Cracks in the Employment Data Continue to Widen

The claims data continue the string of cracks we are seeing in the broader labor market

Highlights

• Rising jobless claims add to the streak of soft labor market data…

• … and the U-6 unemployment rate is on the verge of triggering a recession signal

• Frugal tone to consumer-related earnings

• Fundamentals behind the gold rally remain intact

While We Were Sleeping

It’s a risk-on close to the week for U.S. equity markets, with futures up across the board led by a rally in Tech stocks. And while investors cheer on the better-than-expected earnings results in Q1 (buyback announcements nearing $200 billion are doing their part also — see Buybacks Are Back: Corporate America Is on a Spending Spree in today’s WSJ), we can’t help but notice the weak tone out of consumer-related companies. Airbnb is the latest example (worst day for its stock yesterday in a year, falling -7% on the session), projecting the slowest quarterly growth in bookings since 2020, and that comes on the heels of weak results/commentary out of Starbucks, Amazon, McDonald’s, Expedia, Booking Holdings, and Tripadvisor, just to name a few.

European stocks are solidly in the green, with the Stoxx 50 rising +0.5% so far and on pace for its best weekly gain in more than three months. Helping sentiment in the region was the U.K. posting its best quarter for growth since 2021, snapping out of the technical recession the country found itself in to end the year (more on this below).

Asia posted solid gains as well, led by Hong Kong’s Hang Seng (+2.3%) after the string of investor-friendly regulatory announcements continued with policymakers announcing consideration of a dividend tax waiver. Taiwan (+0.7%), Singapore (+0.6%), Korea (+0.6%), India (+0.5%), Japan’s Nikkei 225 (+0.4%), and Thailand (+0.2%) all advanced on the day while China’s Shanghai Composite was flat. The WSJ runs with Country Garden Misses Bond Payments, Says State Could Help in the latest reminder of property sector weakness hanging over the economy. News that Biden is set to impose tariffs on Chinese EVs is not helping sentiment, either. All market quotes are time-stamped to 4:30 a.m. ET.

Bond markets are also on positive footing to end the week. Treasuries are carrying over yesterday’s positive momentum, with the 10-year yield falling another -1 basis point overnight (to 4.45%) after yesterday’s weaker-than-expected jobless claims data (hitting a nine-month high) and a very good 30-year auction (5th stop through in the past 6 auctions) allowed rates to rally to a one-month low. Across the Atlantic, sovereign yields are down between -4 and -5 basis points. Japan saw market rates tick lower on 10-year JGBs (to 0.9%), while Australia (-3 basis points to 4.31%) and New Zealand (-1 basis point to 4.32%) were the regional outperformers.

Currency markets are calm, with the DXY dollar index little changed after yesterday’s -0.3% decline (to 105.23). Commodities have a bid to them to start the day, with Brent back approaching $85 per barrel this morning after successfully testing support at the 100-day moving average (WTI pushing against $80), gold jumping +1.0% to $2,368 per ounce (a three-week high), copper surging +2.0% to $4.70 per pound, and Bitcoin pressing against the $63,000 mark.

Initial jobless claims for the week ending May 4th rose by +22k to 231k, the highest level since last August. This breaks the streak of rangebound readings between 200k and 220k that became the norm of the past three months. Continuing claims also saw an increase of +17k to 1.785 million from 1.768 million prior, the most in three weeks and further evidence of the struggles of finding a new job in the current environment.

The data coincide with the spring break in New York City public schools (where employees are allowed to claim EI benefits), with the state accounting for half the increase. But, while some giveback is likely in next week’s release, the jump in claims should have been accounted for in seasonal adjustments and by the consensus given this is a known event each year, meaning this was a true surprise. All in, the claims data continue the string of cracks we are seeing in the broader labor market, building off the JOLTS data, and downside miss and weakness beneath the surface of last week’s NFP report.

As mentioned, the most important overnight data point was Q1 GDP for the U.K., which came hot on the heels of the Bank of England’s monetary policy meeting yesterday (full write-up in today’s Breakfast with Dave — the headline is no change to baseline expectations of a June or early August cut). As Governor Bailey hinted at yesterday, growth was stronger than expected in Q1 at +2.4% QoQ annualized (vs. +1.6% consensus), offsetting the -1.2% contraction in Q4 to pull the U.K. out of a technical recession and leave GDP just barely higher than this time last year (+0.2% YoY).

Elsewhere, we had a much better than anticipated March household spending report for Japan, which was positive on the quarter (+1.2% vs. -0.3% expected), although the YoY trend remains underwater at -1.2%. That came alongside a big rise in the current account balance, from ¥2,700 billion to ¥3,400 billion. The Japanese consumer seems to be emerging from the mini-dip we saw in the second half of 2023, but unfortunately the same cannot be said for their Chinese counterpart — consumer sentiment fell to 68.2 in May, the lowest point since May 2022 (when China was still rebuilding confidence after emerging from its “zero-COVID” policy). That said, Japanese sentiment dipped a bit too (from 40.5 to 37.9), putting a bit of a pall on the hard data.

As you head into the weekend, there are some excellent “big picture” perspectives we’d recommend taking a look at. The always thought-provoking Soumaya Keynes ponders the wide range of estimates of the impact of AI on the economy in the FT (How to get big numbers when predicting AI’s effect on growth). You can pair that with an interesting piece in the NYT showing how AI is being deployed to improve airline logistics (Did You Make Your Connecting Flight? You May Have A.I. to Thank). The jury is still out on how much growth AI will deliver and how much it will reshape the labor market, but there is no question that it's being implemented at pace. And ending on a somewhat sour note, do look at the latest in the WSJ’s brilliant coverage of the Chinese real estate sector — a new piece focusing on the next potential domino to fall, China Vanke (Even a State-Linked Giant Can’t Escape China’s Real-Estate Crisis).