Financial Review

November 2017 Jobs Report

Sinclair Noe — December 8, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW + 117 = 24,329
SPX + 14 = 2651
NAS + 27 = 6840
RUT + 1 = 1521
10 Y + .01 = 2.38%
OIL + .67 = 57.36
GOLD + .90 = 1248.70

Cryptocurrency

• Number of Currencies: 1,364
• Total Market Cap: $441,929,662,542
• Volume (24h): $35,290,508,598

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Volume (24h)	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	15,990.0	$276.87B	$21.19B	60.04%	1	-3.69%	+51.10%
	Ethereum	ETH	442.86	$43.91B	$2.35B	6.66%	0.0282401	+6.71%	-2.23%
	Bitcoin Cash	BCH	1,390.00	$24.71B	$2.56B	7.26%	0.0906245	+12.80%	+0.18%
	IOTA	MIOTA	4.87100	$13.84B	$910.05M	2.58%	0.00030818	+18.80%	+254.38%
	Ripple	XRP	0.23333	$9.79B	$661.69M	1.87%	0.00001563	+14.89%	-1.52%
	Litecoin	LTC	127.820	$6.82B	$1.52B	4.30%	0.00778303	+30.51%	+27.24%
	NEM	XEM	0.63875	$5.87B	$252.16M	0.71%	0.00004038	+126.04%	+171.44%
	Dash	DASH	702.00	$5.63B	$288.67M	0.82%	0.0450115	+5.92%	-8.31%
	Bitcoin Gold	BTG	238.58	$4.36B	$179.46M	0.51%	0.0161369	+11.23%	-15.69%
	Monero	XMR	260.48	$4.26B	$200.65M	0.57%	0.0170735	+0.27%	+44.91%

The economy added 228,000 new jobs in November, beating expectations for about 200,000. The unemployment rate was unchanged at 4.1%, a 17-year low.

October job gains were revised lower, to 244,000 from 261,000. The increase in jobs in September was raised to 38,000 from 18,000. Hurricane damage skewed the past two employment reports, with the storms temporarily pushing hundreds of thousands of workers, particularly in the service sector, out of their jobs.

They largely flocked back in October, accounting for much of the month’s larger-than-usual job growth. Payrolls for September and October were revised up by a combined 3 thousand. Accounting for these revisions, job gains have averaged 170,000 over the last three months.

In the first 10 months of the Trump administration the economy has added 1.7 million jobs. In the last 10 months of the Obama administration, the economy added 1.85 million jobs. For the full year of 2016, the economy added 2.24 million jobs.

The United States has now added jobs for 86 consecutive months — a downward blip in September was later revised to show a small gain — and the unemployment rate is lower than it ever got during the last boom, which ended when the housing bubble burst.

Job growth has gradually slowed since 2014, when the American economy added close to three million jobs. But hiring remains remarkably steady. Employers are on track to add about two million jobs in 2017, a solid pace 8 years into an economic expansion.

What we haven’t seen is a substantial increase in wage growth. Worker pay rose 5 cents, or 0.2%, to an average of $26.55 an hour. The yearly increase in hourly pay moved up to 2.5% from 2.3%; this means that over the past year, average hourly earnings have risen by 64 cents; an improvement but still tepid wage growth.

The increase in average hourly earnings is barely enough to keep up with inflation. The average workweek for all employees increased by 0.1 hour to 34.5 hours in November. So, wages didn’t really go up, workers just worked a little longer.

The Labor Force Participation Rate was unchanged in November at 62.7%. This is the percentage of the working age population in the labor force. So, while the labor market is strong, it was not strong enough to pull workers off the sidelines. Or perhaps more significantly, companies were not offering enough in wages to pull workers off the sidelines.

The unemployment rate is approaching the level many economists consider “full employment” — the point at which essentially everyone who wants a job can find one. But the unemployment rate may not fully reflect the number of available workers. Many employers are starting to complain about the lack of available workers – but we still do not see a big move in wage increases.

If workers are so hard to find, why aren’t companies raising pay? The simple answer is that there are plenty of people who still want a job, they just might not be an employers’ ideal candidate. We need to train workers or pay up for trained workers.

The U-6 unemployment rate ticked up to 8% from 7.9% in October. The headline unemployment rate or U-3 is at 4.1%. The U-6 includes the unemployed plus people who are marginally attached to the labor force or working part time for economic reasons. Year-over-year, however, the 8% rate marks an improvement; in November 2016, the figure stood at 9%.

The health care sector added 30,000 jobs. This has been one of the fastest growing sectors in the labor market, but not all those jobs offer good wages. The home health aide industry, paying workers about $22,000 per year, will produce an estimated 425,600 positions by 2026.

Education gained 24,000. Professional and business services added 46,000.

Manufacturing gained 31,000 and a total of 189,000 jobs over the past 12 months. What’s more, manufacturers have now added just over 1 million new jobs since industry employment fell to a post-World War II low of 11.45 million in early 2010. These companies now employ 12.5 million Americans.

