Morning in Arizona

Morning in Arizona
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Friday, September 04, 2015

Labor Day Jobs Report

Financial Review

Labor Day Jobs Report

DOW – 272 = 16,102
SPX – 29 = 1921
NAS – 49 = 4683
10 YR YLD – .04 = 2.13%
OIL – .71 = 46.04
GOLD – 2.30 = 1123.70
SILV – .13 = 14.70

This is a Jobs Report Friday, and I tend to get a little wonkish about the monthly jobs reports, mainly because I believe jobs are pretty much the most important part of the economy; we’ve even set aside a holiday to recognize the importance of labor. Today’s report is especially important because it comes right before a Federal Open Market Committee Meeting where the Fed just might raise interest rates.

The US economy added 173,000 jobs in August, and the unemployment rate dropped to 5.1%. While this was the smallest increase in new jobs since March, the June and July numbers were revised higher by 44,000 jobs. The Labor Department said 245,000 new jobs were created in July instead of 215,000. June’s gain was revised up to 245,000 from 231,000. The 173,000 new jobs missed estimates of 210,000 to 220,000 but the August numbers are notorious for underestimating – only to be revised higher in following months. The unemployment rate of 5.1% is down from July’s 5.3% rate, and beats estimates that the rate would hold steady.

Between 2005 and 2014, August was the month with the lowest first estimate for job growth relative to revisions that were published in the employment reports for the subsequent two months. Over that period, on average the government found 58,000 more jobs added to payrolls in August than initially figured. Job growth in August was revised lower only in 2005 and 2008. One reason why August is difficult to calculate is because it marks the start of the school year, which varies from town to town.

So, one way to get a better grasp on the numbers is to look at longer-term trends. Over the last three months the economy added 221,000 new jobs on average – fairly solid gains. In August, the year-over-year change was over 2.9 million jobs – again, fairly solid gains. The economy has been adding jobs every month going back to March 2010 – a nice streak. The U.S. has added an average of 212,000 jobs a month in 2015 and the economy is on track to generate more than 2 million jobs for the fifth year in a row.

The bulk of the hiring in August, one-third of all new jobs, took place in health care. Healthcare added 56,000 jobs; Professional and business services added 33,000 jobs; employment in eating and drinking places gained 26,000 job; financial firms hired 19,000; retail added over 11,000, wholesale trades hired almost 8,000, construction gained 3,000. Government hired 33,000 workers and it looks like the declines in government hiring are now over. Federal payrolls were unchanged in July, and Federal employment is up just 6,000 year-to-date. Mining and logging, an industry that includes oil exploration and drilling, lost 10,000 jobs; and manufacturing was the big loser – down 17,000 jobs for the month.

The average hourly wage paid to American workers rose 8 cents, or 0.3%, in August to $25.09 an hour. From August 2014 to August 2015 hourly wages rose 2.2%, matching the best gain of the past four years. The Federal Reserve has targeted a 2% rate of inflation, but in the 12-months through July, the Consumer price Index climbed just 0.2%. This means that workers are seeing wage increases that are running faster than inflation – that means real gains – but wage pressure has not been strong enough to push inflation throughout the economy.

But there is another, shorter-term trend in place, wage gains in the past 3 months have only been running at 1.9%. The average workweek for all employees on private nonfarm payrolls edged up by 0.1 hour to 34.6 hours in August. The manufacturing workweek was unchanged at 40.8 hours, and factory overtime edged down by 0.1 hour to 3.3 hours.

Full-time jobs climbed to 122 million, exceeding the prior peak reached in November 2007. The U-6 unemployment rate fell to 10.3%, the lowest level since June 2008; U-6 includes unemployed plus underutilized workers, or people working part-time for economic reasons, plus discouraged workers who aren’t counted under the U-3 measure, or the headline number.

The headline or U-3 unemployment rate doesn’t capture workers who, because of a difficult job market, have stopped looking for work.  The labor force participation rate – the share of the population that is either working or actively looking for work – dropped off sharply during the recession, from about 66 percent to about 63 percent.  While some of those folks left for retirement, others–maybe a third to a half by some measures–can be enticed back into a more welcoming job market.

