NEW$ & VIEW$ (10 JUNE 2013)

MAY U.S. EMPLOYMENT

1. THE FACTS

Jobs Rise Enough to Soothe Markets

Employers added 175,000 jobs in May, maintaining a pace that hasn’t brought unemployment down quickly but has been enough to ease worries of a summer slowdown after a run of murky economic reports.

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(…) “Adding it all up, today’s report has a little something for everyone,” said Michael Feroli of J.P. Morgan Chase. “If the last week or two of soggy data generated renewed…fears, today’s report should help to mollify those concerns. On the other hand, the figures do little to suggest the economy is shifting into higher gear.”

Muddling Through

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2. THE BETTER STUFF

We were most encouraged by the fact that the household survey (from which the unemployment rate is derived) showed an 185,000 monthly increase in full-time employment, the best such performance in 2013.
This is a crucial development for continued household formation and higher home prices.

The demographics of job creation certainly argue for such a scenario to take place. As today’s Hot Chart shows, employment for people aged 25+ is now virtually back to its pre-recession peak. Impressively, more than half of the jobs created in May were for people aged 25-34. This sets the
stage for more consumer-driven spending growth in H2 2013. Youth employment might be depressed in the U.S., but that is mostly concentrated in the younger age cohorts (16-24). (NBF Financial)

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3. THE NOT SO GOOD STUFF

Not so long ago, the media would have highlighted the fact that monthly trends are down, both in total and in private employment. A slower swoon, but a swoon nonetheless.

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And this from Bloomberg:

Bulk of U.S. Payroll Gain in Jobs Paying Less-Than-Average Wages

Occupations paying below-average wages accounted for more than half of last month’s U.S. payroll increase, a dynamic that may restrain consumer spending and the economic recovery.

Retailers, the hospitality industry and temporary-help agencies accounted for 96,300, or 55 percent, of 175,000 jobs added in May, figures from the Labor Department showed today in Washington.

The composition of the employment gain caused hourly earnings for all employees to stagnate at $23.89 on average last month, up a cent from April. They rose 2 percent over the past 12 months, compared with year-to-year increases averaging 3.5 percent in the 10 months leading up to the recession that began in December 2007.

The leisure and hospitality industry, which includes hotels, restaurants, casinos and amusement parks, added 43,000 workers to payrolls last month. On average, those employees are paid $13.45 an hour, the lowest of any of the 10 major employment categories, according to the Labor Department.

Retailers added 27,700 jobs in May, with an average hourly wage of $16.63. Temporary help accounted for 25,600 jobs with an average wage of $15.74 an hour.

In contrast, construction companies, which pay employees an average $26.06 an hour, added 7,000 jobs in May. Manufacturing, which pays $24.22 an hour, lost 8,000 jobs.

Twenty-one percent of all job losses during the recession were in occupations paying median hourly wages of $13.83 or less, according to the National Employment Law Project in New York, a non-profit employee-advocacy group. By contrast, those occupations accounted for 58 percent of new positions during the recovery from February 2010 to March 2012.

As a result, average hourly earnings have sharply decelerated from a +2.1% annualized rate during 2012 to +1.35% during Q1’13 and to +1.17% during the last 3 months. This combination of slowing employment growth and slowing wage growth is obviously not conducive to much enthusiasm on consumer spending. Keep in mind that inflation remains in the 1-2% range and that oil prices have stopped falling.

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And yet:
 

Fed on Track to Ease Up on Bond Buying

Federal Reserve officials are likely to signal at their June policy meeting that they’re on track to begin pulling back their $85-billion-a-month bond-buying program later this year.

A good-but-not-great jobs report Friday ensured officials wouldn’t want to act right away and would instead want to see more data before taking a delicate step toward winding down the program. But they could point at their next meeting to improvement they’re seeing in the economy, a prerequisite to reducing the so-called quantitative-easing program.

Plotting out a move is a tricky task, in part because investors are on edge about the Fed’s plans for the program. Fed Chairman Ben Bernanke signaled last month that the central bank could start pulling back the program “in the next few meetings,” a view echoed by other officials in recent weeks, including some of the program’s most vocal supporters. (…)

Many Fed officials believe the job market and the broader economy have made enough progress to warrant considering a partial pullback in their bond buying, but they still have reservations about the outlook that give them pause.