Construction added 24,000 in November and a total of 132,000 for the 12 months. Leisure and hospitality up 14,000. Transportation gained 10,000. Financial activities 8,000. And government added 7,000 new jobs.

Retail gained over 18,000 jobs. Many of the jobs in retail are seasonal. Retailers hired 595,000 workers in October and November, this is up from just over 509,000 for the same period last year, and about the same level as the previous four years. This is a good indicator for holiday shopping sales.

The holiday shopping season had a strong kick-off to the year. Sales got off to a great start on Black Friday weekend, and a massive shift toward online shopping has sent shippers scrambling to catch up. Packages are taking longer to arrive, and it might get worse.

One caveat: Gasoline prices usually don’t rise in November, but this time they did. That will make retail sales look even better, even though it puts a dent into the finances of consumers.

In a separate report today, the University of Michigan consumer sentiment index dipped to a 3-month low of 96.8. Consumers are by and large upbeat. They’re expecting higher income, and higher inflation as well.

So long as the job market is strong — and the latest report from the Labor Department was — the economy should be in pretty good shape. Consumer expectations fell, while consumers said the current situation improved. The economy seems good now, but we are concerned it will get worse.

Policymakers at the Federal Reserve have sent clear signals that they plan to raise the benchmark interest rate at their meeting next week. It would probably have taken a nearly catastrophic jobs report to change that — and today’s report was a little better than expected.

If the economy continues to add jobs at the current rate, it probably means more rate hikes in 2018 – and especially if wages start to rise more quickly — Fed officials could feel pressure to raise rates faster to head off inflation.

There are also political implications to be drawn from the labor market. At the heart of the Republican tax plan hurtling through Congress is an implicit promise that cutting corporate taxes will lift the middle class through higher wages and more jobs.

Speaker Paul Ryan, for example, said in a recent speech that “fixing the business side of our tax code is really all about helping families and workers,” adding that “cutting the corporate tax rate means more jobs here in the United States. It will foster increased competition, which will directly drive up wages for our workers.”

Yet few American companies have offered specific plans that support those promises. The lack of pledges to create jobs has not been lost on Trump’s top economic adviser, Gary Cohn. At a recent Wall Street Journal conference, Cohn asked his audience of chief executives how many of them would invest more if the tax cut were passed.

When only a few attendees raised their hands, Cohn asked: “Why aren’t the other hands up?”

A few companies say they plan to hire if tax cuts are passed, but most will be looking at share buybacks, increased dividends, or just hoarding the cash. This highlights a critical question over who would benefit the most from the tax bill: shareholders or workers?

The promise of the administration is that a tax overhaul will result in faster economic growth, which will lead to more investment and will eventually trickle down in the form of higher wages. And there is near unanimous consensus among economists that the tax bill will not grow the economy.

Wage growth has remained relatively sluggish over the past several years, even as corporate profits hover near all-time highs as a share of the economy, and the unemployment rate continues to fall to levels that economists normally associate with rapid increases in worker pay. Corporate profit rates have been historically high since 2007, while business investment has been historically low, and that hasn’t been enough to spark meaningful gains in wages.

Productivity growth remains low, inching up at an average annual rate of 1.2 percent over the last eight years, compared with its historic rate of 2.1 percent from 1974 to 2017. There is a strong chance that business could invest in equipment to improve productivity, rather than investing in workers’ wages.

It is possible that a tax cut could increase wages even if companies do not intend it to, but that could just be because there is less slack in the labor market, where unemployment is hovering just above 4 percent.

Frankly it’s time to give up the charade that eliminating estate taxes for Ivanka Trump and her brothers or creating a lower “pass-through” rate for President Trump’s maze of LLC’s is going to boost the economy in the way we now need. We have jobs; we need higher skilled workers and other elements to make workers richer.

What would spur productivity and in turn raise wages? Invest in infrastructure, move capable workers to where the jobs are, get the best and the brightest people from around the world to immigrate here, invest in R & D, improve schools (for all the education “reform,” American students still trail their foreign peers in math) and create a path for teaching high-skill trades outside the four-year college system.

Financial Review

The Value of Everything

Sinclair Noe — July 30, 2015

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW – 5 = 17,745
SPX + .06 = 2108
NAS + 17 = 5128
10 YR YLD – .01 = 2.27%
OIL – .27 = 48.35
GOLD – 8.40 = 1089.30
SILV – .08 = 14.83

Gross domestic product rose at a 2.3% annual rate from April to June, missing expectations for 2.6% growth. First quarter GDP was revised to show 0.6 percent growth after previous reports showed a 0.2 percent downturn. The latest reading on GDP was propelled by higher consumer spending on big-ticket items such as new cars and trucks and the strongest housing market in years. Personal spending accounted for two percent of the 2.3% headline increase.

Builders increased spending on new home construction at a 6.6% clip in the spring, especially for townhouses, condos and apartment units. That follows 10% gains in the prior two quarters. US exports, meanwhile, snapped back with a 5.3% increase after a 6% drop in the first quarter. Imports rose at a slower 3.5% pace. The improved trade figures also gave the economy a small boost.