The nation’s unemployment rate, meanwhile, fell to 5.1% from 5.3%, marking the lowest level since April 2008. The jobless rate is determined by a separate survey of households that showed a sharp 237,000 drop in the number of people who said they were unemployed. Only a smattering of people dropped out of the labor force. The labor force participation rate was unchanged at 62.6% – which is still a historically low rate. There are 2.19 million workers who have been unemployed for more than 26 weeks and still want a job. This was up slightly from 2.18 million in July.

What this means is that there are still lots of potential workers ready to jump back in the labor pool and it is possible that the economy could add new jobs, but see the unemployment rate move higher as workers are encouraged to look for work.

In less than 2 weeks the Federal Open Market Committee will meet to determine monetary policy, and the strength or weakness of the labor market will be a major factor in their deliberations. The Fed has set a target of 5.2% unemployment as the level that might warrant a rate hike, but that won’t be their only concern. An increase seemed all but certain just weeks ago before the stock market’s slide amid fears of a softening Chinese economy and stagnant growth worldwide. Janet Yellen has repeatedly suggested the FOMC was waiting to see data showing a sustained economic recovery.

In a speech just before the jobs report, Richmond Fed president Jeffrey Lacker said the labor market supported the case for raising rates sooner rather than later. But this report was unlikely to “materially alter the labor market picture or, for that matter, the monetary policy outlook.”

Fed-funds futures, used by investors and traders to place bets on central-bank policy, showed Friday a 34% likelihood of a rate increase at the September meeting, compared with 27% before the jobs report. The odds had been around 50% a month ago.

Finance ministers and central bankers of G20 member states have gathered in Ankara, Turkey today. The  Federal Reserve is coming under pressure from emerging markets not to raise rates too soon as turmoil in China threatens global growth, but the G20 will not publicly call for any delay. This G20 comes at a very good time because it gives the Fed an opportunity to gauge all the elements at stake.

In addition to China and emerging markets and all the other concerns, the Fed will likely consider the impact on Wall Street; back when the Fed hinted at ending Quantitative Easing, Wall Street threw a Taper Tantrum. And as the Fed has been inching closer to raising interest rates, Wall Street has thrown what might be called a Rate Ruckus, (you’re welcome to come up with a better name if you wish). In the U.S. stock market, the S&P 500 had its sixth decline exceeding 1 percent in 12 days.

Prior to that there had been 10 such declines since January. The benchmark gauge has moved up or down by an average of more than 2 percent a day since falling out of its 2015 trading range on Aug. 20; almost four times as much as in the prior nine months. September is historically the worst month of the year for the S&P 500, with the equity gauge falling 1.1 percent on average based on data going back to 1927. So, you could blame the declines today on anything, including history, but part of it was a Rate Ruckus.

And there are plenty of reasons why the argument can be made that more needs to be done to improve employment: the Labor Force Participation rate is too low, wages aren’t going up enough, millions have just given up on the prospect of a job, and the jobs created are not quality jobs. The current pace of job growth would result in an extremely low unemployment rate of 4.2% a year from today, with other factors such as labor-force participation held constant. The rate has dropped by about a percentage point over each of the last four 12-month periods.

So even though the Fed targeted 5.2%, as if this is the magical full employment rate, it doesn’t paint a complete picture. The unemployment rate says “raise!” The payroll number says “hold!” The markets will whine and complain no matter what the Fed does.

This month’s jobs report showed signs of strength and signs of weakness, along with very little clarity. One month’s job data is not enough to seal the deal one way or the other. The Fed could just as easily claim victory with the unemployment rate at 5.1%. And like T-Ball athletes, everybody gets a trophy. For many on Wall Street, they can’t imagine a rate hike; after all, it has been almost 10 years since we’ve seen one, so there are actually traders on Wall Street who have not seen a rate hike from the Fed. It’s like the anticipation of ripping off the Band-Aid is worse than the actual act. At a certain point, and we don’t know where that point is, the Fed will likely just raise rates; just do it and be done. That’s my guess.

The Financial markets will be closed on Monday. So, have a safe and happy Labor Day holiday weekend.

