation mandate. The VIX is trading near 14 this morning, while the dollar index surged to trade near 103.8 as Treasury yields surged as well. Yields on 10-year Treasuries are trading near 4.00%, while yields on 2-year Treasuries are trading near 4.37%. Crude oil prices are trading nearly 1% lower in early trade. The grain and oilseed sector traded mostly higher overnight, but then flipped on the jobs data release.
Treasury yields popped and stock futures dropped following the release of this morning’s monthly jobs report on expectations that it reflects a hot labor market that will make the Federal Reserve reluctant to cut interest rates any time soon. The economy created 353K non-farm payroll jobs in January, which is more than double the 170K anticipated by analysts. Furthermore, the December number was revised to 333K jobs created, up from the 216K reported a month ago. The unemployment rate remained unchanged at 3.7%, disappointing analysts who were expecting it to tick higher to 3.8%. The job participation rate held unchanged at 62.5%, meaning that employers had to battle for workers to fill those positions, pushing wages higher. As a result, average hourly earnings rose 0.6% month-on-month, doubling analyst expectations of 0.3%, and up from 0.4% growth the previous month. Average hourly earnings were up 4.5% year-on-year in January, up from analyst expectations that they would remain at 4.1% growth. However, the average workweek contracted to 34.1 hours in January, down from expectations that it would tick higher to 34.4 hours.
Manufacturing added 23K jobs in January, fitting with some of the other data released this week indicating a bit of a recovery in the manufacturing sector. That was up from an upwardly revised 8K job creations in December, and well above the 5K added jobs expected by analysts. Healthcare added 70K jobs in January, while retail added 45K, and social assistance added 30K jobs. Government employment added another 36K jobs as well, although that was below the average monthly gain in 2023 for government employment growth of 57K. The JOLTS report revealed on Tuesday that open job postings increased to 9.026 million at the end of December, which fits well with the job growth that we saw in January. Today’s jobs report is a hot one all the way around, reflecting a tight labor market that will keep upward pressure on wage inflation, making it difficult for the Federal Reserve to cut interest rates at a time when the economy is expanding at this pace. We’ll get an update on consumer sentiment readings later this morning, but all indications are that consumer sentiment is also rising, creating demand for goods and services, as well as for housing. This is definitely good news for the health of the economy, but it is not the news needed to justify interest rate cuts any time soon. Fed fund futures dramatically lowered their odds of a March rate cut following the release of this report, while also dialing back expectations for May as well.
Land sale taxes are a significant source of revenue needed to finance local government budgets in China, and it’s the local governments that bear the responsibility for the bulk of the growth projects, although the central government sometimes backs them. Fiscal revenue from land sales fell by 13.2% in 2023, dropping for the third year in a row as the property sector continues to slump. Land sales totaled 5.8 trillion yuan in 2023, down 886 billion yuan ($139 billion) from the previous year, and down nearly 3 trillion yuan from the peak in 2021. Overall fiscal revenue from taxes rose to 11.72 trillion yuan ($1.64 trillion), up 7.8% year-on-year, despite a cut in revenue from land sales. Fiscal revenue from land sales dropped to 49% of receipts in 2023, down from 58% the previous year, but still roughly half of the budgeted revenue, keeping them dependent on the health of the property market. This will require more transfer payments from the central government, leaving less revenue for stimulus efforts.
Grain and oilseed prices immediately came under pressure following the release of this morning’s jobs numbers as the dollar surged higher along with Treasury yields on the expectation that the Federal Reserve would keep rates higher for longer to bring down inflation, reducing demand for U.S. commodities. Export demand for U.S. commodities is already soft, and today’s surge in the dollar won’t help matters. Furthermore, today’s data reinforces the commodity deflation mantra that has been in place for nearly two years. I still expect that sentiment to flip later in the year, but for now, it is well-entrenched, with today’s data supporting it. Nevertheless, wheat prices have thus far maintained modest overnight gains on ideas that it is already cheap, and that quality milling supplies are tightening.