Business investment was weak again. Outlays on equipment declined 4.1% and the value of inventories fell slightly to $110 billion from $112.8 billion. Spending on structures such as oil platforms fell 1.6%, largely because of the drop in oil prices. The story on the economy remains consistent: strong consumption, weak investment.

Inflation as measured by the PCE price index increased at a 2.2% annual rate after falling by 1.9% in the first quarter, a decline tied mostly to plunging gasoline costs. Excluding food and energy, core PCE rose to a 1.8% annual pace from 1% in the first three months of the year. The PCE is the Fed’s preferred measure of inflation and it is really close to their inflation target. The personal saving rate was 4.8 percent for the quarter, the same as the average of 2014; this would indicate that people are indeed spending the money they save on lower prices at the gas pump.

Gross domestic product is supposed to be a measure of everything a nation produces. As you might imagine, that is a difficult task. How do you go about placing a value on everything? GDP includes the value of electricity produced but it does not subtract for the air pollution from the coal fired plant; it includes the price of divorce lawyers but places no value on a healthy marriage. In other words, it is imprecise. And so it is constantly subject to revision. The mixing and matching of what drives GDP growth has changed to reflect the economy, with greater emphasis on services, consumption, and housing. Spending on intellectual property products grew at an annual rate of 5.5% in the second quarter, continuing a nice string of advances which offers some hope for improved productivity growth in future quarters. A couple of years ago, intellectual property wasn’t even counted.

The second-quarter report is the first to include new methodology meant to make GDP more accurate. Over the past several years GDP has slightly underestimated growth in the first quarter and sharply overestimated growth in the third quarter. The problems stemmed mostly from difficulties in measuring spending on the military as well as consumer services such as health care. The new report also incorporates changes in how certain taxes and social benefits are categorized. Based on the new calculations, the economy expanded at average 2% rate each year from 2012 to 2014 instead of 2.3% as reported under the old method of calculating GDP. So, if you thought the recovery wasn’t quite as robust as the numbers, you were unfortunately correct.

The GDP report was decent, not great, but good enough. It is totally consistent with the Fed’s assessment of the economy. Yesterday, the Federal Reserve FOMC left interest rates unchanged, but they left the door open for a possible interest rate hike when central bank policymakers next meet in September – if the economy and job growth continue to improve. Fed officials said they felt the economy had overcome a first-quarter slowdown and was “expanding moderately” and job gains have been “solid”. Today’s GDP report is in-line with that view.

The Fed will also watch the next couple of jobs reports to see if they are in-line with their assessment of the economy. Today, a report showed new applications for unemployment benefits rose by 12,000 to 267,000 in the week ended July 25. Jobless claims have been below 300,000 since May. That’s the longest run in 15 years. Next week, we’ll see the jobs report for July; based upon first time claims, the jobs report should be “solid”. And that in turn would point to a September rate hike by the Fed.

The average rate for a 30-year fixed-rate mortgage dropped to 3.98% in the week that ended July 30, falling to the lowest level in almost two months. This would seem to be a good time for many homeowners to refinance, but not everybody can, because many homeowners are still underwater.

There are programs to help, such as the Home Affordable Modification Program, or HAMP, which aims to make mortgages more affordable by changing terms, such as interest rates and loan duration. But there is a problem. Mortgage servicers reject 72% of struggling borrowers from HAMP. The Treasury Department requires mortgage servicers to explain why they reject borrowers, but a new report says the servicers aren’t giving a clear picture for the rejection, and that officials have found that servicers have “wrongfully denied” borrowers from entering HAMP.

Chinese stocks tumbled in the last hour of trading – with the Shanghai composite falling more than 2 percent-on reports that banks were investigating their exposure to the stock market. This year’s slump in China’s property market could hit the country’s banks, according to ratings agency Standard & Poor’s, in the latest warning to the world’s second largest economy.

Saudi Arabia, is planning to pull back from record-high levels of production at the end of the summer. The reduction could begin as soon as September and would amount to about 200,000 to 300,000 barrels a day.

Earnings season continues: Royal Dutch Shell warned that lower crude prices could continue for several years. Shell announced lower earnings, and plans to cut 6,500 jobs and pull back on capital spending.

Linn Energy reported a $379 million net loss and a 46% decline in revenue. Share price dropped 26% today.

Procter & Gamble posted a better-than-expected profit of $521 million, or 18 cents a share, but the consumer-products giant missed on revenue and provided a downbeat outlook for its fiscal 2016 earnings.

T-Mobile posted better-than-expected second-quarter revenue of $8.2 billion, and said it added 2.1 million subscribers, and raised its full-year subscriber outlook.

Time Warner Cable missed Street estimates with a second-quarter profit of $463 million, or $1.62 a share. The cable company did report a growth in subscribers.

LinkedIn revealed second-quarter results that easily topped Wall Street’s estimates on both lines, along with an upbeat full-year outlook.

Higher sales of Amgen’s blockbuster rheumatoid arthritis drug Enbrel and some newer drugs boosted second-quarter profit 7 percent. Amgen beat Wall Street estimates and raised full year profit forecasts.

