VALE - Why Markets Liked The April 2023 Non-Farm Payroll Report

2023-05-05 14:10:12 ET

Summary

• April 2023 unemployment remained low as jobs were added to the economy.
• February and March employment numbers were revised lower.
• Watch cyclical and semiconductor sectors.

The Dow Jones (DJI) has gained around 400 points today, helped by the jobs report, Apple Inc.'s (AAPL) quarterly results , and tempered fears over regional banks. Among those three events, investors should look at the strong April 2023 non-farm payrolls report released by the U.S. Bureau of Labor Statistics closely.

After the Federal Reserve raised rates on Wednesday , Fed Chair Jerome Powell singled out the upcoming jobs data to justify further hikes. The strong economy added 253,000 jobs and sent the unemployment rate falling to 3.4%. It strongly decreases the likelihood of an interest rate pause. The 5.0% to 5.25% Fed Funds rate will hold for longer than investors like.

Employment Situation

The BLS reported a continued positive trend for professional and business services (+43,000), health care (+40,000), leisure and hospitality (+73,000), and social assistance (+25,000). Notably, unemployment rates fell in the service and sales, and office occupations (highlighted below):

The falling unemployment rates in installation, maintenance, and repair occupations might continue adding cost pressures in the housing market. Persistently low unemployment in services will sustain price pressures. SPI Global (SPGI) reflected on the service sector, where rising demand led to increased pricing power in April .

The Fed and central banks around the world combatting inflation will need a recession later this year to fight those inflationary pressures.

February and March 2023 Jobs Revised Lower

Tucked on the third page, the BLS revised the Feb. 2023 nonfarm payroll employment down by 78,000, from +326,000 to +248,000. The BLS also revised the March jobs down by 71,000. This decreases the previously released +236,000 figure to +165,000.

The lower revision would turn the strong jobs report into missing expectations. This is akin to Advanced Micro Devices, Inc. ( AMD ) rallying nearly 10% on reports of Microsoft Corporation ( MSFT ) investing in the former's artificial intelligence hardware. On May 5, a Microsoft spokesperson denied Athena's involvement with AMD . Athena is Microsoft's project codename to build a chip for AI applications.

The stock market's embrace of rumors and old economic data suggests that bullish sentiment will not reverse. The market may overcome the bearish adage of "Sell in May."

April 2023 Revisions

Investors may infer that the BLS will revise the announced April 2023 figures in the future. More importantly, the Federal Reserve's interpretation of the report will matter more. The Fed should anticipate that the unemployment rate could rise sharply as high interest rates slow the economy.

Higher for Longer

The strong job report will increase the probability that the Fed Funds Rate remains at 5%. Mainstream media will embrace " higher for longer ." Investors who want to lock in higher returns may move cash to short-term treasury bills. Readers may track the intraday yield on the US 1-month ( US1M ), US 3-month ( US3M ), and the US 6-month treasury ( US6M ) closely:

Investors who anticipate interest rates pausing and eventually falling may hold the iShares 7-10 Year Treasury Bond ETF ( IEF ) and iShares 20+ Year Treasury Bond ETF ( TLT ). They should increase in value when rates fall.

Watch Semiconductors

The "higher for longer" interest rates will slow the economy. However, semiconductor stocks do not trade in expectation of a deep recession. For example, Micron Technology, Inc. ( MU ) lost $1.91 a share as revenue fell by 52.6% Y/Y to $3.69 billion . MU stock barely reacted to the shortfall.

The market's willingness to pay a premium for AI chips sent Nvidia Corporation ( NVDA ) shares toward a 52-week high. As mentioned earlier, AMD posted revenue falling by 9.2% to $5.35 billion . AMD stock erased the nearly 9% daily loss after the earnings report.

Qualcomm Incorporated ( QCOM ) posted a decline in revenue . After QCOM stock adjusted for its valuation and weaker growth, the profitable firm will reward investors when the chip cycle turns positive.

Watch Resources

Weak Chinese demand for copper hurt Freeport-McMoRan Inc. ( FCX ) stock recently. Weak sales from a February weather event overshadowed its full recovery in March . When the mining firm's Grasberg mine is online again, following a nearby flooding, it will post stronger results next quarter.

Vale S.A. ( VALE ) posted a lower net profit . Its prospects in iron ore strengthened through mergers and acquisitions. Chief Executive Officer Eduardo Bartolomeo said that the industry would consolidate. Vale will lower operating costs as it meets its full-year production targets.

Your Takeaway

Stock markets welcomed the strong job report, which supports the Fed's decision to keep rates at higher levels. The central bank will likely continue battling persistently high inflation without hurting job prospects. This report should remind investors to take advantage of high short-term interest rates. Readers may stay invested in sectors that will navigate through a continued, strong economy.

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