Most notably, officials are expecting the combination of federal tax increases and spending cuts to weigh on growth in the second and third quarters. Many want to see how the economy weathers that fiscal drag before altering the bond-buying program.

Officials believe the private sector, aided by a rebounding housing market and solid consumer spending, has enough momentum to drive a pickup in growth later in the year. Moreover, the effects of state and local government cutbacks show signs of waning.

Are we heading towards another policy mistake?

Housing’s Up, but Is Foundation Sound?

(…) Housing bulls see the slow economic recovery releasing pent-up demand, first for rental housing and then for home purchases. More young adults—many of them among the 65 million “echo” boomers born to baby boomers between 1981 and 1995—are moving out of their parents’ homes and into apartments. Others that had delayed home purchases during the bubble are ready to buy.

Rising prices in many parts of the country today show what happens when demand outstrips supply. To be sure, some homes are being held off the market by owners who can’t sell because they owe more than their homes or worth. Others are reluctant to sell at prices that leave them with little money to make a down payment on their next home.

Meanwhile, bulls still see too few homes being built, even after accounting for that “shadow” inventory. Population growth will require 14 million additional housing units this decade, around three-quarters of them single-family homes, according to Zelman & Associates, a research and advisory firm. Analysts at Zelman estimate that only 5.7 million of those units will be built by 2015, meaning the U.S. would need to add two million homes a year over the last four years of the decade—spurring a big boost of construction that would ripple through the economy. (…)

Equally important is that home prices have stopped falling, convincing consumers that they’re no longer at risk of catching a falling knife. (…)

The bear case, the outlines of which are laid out in a forthcoming paper by Joshua Rosner, managing director of Graham Fisher & Co., draws attention to several forces that had helped housing—and the economy—expand over the past few decades but whose end will now hinder growth. (…)

The democratization of credit ended during the bust, and a new period of much tighter credit standards has replaced it. Mortgage lending has seen little expansion amid a slew of new regulations and tougher capital rules.

Tight credit isn’t the only problem, argue the bears. Many Americans will face trouble qualifying for loans because they have too much debt relative to incomes that aren’t growing fast—particularly first-time buyers from the “echo” boom who have taken on heavy student-debt loads over the past decade. All of this is likely to unfold in a rising-interest-rate environment. (…)

Skeptics also haven’t taken comfort in the housing rebound because they see it as too dependent on investors. “We shouldn’t look at it as a fundamentally recovered housing market,” says Mr. Rosner. Sooner or later, he says, there needs to be “a handoff from the investor purchase to the primary-resident purchase.”

How that handoff unfolds will go a long way toward deciding whether the bulls or the bears have the last laugh.

Good read on U.S. housing:  Blackstone Denies It Is the Cause Of Housing Bubble 2.0

 Consumers Boost Borrowing for Cars, Education

 

Consumer credit, a measure of lending that excludes home mortgages, rose by $11.06 billion to a seasonally adjusted $2.820 trillion, a Federal Reserve report showed Friday. That’s a little short of economist expectations of a $13.4 billion advance, but overall figures have now grown steadily for 20 straight months.

Non-revolving credit, which includes student loans and auto financing, rose by $10.38 billion to $1.970 trillion on a seasonally adjusted basis. It was the 20th consecutive monthly increase.

More detailed figures aren’t seasonally adjusted so comparisons are imperfect. But the Fed numbers suggest a good chunk of that increase was related to borrowing for cars, trucks, boats, motor homes and the like.

Revolving credit, which is mainly credit-card debt, rose only $682.3 million to $849.81 billion. Outstanding credit card debt bottomed out two years ago and has only crept ahead in fits and starts since.

 Home Loan Rates Near 4% Send Buyers Scurrying

Mortgage applications to purchase homes fell 1.6 percent last week and are 6 percent below a three-year high at the beginning of last month. Applications to refinance loans dropped 15 percent, the fourth straight decline, to the lowest level in more than a year, according to the Mortgage Bankers Association.

Surprised smile  Canada posts biggest job gains in more than a decade as sentiment firms up

A surprising 95,000 jobs were created last month, marking the biggest gain in almost 11 years and just shy of the record 95,100 of August, 2002. The surge pushed the unemployment rate down a notch to 7.1 per cent, Statistics Canada said Friday.

Even though such month-to-month numbers can be volatile, the economy still likely created at least 38,000 jobs even when standard errors from the survey are taken into account.