Samsung Electronics is warning of “mounting challenges” ahead as the company’s once-highflying mobile unit again dragged on its quarterly results. With poor Galaxy S6 sales and a dramatic loss of Chinese market share, operating profit dropped 4% to $5.9 billion.

Looking to gain a better foothold in the mobile messaging market, Yahoo is launching Livetext, an app that makes video calling almost as private as texting. Users will be able to hold video chats in which text messages/emojis appear on the screen, but no audio is present. The app will be released today for Apple and Android devices.

After recently passing hedge funds in terms of total assets, ETFs are setting fresh sales record. In the past 12 months investors traded $18.2 trillion worth of ETF shares, a 17% increase from the 12 months prior and more than triple what it was 10 years ago. For perspective: The amount of dollars exchanging hands through ETFs is now more than the U.S. GDP, which stands at $17.4 trillion.

Meanwhile, the Export-Import Bank will stay shuttered for the rest of the summer after the House passed a highway funding bill that excluded a measure to save the lender. As a result, several corporations – the latest Boeing – are considering moving work overseas given the federal credit agency’s uncertain future. Ex-Im provided $27.4 billion in financing for U.S. exports in fiscal year 2014.

The Senate today passed legislation funding the nation’s highways, bridges, and roads for another three months – one day before construction across the U.S. would have come screeching to a halt. It is the 34th short-term patch passed by Congress since 2009. Remember the government shutdown of 2013; it didn’t last long, but it was a mess; it actually cost more to shut the government down than to keep it running. After that fiasco, lawmakers agreed to lift spending curbs for 2 years. That agreement expires October 1, when Congress will again be subject to the caps known as sequester. That may sound like plenty of time to fix the problem but remember, we’re talking about Congress; summer recess just started; they won’t even be back in Washington for a few weeks, and then they’ll take another break for Labor Day. So, they will try to pass a stop-gap spending resolution to buy more time in September. Still, you can’t rule out a partial government shutdown, again.

FINANCIAL REVIEW

Solid Guesses

Sinclair Noe — July 29, 2015

Audio Player

DOW + 121 = 17,751
SPX + 15 = 2108
NAS + 22 = 5111
10 YR YLD + .03 = 2.28%
OIL + .91 = 48.89
GOLD + 1.20 = 1097.70
SILV + .13 = 14.91

The Federal Reserve FOMC meeting wrapped up earlier today. They issued a statement but there was no press conference. The Fed did not change monetary policy; no surprise, nobody expected a change from this meeting.

The next FOMC meeting is in September and we might see changes then, or maybe December. There really weren’t many clues in the statement. There were a few subtle changes in wording of the statement; specifically on jobs, the Fed said: “The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year.” “Solid job gains” is a fairly strong phrase for the Fed. No indication of slack in the labor market.

The actual decision to raise rates will come when the Fed sees “some” further improvement in the labor market. The word “some” was new. What does “some” mean? You can give it whatever meaning you want but I think it means the labor market is headed in the right direction and as long as it stays on the tracks and continues to make a little progress, it is good.

The Fed kept language saying that “economic activity has been expanding moderately.” The Fed also said that housing has shown “additional” improvement. The Fed acknowledged that energy prices have remained low and that is causing inflation to run below the FOMC’s long-run inflation objectives. And while it may be hard to justify a rate increase with below-target inflation, we also know from Fed Chair Janet Yellen’s earlier testimony that she believes low energy prices are transitory.

In other words, there is nothing in the statement that would stop the Fed from raising rates in September, or December. I don’t think the Fed is certain exactly when they will raise rates, but absent an unexpected meltdown, we will see at least one rate hike before the end of the year. That’s my guess, and the fed funds futures markets support it; but if you are dovish or hawkish you could interpret the Fed statement to your liking.

The Chinese stock market snapped a three-day losing streak. The Shanghai Composite closed up 3.5%. The China Securities Regulatory Commission said that local governments will increase purchases of stocks, while the central bank injected cash into money markets and hinted at further monetary easing. The country’s securities regulator said it was investigating share dumping incidents.

Bill Gross, the former Pimco bond fund manager, now at Janus Capital, criticized the financial markets today, writing that “all global markets are a shell game now. Artificial prices, artificial manipulation. Where’s the real pea (price)?” Gross says the Chinese government, and all the central banks are manipulating markets and prices. He’s afraid that when they stop manipulating markets, prices will drop. What Gross fails to grasp is that there is no indication central banks will stop manipulating markets.

Standard & Poor’s has warned Brazil it could lose its investment-grade credit rating in the coming year if fallout from a number of corruption investigations further stymies economic growth and implementation of austerity measures. The agency has now put the country’s foreign currency rating, which is rated one notch above junk, on negative outlook for possible downgrade. The Brazilian real slid 2% to 3.43 per dollar following the announcement, its weakest level in more than 12 years.

A disorderly resolution to Puerto Rico’s debt problems would be costly not only for the territory but for the United States as a whole. Treasury Secretary Jack Lew said in a letter to the Senate Finance Committee that “The continued deterioration…has the potential to further harm retiree investment portfolios across the country.” Attempts to grant the commonwealth’s public authorities access to Chapter 9 bankruptcy provisions have so far made little progress.

