NEW$ & VIEW$ (8 JULY 2013)

Job Gains Show Staying Power The U.S. job market chalked up solid progress in June, bolstering evidence that the economy might be strong enough to grow with less help from the Federal Reserve and sending bond investors rushing to sell.

American employers added 195,000 jobs in June, the Labor Department said Friday, and tallies for April and May climbed by a combined 70,000.



Revisions are almost always up!



Job creation is still concentrated in the low-income, low wage industries. During June, 121,600 of the 195,000 jobs created (or 62 percent) were in leisure & hospitality (75,000), retail (37,100), and temporary worker (9,500) industries. It isn’t easy to get the economy going with jobs growth relatively isolated to these low-wage sectors. Overall, average hourly earnings increased just 0.4 percent in June, 2.2 percent from year ago levels. Once adjusted for the mild inflation of about 1.5 percent, real earnings are advancing at about a 1 percent pace. (Bloomberg)

Construction companies added 13,000 jobs, the most in three months, while automakers boosted employment by 5,100 workers, the biggest gain in four months. Hiring at auto dealerships and home-improvement stores also picked up, the report showed.

Factories reduced payrolls by 6,000 in June.

Doug Short illustrates the consumer earnings trends:


The next chart applies some simple math to the two data series. Let’s create a snapshot of hypothetical expected real annual earnings: multiply Real Average Hourly Earnings times the Average Hours Per Week and then multiply the weekly earnings times 50 (yes, a couple of weeks of unpaid vacation).



Some Troubling Signs In June’s Jobs Report  The latest June jobs report isn’t quite all roses.

Behind the solid payroll gains are a few troubling signs. The number of Americans working part-time because they can’t find full-time jobs and the number who want jobs but have given up looking both jumped last month.

As a result, a broader measure of unemployment increased a half percentage point in June to 14.3%. That’s the highest level since February and the largest monthly increase since 2009 in that rate, known as the “U-6,″ for its data classification by the Labor Department. (…)

The number of workers employed part-time because they couldn’t find a full-time job increased by a seasonally adjusted 322,000 last month. There were 1 million so-called discouraged workers in June, those who say they are not currently looking for work because they believe no jobs are available for them. That’s an increase of more than 200,000 from a year ago. (…)

Prime-Age workers remain jobless:

To get a cleaner read of trends in job opportunities we look at the EPOP after removing young people and people near or above retirement age. As the figure below shows, the employment-to-population ratio of “prime-age” workers—workers age 25–54—dropped from over 80 percent in early 2007 to 74.8 percent at the end of 2009, and has since increased to 75.9 percent. In other words, we are four years into the recovery, and we have climbed only about one-fifth of the way out of the hole left by the Great Recession. (Heidi Shierholz at the Economic Policy Institute)

 Annoyed  Jobs Strength Keeps Fed on Track

The Labor Department’s strong June employment report improved the odds the Fed will begin to pull back on its $85 billion-per-month bond-buying program by the end of the year.

The Labor Department said U.S. employers have added more than 200,000 jobs per month over the past six months, hitting a benchmark some Fed officials have cited as an indication of the kind of economic progress they want to see before shrinking their bond purchases.

But the market is not waiting for the Fed:

“The Fed has made clear that at the end of the day it is employment which will call the tune,” Mr. Feroli said. “Coming into today, our call for a December first taper was already probably a little underwater, and after today’s report we are moving to a call for a first reduction in asset purchases at the September FOMC meeting.”

The Atlanta Fed’s “Jobs Calculator” says if the economy can add an average of 180,000 jobs per month, that 7% jobless mark could be hit in a year’s time, all other labor force factors being equal.

Rising long-term rates are not without consequences:

Incidentally, ISI’s homebuilders’ survey has been wakening in recent weeks.

And the PMIs:


And this big danger:




Office Recovery Stays Slow

The U.S. office market continued its slow-but-steady recovery in the second quarter, as employers took on additional space at a modestly improved pace compared with recent anemic levels.

