Not So Fast…

I’d like to think that the title of today’s piece can be interpreted in three ways.  The obvious reference is to the slower than expected jobs growth revealed by the monthly payrolls report, but the first subtext refers to the ISM numbers that arrived an hour and a half later.  The third relates to Apple, whose massive buyback may be an acknowledgement of a slower-growth future.

When the employment report arrived, I joked that we should play a Goldilocks drinking game, taking a shot each time someone on financial media mentions that today’s result was neither too hot nor too cold.  It would have been a major impediment to getting any work done.  But while the game would have been wildly inappropriate — even with coffee I would have been overcaffeinated – the description is not.  Although April Nonfarm Payrolls missed expectations by a wide margin (+170k vs. +240k consensus and a revised +315k in March), they were high enough to be consistent with a growing economy – just one that is growing more slowly than expected.   The same can be said for the Unemployment Rate rising to 3.9% from 3.8% (both last month and consensus), while a dip in the monthly change in average hourly earnings to +0.2% from +0.3% (also both last month and consensus) offered some welcome relief from concerns about wage inflation. 

A reporter asked for comment within minutes after the 8:30 EDT report, and within seconds I offered the following:

Everything missed

A few minutes later, I expanded:

This is a very market-friendly set of numbers, at least in the short term.  We’re at a point where bad news can be good.

The cooling economy that they portray is just what bond investors want to see, and stocks, which were primed to rally after AAPL and AMGN [Amgen], took the cue immediately.

Longer-term, we can quibble about whether this signals the start of something worse about the economy, but that would spoil this morning’s party.

That last point is one that I’ll want to explore further in the days to come, most likely when I tape a podcast with our senior economist Jose Torres next week.  Today’s numbers are completely consistent with the much hoped-for soft landing, but hard landings typically start with softer numbers that then metastasize.  The key question is which is the more probable outcome.  Equity traders are clearly betting that a modest deceleration is the base case.  Bond traders still persist in pricing in a recession-implying inverted yield curve.  (Another question I hope to address – how much of the inversion stems from the Treasury’s debt issuance preferences and whether the Fed will try to offset that with pseudo yield curve control while reducing quantitative tightening?)

Then at 10AM EDT, the folks at ISM harshed some of the market’s mellow.  We know that Chair Powell pushed back on the idea that we are experiencing stagflation, but how else might we explain weaker than expected growth combined with higher-than-expected prices?  The ISM Services PMI fell to 49.4, well below the consensus 52 and last month’s 51.4.  This was the lowest reading since December 2022.  It is important to remember that a reading below 50 indicates contraction.  This is certainly not a disaster, but when combined with a much higher reading for ISM Services Prices Paid of 59.2 (vs. 55.0 consensus and a prior 53.4), this does nothing to reverse the fears of a slowing economy combined with persistently high inflation. 

That the markets didn’t fully reverse is a testament to the relative importance of the reports.  Government numbers typically outweigh privately compiled figures.  And while the S&P 500 (SPX) and Nasdaq 100 (NDX) have only given back about 1/3 of their maximum gains so far today, bond yields have given back about half of theirs.  The 2-Year Treasury yield plunged from 4.87% to 4.71% in the immediate aftermath of the payrolls report, but they are now about 4.80%; 10-Year yields went from 4.58% to 4.45% to a current 4.51%.

We alluded earlier to part of the reason why stocks are enthused today.  AAPL is up about 7%, thanks to a modest earnings beat and a massive $110 billion buyback announcement, while AMGN is up about 13%, shrugging of a modest EPS miss thanks to positive news about an anti-obesity drug development.  Throw in the opportunity for a Friday afternoon ramp powered by expiring weekly options, and we have more than ample rationale for a sold rally. 

Yet as stunning as the AAPL buyback is, we need to consider if the company is offering an important change in its narrative.  Beginning last autumn, we began to question whether AAPL should continue to be classified as a high-growth company when it shows little to no growth in either revenues or earnings per share.  Once again, revenues were below those of the year-ago quarter, while the EPS surprise allowed it to exceed that year-ago level by a penny ($1.53 vs. $1.52, when $1.50 was expected).  I’m sorry that is not growth, and I asserted that to a reporter yesterday:

An astonishing number… Apple may be acknowledging that they are becoming a value stock that returns money to shareholders rather than a high powered growth stock that needs its cash for R&D or expansion.

Please note that this is not necessarily a bad thing.  I’ve been advocating for investors to consider dividend-paying stocks for some time, and while a one cent bump in its quarterly payment doesn’t move the needle much – going from $0.24 to $0.25 means that AAPL’s indicated yield is only 0.54% — the buyback could imply that management now shares the view that returning money to shareholders is a more likely path to prosperity than hoarding it for potential products that require cash to finance growth.  Let’s see if and when the consensus shifts toward that view.

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