Just a reminder that the global bond market is about twice the size of the global equities market. The bond market is supposed to be a place for safe money. Bond investors should be extremely nervous and very cautious. Most of the big money that flowed into Greek bonds and Puerto Rican bonds over the past few years came from institutional investors; in theory they are sophisticated investors.

If you make a bad investment, you are supposed to pay the full price, because if you don’t pay the full price, you will keep making bad investments. The only way to get the bond market back to its historic role is to make bondholders feel real fear that they might lose money if they make bad decisions. The market should reward bets that are economically wise, and it should punish the foolish players.

A gauge of pending home sales fell in June, pulling back from May’s reading, which was the highest in more than nine years. The index from the National Association of Realtors reached a seasonally adjusted 110.3 in June, down 1.8% from 112.3 in May, signaling that upcoming deals could slow. June is the first decrease in six months.

S&P 500 earnings for the first half of the year are expected to show a 0.7 percent contraction compared to a year ago, the weakest showing since 2009, according to numbers from FactSet research. Growth in the first quarter was just 1.1%, but the second quarter is more than offsetting that, expected to contract at a 2.2% rate.

Meanwhile, Thomson Reuters calculates first-quarter EPS growth at 2%, and currently pegs the second quarter at 0.3% growth. Whichever number you use, chew this over: Both rates, positive and negative, are nominal. They are not adjusted for inflation, and they don’t account for population growth either.

Facebook reported after the closing bell. Advertising revenue remains strong and the number of mobile users is growing. Revenue rose 39 percent to $4.04 billion, the social-media company said in a statement Wednesday, beating analysts’ average projection for $3.99 billion. Net income was $719 million, down from $791 million a year earlier. They beat estimates.

Whole Foods Market reported disappointing results and cut its annual sales forecast. The problem is that you can now find organic produce in most grocery stores.

After the close yesterday, Twitter announced results that beat estimates, but then they lowered guidance in a brutally frank way, saying execution had failed, new product initiatives were not going well; basically they stopped just short of saying you should never, ever tweet. Shares dropped 14% today.

Advancing its push for commercial drones, Amazon has laid out a proposal to slice U.S. airspace into different categories of aircraft. The plan describes a “high-speed transit zone” from 200-400 feet above the ground for advanced drones and a no-fly area between 400-500 feet to create a buffer zone with manned aircraft. Simple consumer drones would be restricted to a “low-speed” zone below 200 feet. The system also permits one person to oversee many automated drones well beyond his or her sight, but bans flights around airports.

Intel and Micron say they developed a new breed of memory chips that could bring dramatic performance gains to computers, smartphones and other kinds of high-tech products. The companies say the new chips will be up to 1,000 times faster than the NAND flash memory chips now used in most mobile devices. The chips won’t be as fast as DRAM but they will be able to store 10 times more data than dynamic random access memory, and they will retain data, even when powered down.

New hardware from Nokia. Jumping into the virtual reality space, the Finnish technology group has revealed a spherical ball-like camera called OZO that can capture 360-degree videos through eight optical image sensors. Advantages of Nokia’s new camera: Live monitoring – footage can be seen as it’s being shot. Rapid playback – recordings don’t need to be digitally stitched together before they’re viewed.

It’s Here: Microsoft’s Windows 10 Now Available As a Free Upgrade.  The new operating system is now available to download as a free upgrade for Windows 7 and 8 users. If you’re running an older version of Windows, the cost to upgrade is $119.

Chevron plans to eliminate 1,500 jobs across the globe amid the ongoing environment of low oil prices. Chevron said the cuts are aimed at increasing efficiency, reducing costs and focusing on work that directly supports business priorities, with $1 billion in targets coming through corporate center cost reductions.

California Senators Dianne Feinstein and Barbara Boxer introduced emergency drought legislation today aimed at helping communities facing severe water shortages and supporting new water projects in the parched state. Key provisions of the California Emergency Drought Relief Act will assist rural and disadvantaged drought-stricken communities with a new USDA program, seek federal support for desalination projects, promote the building of new reservoirs, support water recycling projects, and increase agriculture water conservation mandates.

The Senate ended debate on its long-term highway bill today. Meanwhile the House is going into recess today, and that means the Senate will have to take up a three-month extension of federal highway funding ahead of an end-of-the-week deadline to prevent a gap in infrastructure funds.

Financial Review

Ongoing Criminal Enterprises

Sinclair Noe — May 20, 2015

 

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

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DOW – 26 = 18,285
SPX – 1 = 2125
NAS + 1 = 5071
10 YR YLD – .01 = 2.25%
OIL + .77 = 58.76
GOLD + 1.80 = 1210.80
SILV un = 17.18

April 29 and 30 the Federal Reserve’s Federal Open Market Committee met to determine monetary policy; today, they published the minutes of that meeting. There were no surprises. Policymakers have no plans to increase interest rate targets in June. We all knew that. Officials in April “had increased uncertainty regarding the economic outlook,” the minutes showed. They had no good reason to explain why consumer spending was so weak.

