Q2 Begins Upbeat After Dismal Q1…..

U.S. equities finished higher in a rollercoaster ride of a session, starting Q2 off in positive fashion after posting the worst quarterly performance in two years in Q1. Investors sifted through a slew of key economic data and assessed with what the implications are for how aggressive the Fed will be. The labor report showed that although job growth missed, underlying components were solid, while ISM and S&P Global indicated that manufacturing growth remains healthy, but inflation and supply chain challenges continued. Meanwhile, the ongoing war in Ukraine remained in focus with Russia and Ukraine continuing ceasefire talks today. Treasuries were mixed, with the yield curve inverting for the first time since 2006, and the U.S. dollar gained ground, while crude oil prices fell below the $100 per barrel mark, and gold tumbled. Equity news remained sparse, with BlackBerry missing cybersecurity revenue projections and offering a disappointing outlook, GameStop announced plans to ask for shareholder approval to increase its share count to pave the way for a stock split, while some automakers reported disappointing Q1 U.S. sales. Stocks in Europe gained ground despite another record high consumer price inflation report, while markets in Asia closed out the week mixed.

The Dow Jones Industrial Average rose 140 points (0.4%) to 34,818, the S&P 500 Index gained 15 points (0.3%) to 4,546, and the Nasdaq Composite increased 41 points (0.3%) to 14,262. In moderate volume, 4.5 billion shares of NYSE-listed stocks were traded, and 4.9 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.01 to $99.27 per barrel. Elsewhere, the gold spot price traded $27.10 lower to $1,926.90 per ounce, and the Dollar Index was 0.3% higher at 98.58. Markets were mixed for the week, as the DJIA was down 0.1%, while the S&P 500 gained 0.1%, and the Nasdaq Composite increased 0.7%.

March jobs report shows labor market remains tight, manufacturing growth remains

Nonfarm payrolls rose by 431,000 jobs month-over-month (m/m) in March, compared to the Bloomberg consensus estimate of a 490,000 rise, while February’s figure was adjusted higher to an increase of 750,000 from the initial reading of a 678,000 gain. Excluding government hiring and firing, private sector payrolls advanced by 426,000, versus the forecasted rise of 496,000, after increasing by 739,000, revised higher from the preliminarily reported 654,000 gain in February. The labor force participation rate rose to 62.4% from February’s unrevised 62.3% figure, and matching forecasts.

The Bureau of Labor Statistics said notable job gains continued in leisure and hospitality, professional and business services, retail trade, and manufacturing.

The unemployment rate dropped to 3.6%, from 3.8%, with forecasts calling for it to dip to 3.7%. The underemployment rate—including total unemployed and those employed part time for economic reasons, along with people who are marginally attached to the labor force—declined to 6.9% from the prior month’s 7.2% rate. Average hourly earnings were up 0.4% m/m, in line with projections, and compared to February’s upwardly-revised 0.1% rise. Compared to last year, wages were 5.6% higher, north of forecasts of a 5.5% rise. Finally, average weekly hours dipped to 34.6 from February’s unrevised 34.7, where it was expected to remain.

The March Institute for Supply Management (ISM) Manufacturing Index showed manufacturing growth (a reading above 50) unexpectedly deteriorated but continued to show expansion. The index declined to 57.1 from February’s 58.6 level, and versus estimates of an increase to 59.0. The softer-than-expected report came as both new orders and production fell but continued to grow. However, inventories expanded, employment growth accelerated, and supplier delivery times slowed. Inflation pressures ramped back up, with prices paid jumping 11.5 points to 87.1.

The ISM said, “The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment. In March, progress was made to solve the labor shortage problems at all tiers of the supply chain, which will result in improved factory throughput and supplier deliveries. Panelists reported lower rates of quits and early retirements compared to previous months, as well as improving internal and supplier labor positions. March brought back increasing rates of price expansion, due primarily to instability in global energy markets. Suppliers are not waiting to experience the full impacts of price increases before negotiating with their customers. Panel sentiment remained strongly optimistic regarding demand, with six positive growth comments for every cautious comment, down from February’s ratio of 12-to-1.”

The final March S&P Global U.S. Manufacturing PMI Index was upwardly-revised to 58.8, above estimates calling for an unrevised 58.5 level. The index was above February’s reading of 57.3. A reading above 50 denotes expansion.

S&P Global said the report signaled a sharp improvement in operating conditions across the U.S. manufacturing sector. It added that overall growth was supported by faster increases in output and new orders, as domestic and foreign client demand ticked higher, while firms noted that fewer supply bottlenecks allowed production to expand at a faster rate. The report also showed supplier delivery times deteriorated to the smallest extent since January 2021, and amid the stronger demand conditions firms stepped up their hiring activity, but costs continued to soar.

Construction spending increased 0.5% m/m in February, versus projections of a 1.0% gain and down from January’s upwardly-revised 1.6% rise. Residential spending grew 1.1%, and non-residential spending dipped 0.1%.

Treasuries were mixed after a recent drop that lifted yields amid increased expectations of a more aggressive Fed monetary policy tightening cycle as it tries to combat the surge in inflation. Also, the yield curve spread is garnering heavy attention, with some portions of the curve inverting to foster talk of the potential for a recession on the horizon.

©2022 Charles Schwab & Co., Inc. All rights reserved. Member SIPC.

Schwab Center for Financial Research (“SCFR”) is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.