CHINA

 

China’s Export Growth Slumps

China’s exports edged up a meager 1% in May over a year ago while imports slipped 0.3%. That left a wider surplus of $20.4 billion—up from $18.16 billion in April, according to customs figures.

The export rise was less than a 5.6% gain forecast by economists polled by The Wall Street Journal and well below the 14.7% climb year over year in April. The April figure was widely believed to have been distorted by exporters inflating their data, trying to skirt capital restrictions and move capital into China to take advantage of a rising Chinese currency.

Exports to Hong Kong, a key focus of suspected data problems, showed the clearest evidence of an impact of tighter regulations. Exports in May rose 7.7% year on year, but they were up 69.2% in the first four months of the year compared with the same period in 2012.

Exports to large markets such as the U.S. and the EU were down 1.6% and 9.7% in May compared with a year ago, according to The Wall Street Journal calculations.

China’s CPI grows 2.1%

China’s consumer price index, a main gauge of inflation, grew 2.1 percent year-on-year in May,down from 2.4 percent in April.

In May, food prices, which account for nearly one-third of the weighting in China’s CPI, increased 3.2 percent year on year, NBS data showed.

On a monthly basis, the CPI in May edged down 0.6 percent from April, compared to a rise of 0.2 percent in April from March.

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Non-food CPI fell 0.1% MoM, after having risen 0.2% in April and 0.1% in March.

China’s May PPI down 2.9%

China’s producer price index, which measures inflation at the wholesale level, fell 2.9 percent year-on-year in May, the National Bureau of Statistics announced on Sunday.

The figure marked a further drop of 0.6 percent from April’s, according to data released by the NBS. For the January-May period, the PPI fell 2.1 percent.

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China’s fixed-asset investment up 20.4% in Jan-May

China’s urban fixed asset investment rose 20.4 percent year-on-year to 13.12 trillion yuan ($2.13 trillion) in the first five months.

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China’s retail sales up 12.9% in May

China’s retail sales grew 12.9 percent year-on-year to 1.89 trillion yuan ($306.8 billion) in May, the National Bureau of Statistics announced

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Nominal retail sales rose 1.17% MoM in May, compared to 1.25% in April and 1.11% a year ago. Sales of gold, silver and jewelry rose 38.4% YoY in May and are up 31.3% YTD.

China’s Risky Move to Slow Credit

(…) Total social financing, China’s widest measure of credit, fell by about one-third to 1.19 trillion yuan ($194 billion) in May from April, the second month of substantial decline, the People’s Bank of China said Sunday. And new bank loans, a subset of total social financing, also have fallen substantially in the past two months.

[image]Total social financing consists of all manner of financing including banks, trusts, financing companies, trade credit, corporate bonds, certain kinds of interbank lending and informal lending by individuals, among other kinds of credit.

Regulators, however, have a way to go to curb overall lending. In the first five months of 2013, total social financing was up 52% from 2012. (…)

In May, both traditional bank loans and nontraditional lending fell. (…)

China’s industrial output was up 9.2% year-to-year in May, off fractionally from April’s growth rate, and much slower than the rates of expansion routinely recorded in 2010 and 2011.

Pointing up  Electricity output, a barometer of industrial activity, rose 4.1% year-to-year in May versus 6.2% in April. Construction starts by area, a key measure of the health of the property market, were up just 1% in the January-to-May period, versus the same five months last year. (…)

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ELSWHERE
 
German Industrial Production Increases Most in a Year

Production jumped 1.8 percent percent from March, when it gained 1.2 percent, the Economy Ministry in Berlin said today. That’s the third consecutive increase and the strongest gain since March last year. From a year earlier, production rose 1 percent when adjusted for working days.

Poland Warns on Further Volatility Curbs

Poland’s central bank took the market by surprise by intervening on the local currency market in order to limit the Polish zloty’s volatility Friday, and central bank Governor Marek Belka said they could do it again.

The zloty, Polish bonds and other emerging market assets have been under immense pressure since the Federal Reserve indicated in late May that it may consider unwinding its bond-buying stimulus program if the U.S. economy continues to improve. The prospect of tighter policy in the U.S. has prompted investors to exit riskier assets and rush to safe-haven currencies and bonds.

Italian Economy Contracts as French Confidence Stalls: Economy

Italian gross domestic product fell 0.6 percent from the previous three months, the Rome-based National Statistics Institute, said today, after a May 15 estimate of a 0.5 percent drop. A French index of sentiment among factory managers was unchanged at 94, while an index of service companies fell to 88 from 89, according to the Bank of France.