“Most” Fed officials think the dramatic slowdown in growth in the first quarter was transitory and that a moderate rebound would resume in the second quarter. Inflation was also expected to move higher.  The international context isn’t helpful to the US economy. Fed officials deem “foreign economic and financial developments” as constituting “potential downside risks,” and they specifically mention Greece and China. Moreover, despite its recent partial retracement, the dollar’s appreciation is “likely to continue to be a factor restraining US net exports and economic growth for a time.”

This suggests that they see a rate hike coming sometime later this year. Only a “few” on the U.S. central bank questioned whether the Fed was providing enough stimulus for the economy at the present time and cautioned against any rate hike in the near future. This is an interesting point because the Fed really hasn’t provided much stimulus for the economy; they have provided stimulus to financial markets but not the broader economy in a direct fashion.

Indirectly, the Fed has provided stimulus to the broader economy through something known as the monetary transmission mechanism, which works largely through housing or other long-lived investments which are sensitive to interest rates. Interest rates don’t have strong impact on short-term investments or short-term capex. A lot of business investment is short-term; a lot of household spending is short-term. So Fed policy, by moving interest rates, normally exerts its effect mainly through housing. And interest rates do move housing. Remember the early 1980s when Paul Volker decided to tighten, interest rates jumped, and housing collapsed. And housing has come back from the lows, but not all the way back. One reason is because people who are most likely to buy houses got slammed in the downturn and couldn’t or wouldn’t jump back into that frying pan.

Today’s economic data backs up the relationship between housing and rates. Mortgage purchase applications fell 4.0 percent in the May 15 week though, year-on-year, applications are still up a very strong 11.0 percent. The ongoing run up in mortgage rates may be easing demand for mortgage applications just at the time that demand for purchase applications had been gaining steam.

And so the Fed is feeling like it has its back to the wall, and the wall is zero interest rates. If there is an economic problem the Fed can’t respond by lowering interest rates, or at least the impact of going into negative territory would be dangerous ground.

There was some debate about how to communicate any move to tighten rates. Some officials think it is important to give a warning to the markets, others worry that telegraphing intentions to hike rates will only result in a rate tantrum. The recent bond-market rout underscores that with bond yields near historical lows, even a moderate rise in yields would chip away the slim interest payments and inflict pain on bondholders. The Fed identifies this as episodes in which there were large monetary disturbances not caused by output fluctuations. Hopefully the Fed remembers the lesson from the Crash of 87; the markets respond violently to surprise rate hikes.

A mixed bag of economic releases this month has bolstered investors’ expectations that the Fed would wait until late this year to act. Fed Chairwoman Janet Yellen will make a speech on Friday that might provide further guidance.

Five global banks have agreed to pay $5.8 billion in combined penalties and will plead guilty to criminal charges related to manipulating foreign currency exchange rates, also known as Forex. Four of the banks, JPMorgan Chase, Barclays, Royal Bank of Scotland, and Citigroup, will plead guilty to conspiring to manipulate the price of US dollars and euros.

Barclays will pay $650 million, Citigroup $925, million J.P. Morgan $550 million and RBS $395 million. Barclays will pay another $1.3 billion to New York State, federal and U.K. regulators.

The fifth bank, UBS, received immunity in the antitrust case because they informed regulators about the Forex rigging as part of an earlier deal related to Libor rigging; UBS had signed a Non-Prosecution Agreement in 2012 on the Libor charges, and their misconduct in the Forex markets violated that earlier agreement even though they self-reported wrongdoing. So, they have immunity on Forex but they had to plead guilty to Libor rigging.  UBS will pay $545 million in fines to the Justice Department and Federal Reserve.

The five banks will pay a further $1.6 billion in fines to the Federal Reserve. Bank of America also faces a $205 million fine by the Fed, but no criminal charges. No bank employees have been criminally charged. The five banks will be under a three-year period of probation.

Between December 2007 and January 2013, euro-dollar traders at Citigroup, JPMorgan, Barclays, RBS and UBS gathered in an exclusive electronic chat room and used coded language to coordinate their moves in the U.S. dollar-euro market. They referred to themselves as the Cartel. By agreeing not to buy or sell at certain times, they protected each other’s trading positions. The big banks were the market makers, setting daily exchange rates, known as the fix. The fix became the price paid for billions of dollars of currency bought or sold on any given day.

And the Cartel managed to skim a little for their efforts. One Barclays trader in the chat room about adding secret mark-ups to the prices wrote: “If you ain’t cheating, you ain’t trying.” Ben Lawsky, New York’s superintendent of Financial Services explained it simply:  “They engaged in a brazen ‘heads I win, tails you lose’ scheme to rip off their clients.” Also, a side note, after the big settlement announcement Lawsky announced he will step down next month as New York’s top bank regulator after four years. To his credit, he is not going to work for JPMorgan.

I have not yet seen a figure for how much prosecutors think the Cartel stole, but the Forex market trades close to $5 trillion dollars a day, so today’s fines amount to about one/one-thousandth of daily volume. The rigging took place over more than 5 years. I’m guessing that the money they stole in rigging Forex might amount to more than the fines ordered today. And that raises another interesting question – how did they report that income? Will they now go back and amend their earnings reports?