Thursday, September 03, 2015

Sliding Into the Close

Financial Review

Sliding Into the Close

DOW + 23 = 16,374
SPX + 2 = 1951
NAS – 16 = 4733
10 YR YLD – .03 = 2.17%
OIL – .12 = 46.63
GOLD – 8.70 = 1126.00
SILV + .03 = 14.83

Wall Street started the session on a high note, but could not hold it. Stocks slipped into the close and the Nasdaq turned red for the day. The stakes couldn’t be higher for the tomorrow morning’s August employment report, even though the month has typically been cursed by disappointment. The consensus guesstimate calls for about 215,000 to 220,000 new jobs created in August, with the unemployment rate holding at 5.3%, but August is notorious for misses. From 2005 to 2014, forecasters have over-estimated the initial August payrolls print seven times, including in each of the past four years.

What’s more, the Labor Department (excluding annual and benchmark revisions) has marked up its first estimate in subsequent months in eight of the past 10 years. Part of the puzzle of forecasting August payrolls is the difficulty in adjusting for annual changes in the school-year calendar. Financial-market turmoil, at least, probably did little to impact hiring decisions in August. The government surveys households and businesses in the week that contains the 12th of the month, so the data will reflect responses covering the Aug. 9-15 period; that was a few days before the market rollercoaster ride began.

Short-dated Treasury debt yields, which are tied most closely to monetary policy forecasts, rose in August, with the two-year note yield logging its fifth straight monthly increase. That was its longest winning streak since 2006 when the Fed last raised interest rates. Long-dated Treasury yields, often seen as a safe haven from stock market volatility, are virtually unchanged on the year, suggesting that bond investors are brushing off the panic about slowing global growth. This would suggest that bond traders are bracing for an imminent rate hike.

The European Central Bank will continue its 60 billion-euro a month asset purchase plan; that’s the Euro version of QE. The stimulus is intended to help get consumer price inflation back toward the ECB’s target of just below 2%. In the year to August, it stood at 0.2%. ECB President Mario Draghi today said it could go negative in the coming months following recent oil price falls. Draghi said: “The risks to the euro area growth outlook remain on the downside…” And if things actually do get worse, Draghi emphasized he is willing to do even more. The euro dropped against the dollar and Eurozone stock markets enjoyed a nice bounce.

Chinese markets are closed today and tomorrow to mark the 70th anniversary of the end of World War II. The holiday is officially called “The 70th Anniversary of Victories in the Chinese people’s War of Resistance Against Japanese Aggression and the World Against Fascism”; and right there we have a glimpse into the problems in China. Presiding over the extravaganza, President Xi Jinping said China would remain committed to “the path of peaceful development” and unexpectedly pledged to slash 300,000 troops from the country’s 2.3 million strong military. The announcement came before a huge military parade. At the same time, the U.S. government reported that five Chinese Navy ships were sailing in international waters off Alaska for the first time.

Treasury Secretary Jack Lew criticized China’s handling of its currency devaluation. In a CNBC interview, Lew said, “there’s an economic and a political reality to things like exchange rates,” and “how they manage their exchange rate is a matter of great concern to us and that they need to be willing to let market forces drive the value up, not just drive it down.” Lew, will be participating in a meeting of G-20 financial ministers and central bankers Friday in Turkey. The treasury secretary’s remarks come ahead of the Chinese premier’s visit to the U.S. later this month.

Tomorrow brings the big monthly jobs report for August.  This will be the data that the Fed will use at their FOMC meeting September 16 & 17; the question is whether the report will be weak enough to keep the Fed from hiking rates or strong enough to allow a hike.

Also tomorrow, the G-20 will be meeting in Turkey. The International Monetary Fund has prepared a report for G20 finance chiefs, and the IMF says the turmoil in China and other factors like capital flow reversals were increasing the risks to economic growth around the world. It warned that advanced and emerging economies need to continue to support demand with reforms and investment to ensure that the turbulence in markets and China’s troubles do not stall economic activity in the rest of the world.