Exports dropped 1.9 percent in the first three months, the first quarterly fall since the second quarter of 2009, today’s report showed. Industrial output unexpectedly declined in April.

Sweden Industrial Output Declines as Domestic Demand Falters

Industrial production fell an annual 0.8 percent after sliding a revised 0.1 percent the previous month, Stockholm-based Statistics Sweden said today. Output fell a monthly 0.5 percent after rising a revised 0.6 percent the previous month.

Industrial orders rose an annual 1.7 percent in April and plunged a monthly 10.3 percent, Statistics Sweden said. Domestic orders slid 4.6 percent in the year while export orders rose 6.5 percent.

Sweden’s exports, which account for about half of the country’s output, fell 5.5 percent in the first quarter from the same period last year as countries in Europe cut spending to reduce debt.

Philippine Peso Falls to Lowest Level in a Year  The Philippine peso on Monday depreciated to its lowest level against the U.S. dollar in a year, and analysts think it may retreat further along with other Asian currencies as the U.S. economy gains traction and U.S. Treasury yields improve.

Japan sharply revises up Q1 growth
Rate stronger than initial estimate of 3.5%, in a boost to Abe

Government data released on Monday showed that the economy expanded at an annualised rate of 4.1 per cent between January and March, lifted by strong household spending and a pick-up in private residential investment. That was much higher than the preliminary estimate of 3.5 per cent, which was already the fastest rate recorded by any Group of Seven economy.

Composite Leading Indicators (CLIs), OECD, June 2013

The United States and Japan are the only countries where the CLIs point to economic growth firming. In other major economies, the CLIs point to limited growth momentum.

In the Euro Area as a whole, the CLI continues to indicate a gain in growth momentum. In Germany, the CLI shows that growth is returning to trend. As in April and May, the CLI points to a positive change in momentum in Italy. In France, the CLI does not indicate any change in momentum.

The CLIs for the United Kingdom, Canada, China and Brazil point to growth close to trend rates. The CLI indicates that growth is losing momentum in Russia, whereas for India, it continues to indicate growth below trend.

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Fears of hyperinflation grip Venezuela
Prices rise by highest monthly amount on record in May
 
Sudan orders halt to South Sudan oil
President tells army to prepare for holy war

South Sudan had started to pump 200,000 barrels per day in April. Its output was around 300,000 bpd before the shutdown.

SENTIMENT WATCH

U.S. Expansion Poised for Longevity Without Many Excesses

Record $12.5bn outflows from bond funds
Selling wave across all major classes in past week

Two-thirds of the total outflows came from US funds, where nervousness over the Federal Reserve’s next moves in monetary policy is at its height.

(…) The accelerating outflows are already showing up in junk bond prices, which have fallen sharply, sending yields higher. The average yield has surged from its historic low of 4.95 per cent on May 9, to 6.20 per cent on Thursday night, according to a Barclays index.

Forecast Calls for a Summer of Swings

Investors are bracing for a stormy summer, as steady asset-price gains fueled by bottomless central-bank liquidity have given way to sharp swings jolting stocks, currencies and commodities alike.

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Good FT piece by David Rosenberg today: The Fed has turned things upside down

  • That is how the Fed has turned things so upside down and inside out. Investors in the Treasury market today are not there for the income but for the prospective capital gain should yields decline. And when you look at the sectors that have done best this year on a risk-adjusted basis, they are the stodgy defensives for the most part that carry a 3.5 per cent dividend yield – investors are here not for the capital gain (though it is always welcome) but for the income. Equities for income and bonds for capital gains. How fascinating.
  • Yet, in the past month, more than 60 per cent of the incoming US economic data have come in below expectations versus 34 per cent above expectations. Two months ago, only 42 per cent of data were disappointing and 53 per cent surprising to the upside.
  • While there has been some reversal in recent weeks, the defensive segment of the stock market is up nearly 20 per cent so far this year versus just over 10 per cent for the cyclicals in the largest outperformance in a good 15 years.
  • Cyclical stocks command an average yield of only 1.8 per cent and you can see how income-hungry investors in the stock market are paying up for the yield characteristics: at a price/earnings multiple of nearly 19 times, the defensives command a 20 per cent multiple premium over their economically-sensitive cousins.

 

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