Didn’t managers and Board of Directors sign off under Sarbanes-Oxley?

And remember that the Forex scandal follows on the heels of the Libor rigging scandal, and the ISDAfix scandal (that involved the $381 trillion market for interest-rate swaps and the $44 trillion market for options on swaps. Banks use it to set coupons paid for bonds tied to commercial real estate. And there is a mountain of evidence, and today Barclays agreed to a $115 million dollar settlement on the ISDAfix investigation. Other banks are also being investigated.)

And before that, the municipal bond rigging scandals, and scandals in commodity markets including precious metals, and tax evasion scandals, and money laundering scandals, and predatory lending scandals, and much, much, much more. Past performance is not a guarantee of future results, but based on past performance you have to figure that the banks have rigged all the financial markets.

FT has a running total of legal fines and settlements paid by banks to US regulators since 2007. According to their calculations, the tote board just touched $155 billion. In case you were wondering, over eight years that works out to $53m per day (including weekends, because client service is a 24 hour kind of business, right.)

The big news in today’s settlement was not the size of the fines, not the scale of the scandal, but that the banks actually admitted criminal guilt. UBS violated its 2012 Non-Prosecution Agreement, and we’re still just looking at a fine for a repeat offender. The banks will get to keep their charters; they can continue to conduct business; three years’ probation. They can still vote, or at least buy elections. The deal does not prevent the Department of Justice from going after individual criminal charges but for now, nobody goes to jail.

HSBC has become one of the biggest global banks to say it will begin charging clients on deposits in a basket of European currencies to prevent its profit margins from being crushed in a record low-interest rate environment. The unusual steps come after the ECB last year became the first big central bank to announce a negative deposit rate, in effect a penalty on banks parking their surplus cash.

The Japanese economy staged a comeback in first quarter, expanding at an annualized 2.4% vs. the previous quarter. Despite the positive figure, economists are still worried about Japanese growth and deflation as most of the expansion was due to a huge build-up of inventories. The Nikkei Stock Index finished the session at a 15-year high.

It is widely recognized that Greece is running out of money. The next questions are when they will run out money and what will happen when they run out of money. Nikos Filis, from the ruling Syriza party, told Greek television Greece will not be able to make a €1.5 billion repayment to the IMF that falls due on June 5 if there is no deal with its international creditors by then.

Financial Review

Lousy Good Friday Jobs Report

Sinclair Noe — April 3, 2015

 

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The New York Stock Exchange and the Nasdaq were closed in observance of Good Friday. The Chicago Mercantile Exchange was open, for a holiday shortened session, so there was some trading in equity index futures, and interest-rate and forex futures, and also some light trading in the bond markets. Good Friday is not a federally recognized holiday, and so the monthly jobs report was issued on schedule. We’ll just have to wait until Monday to see how the markets react.

It was a lousy jobs report. The economy generated just 126,000 new jobs last month, marking the smallest gain since the end of 2013; estimates had been calling for twice as many new jobs. The unemployment rate was unchanged at 5.5%. Employment gains for February and January were revised lower by a combined 69,000. The result: The increase in hiring in the first three months of 2015 has slowed dramatically to an average of 197,000. While the pace of hiring this year is still fairly decent, it doesn’t come close to matching average job gains of 289,000 in the fourth quarter.

This was just one lousy jobs report, and that does not constitute a trend but it might reflect a slowdown that we’ve been seeing in other economic data, including consumer spending patterns, a slowdown in the energy sector, sluggish business investment; and don’t forget the bad weather. The energy sector has responded to lower oil prices by cutting the number of active oil rigs and laying off workers. Lower oil prices have been a boon for most consumers, but it hasn’t resulted in more spending; instead consumers are saving more.

With companies hiring at a slower pace, some 96,000 Americans dropped out of the labor force in March. The labor-force participation rate fell a tick to 62.7%, once again matching the lowest level in 37 years. This indicates that we are now realizing the demographic shift of the boomer population moving into retirement; 37 years ago, back in the late 1970s, the boomers were just moving into the jobs and careers – that pushed the participation rate higher. Right now the participation rate for 25 to 54 year olds, or people in their prime working years, is at 80.9%. For people older than 55 the participation rate is 39%. That’s because as people age, they retire and drop out of the labor force. And get this… in 2000, the 25-to-54-year-old group made up 42% of the population, while the 55-and-over group made up 20%. Today, the over-55 group makes up 27%, while the younger group has declined to 39%. Certainly some people dropped out of the labor force because they were discouraged, and some discouraged workers retired; but more and more we are seeing a massive demographic shift with boomers retiring. The demographic shift can play havoc with economic growth, lopping off more than a half a percentage point in economic growth per year.

Long-term unemployment also remains a problem for older workers even as more seniors are hanging on to their jobs well into their 60s. A report issued by the AARP Policy Institute this week noted that last year, on average, 45 percent of job seekers aged 55 and older were out of work for 27 weeks or more. The number of long-term unemployed was little changed at 2.6 million in March.