The report expressed continued confidence that growth is picking up “modestly” in advanced economies in the second half of 2015 and in 2016, helped by the impact of cheaper oil. But the oil price plunge, along with other commodities, is hurting emerging market economies, and they are also being buffeted by the impact on their currencies of China’s yuan devaluation and the strong dollar. The dollar’s strength, the Fund warned, could take a toll on companies with dollar liabilities. The Fund highlighted an increase in risks to overall global growth: that China would not confront its slowdown with growth-supporting policies; that commodity prices would slide further; that the US dollar would continue to rise; and that companies would suffer from higher debts.

Of course, writing a report doesn’t make it so. The reality on the ground is that gauging China’s economy is a guessing game; the Chinese simply don’t measure their economy in familiar ways and they certainly run their economy a bit differently. And most analysis overlooks the fact that China’s economy is changing; the service sector is now the driver of growth, so it makes sense that industrial growth is slowing down, but it doesn’t necessarily mean the economy has gone over a cliff. Beijing’s economic policy makers know that even though structural overhauls will moderate growth in the near-term, they’ll also bolster long-term growth and help stave off a major deceleration.

The U.S. trade deficit fell in July to its lowest level in five months as exports rose. The Commerce Department said the trade gap narrowed 7.4 percent to $41.9 billion, the smallest since February. The smaller deficit implied a modest contribution to gross domestic product from trade early in the third quarter.

The Institute for Supply Management said its services index slipped in August, to 59% from 60.3% in July, but still a very strong reading indicating growth in the sector.  Ahead of Friday’s payrolls report, the ISM services employment index fell 3.6 points to 56%.

The Commerce Department reported today on the gross domestic product broken out for each state for 2014. Just 16 states outperformed the country as a whole last year. In 32 states, gross domestic product advanced at the same or slower pace than the 2.2% economic growth recorded for the U.S. And the economies in two other states, Alaska and Mississippi, contracted last year. Among those 16 were the four largest state economies: California, Texas, New York and Florida. The fastest growing state was North Dakota, thanks to a booming oil patch; it is unlikely to repeat in 2015. Arizona came in at #37, with anemic 1.4% growth in GDP.

Jobless claims increased by 12,000 to 282,000 in the week ended Aug. 29. Since the beginning of March claims have held below 300,000, indicating employers in the U.S. are confident in their outlook.

Sony Pictures has reached a settlement with former employees in a lawsuit related to the massive data breach it suffered almost a year ago. The federal lawsuit, which is still pending class-action status, is a combination of seven different cases brought by nearly 50,000 current and former employees whose personal, financial and medical information were posted online. Additional details about Sony’s settlement are expected to be filed by mid-October.

Novartis said it will begin selling the first biosimilar drug in the U.S. after an appeals court in Washington rejected a request to block the Swiss drug maker’s sale of its copycat version of Amgen’s blockbuster remedy, Neupogen. Zarxio was the first biosimilar–a copy of a biotechnology drug–approved by the FDA. In Europe, where biosimilars have been available for several years, they typically cost 15% to 30% less than the original brands.

Royal Dutch Shell’s proposed $58 billion merger with BG Group has received unconditional clearance from the European Commission, the third of five key markets needed to clear the deal. The EU’s top antitrust regulator concluded that the acquisition would not allow Shell to influence prices for oil and natural gas, and that the markets would remain competitive after the transaction.

Pimco Total Return saw another $1.8 billion in net outflows in August, down from $2.5 billion in July and $3 billion in June. Total assets under management at the former giant of mutual funds have now fallen below $100 billion for the first time since 2007 (the fund neared $300 billion at its peak). As for the performance scorecard, Pimco Total Return’s year-to-date gain is 0.72% vs. the benchmark of 0.45%. It’s also outperformed the benchmark over 3-year, 5-year, and 10-year periods, as well as since its inception.

Meanwhile, Bill Ackman has joined a string of high profile hedge fund managers in reporting deep losses for August. The firm’s Pershing Square Holdings portfolio dropped 9.2%, and is now down 0.1% since January. Last year the fund gained 40%, beating the S&P’s 13.7% gain. Other hedge fund losses for August: Greenlight Capital -5.3%; Third Point -5.2%; Jana Partners -4.3%; Viking Global -2.1%; Omega Advisors -6%; Andor Capital -4.5%.