That said, we are not at full employment. We’re not even certain what full employment is anymore. The Fed guesstimates that it is around 5% to 5.2%, but that is a guess. There are still 6.7 million workers employed part-time for economic reasons; that means they want a good full-time job, but they can’t get one or because their hours were cut back. These workers are included in the alternate measure known as U-6, which measures unemployment and underutilization. The U-6 decreased to 10.9% in March from 11% in February. This is the lowest U-6 since the summer of 2008.

Slack in the labor market shows up in the wage numbers. If we were at full employment, workers should be demanding and getting higher wages. We are starting to see a little improvement, but still not enough to stoke wage push inflation. McDonald’s and Walmart each announced this week that they would start raising wages for low wage workers; this was not part of this month’s jobs report but it will start showing up over the next few months. Think of slack as who has leverage, employers or workers. Right now, employers still call the shots. Wages are starting to move higher because the leverage is starting to shift, just starting.

Average hourly wages rose a solid 0.3% in March, or 7 cents to $24.86; though how much employees get paid hasn’t shown much change despite the biggest increase in hiring in 2014 in 15 years. The increase in wages over the past 12 months was 2.1%.Year-over-year increases have stuck to a tight range of 1.9% to 2.2% for the past three years. And wage gains have averaged about 2% since 2010, just two-thirds as fast as they normally grow. Still, wage growth is now running just a little ahead of inflation, so the gains are real… except, the amount of time people worked each week slipped 0.1 hours to 34.5 hours after hovering at a post-recession high for months. So, wages up, hours down – it’s a wash.

Total employment increased 126,000 from February to March and is now 2.8 million above the previous peak.  Total employment is up 11.5 million from the employment recession low. Private payroll employment increased 129,000 from February to March, and private employment is now 3.3 million above the previous peak. Private employment is up 12.1 million from the recession low. And that is one of the unique things about the jobs recovery, it has happened without a boost from government jobs; to the contrary, government jobs have been cut since the recession and that has served as a drag on recovery in the labor market.

Breaking it down by industries: government lost 3,000 jobs last month, manufacturing and logging each lost 1,000 jobs, the mining and logging sector lost 11,000 jobs – this includes jobs in the oil exploration and drilling industries. We saw 2,000 jobs added in the information sector, 5,800 new jobs in wholesale trades, 8,000 new jobs in financial activities, a gain of 9,500 in transportation and warehousing, almost 30,000 jobs in retail, and 13,000 new jobs in hospitality and leisure (we saw a big jump in restaurant jobs – 88,000 in February – but that might be tapering off now), education and health services added 38,000 jobs, and professional and business services added 40,000.

So, what does this mean for the economy and the markets? Well, first of all, this is one month, it is not a trend. One year ago, we were just coming out of a harsh winter, and the economy was down, and then the economy bounced back very strong in the second and third quarters with a sharp uptick in new jobs. If you think you know what the economy is doing right now, you are probably delusional. About the only thing I can say with confidence is that these are uncertain times. I have no idea how the markets will respond on Monday. The dollar moved a little lower but it is still strong. Commodity prices moved lower despite a weaker dollar. The yield on the 10-year Treasury note slipped 7 basis points to 1.84%. Stocks could move up Monday on the idea that bad news is good; meaning the weak jobs numbers will restrain the Fed from raising rates in June or maybe even this year; or stocks might drop next week on the idea that bad news is bad; the economy is weak and that will hurt sales and profits.

I don’t think the Fed knows either. Speaking at a conference in San Francisco last week, Janet L. Yellen, the Fed’s chairwoman, warned that the recovery was fragile, despite steady progress on the jobs front. The Fed went from being “patient” about raising rates to being data dependent.

I do think this lousy jobs report means there is almost no chance the Fed will raise rates in June. My thinking is that the Fed does not want to make the mistake of shocking the markets, because markets tend to fall down when they are shocked. So they will want to see next month’s jobs numbers (because they are data dependent) and then they will want to communicate their position to the markets, and then they will want to communicate again (just to make sure everybody knows what they think without any equivocation), and that pushes a rate hike back to August at the earliest, and only if we see a strong rebound in economic data and an improving labor market. If the data remains squishy or turns a bit nasty, we might not see a rate increase this year.

We’ve made it through the first quarter and we still don’t know where we’re headed. Maybe the cold weather in the Northeast and the drought in the West hurt the economy; maybe the West Coast port slowdown was a factor; maybe the stronger dollar is hurting profits for multinationals, but the rest of the world’s economies are acting as a drag on the US. And then we need to remember that the economy still added jobs. It’s not like we lost 800,000 jobs; this is not 2008. The unusual thing about recent labor market data is the consistency of positive news. Over the last 30 years we’ve had just four calendar years in which we didn’t have at least one month with net private sector job creation of less than 100,000. Those years were 1987, 1994, 2013 and 2014. Prior to the relatively weak results for March, we had a streak of 12 consecutive months with private sector job gains exceeding 200,000. That was the first time that has happened since 1977. The trend is still up…, for now.