The amount of office space occupied by employers increased by 7.2 million square feet, or 0.2% of the total occupied stock, during the quarter, according to real-estate research service Reis Inc. That was the biggest increase since the economy began slowing in 2007.

But the pickup still was below levels seen in more typical periods of economic growth. During such times, the volume of occupied space can increase some 10 million to 20 million square feet per quarter. In contrast, employers have generally taken on between three million and five million square feet of additional space per quarter since the market began improving in 2011.

Without faster growth, the office-vacancy rate is likely to continue to stay high—and rents relatively low. In the second quarter, the overall U.S. vacancy rate stayed flat at 17%, down from a postrecession peak of 17.6% reached in mid-2010.

Rents sought by landlords ticked up to $28.78 per square foot in the second quarter, from $28.66 per square foot in the first quarter and $28.18 one year earlier, according to Reis, which tracks 79 metropolitan areas.

Ripple effects:

FT’s John Authers: ECB comes to the market’s rescue again

(…) Friday’s US jobs report, revealing the US labour market continued to show slightly greater strength than many expected, forced the message home. Despite much ongoing weakness in the US economy, if its labour market keeps improving like this, the chances are that the Fed stimulus will end next summer. In response, bond yields moved sharply upwards across the world. This may well have been what Mr Bernanke wanted, even if Fed colleagues later downplayed his remarks.

What is now beyond doubt is that the market went very far beyond anything the BoE or ECB could tolerate.

To counter rising rates, the ECB said it “expects the key rates to remain at present or lower levels for an extended period of time”, while the BoE’s new governor, Mark Carney, said “the implied rise” in future rates was “not warranted by the recent developments in the domestic economy”. In other words, the market had set gilt yields too high.

As a result, although the Fed is still buying bonds, while the ECB’s balance sheet is contracting, the extra yield on German Bunds compared to US Treasury bonds reached its highest since the crisis.

There is irony here. When the Fed launched its programme of bond purchases in early 2009 – arguably a form of printing money – the rest of the world complained that it was fighting “currency wars”. Low US rates made for a weak dollar, and cheaper US exports. The response was for other countries to cut their rates. In effect, the Fed exported its low interest rates. Now the problem has reversed. The Fed is exporting higher rates, and the ECB and BoE have been forced to be more lenient.

There is one safe bet out of this, which is prolonged weakness for sterling and the euro, already near their lows for the year. When their central banks appear so much more dovish than the Fed, this can only weaken them against the dollar.

A second, slightly less safe bet is on European equities. Easy money is good for stocks, and these announcements will prop up stock markets which in Europe have been anaemic. (…)

While European stocks enjoy support from their central banks, it is a bad idea to bet against them. But in the longer term, the reasons for concern about the eurozone and UK are not going away. That they share the world with a Fed that is talking up rates only adds to the hazards.

Canada Jobs Little Changed in June After May’s Huge Gain

Employment fell by 400 last month after May’s surge of 95,000 while the jobless rate was unchanged at 7.1 percent, Statistics Canada said today in Ottawa. (…)

Canada’s job gains have slowed so far this year, with the average monthly gain of 14,000 less than the 27,000 recorded in the second half of last year, Statistics Canada said.

Full-time employment fell by 32,400 in June, following a 76,700 gain the prior month. Part-time positions rose by 32,200, Statistics Canada said.

Private companies cut 5,300 workers last month after May’s 94,600 increase, while public-sector employment rose by 1,000.

Meanwhile, in the Eurozone

German Industrial Production Decreased in May

Production fell 1 percent from April, when it gained a revised 2 percent, the Economy Ministry in Berlin said today. That’s the first decline since January. From a year earlier, production decreased 1 percent when adjusted for working days.

Orders are also falling:

German Factory Orders Drop as Euro-Area Economy Struggles

Orders, adjusted for seasonal swings and inflation, dropped 1.3 percent from April, when they fell a revised 2.2 percent, the Economy Ministry in Berlin said today. Economists forecast a gain of 1.2 percent, according to the median of 42 estimates in a Bloomberg News survey. Orders slid 2 percent from a year ago, when adjusted for the number of working days.

Germany’s domestic orders declined 2 percent in May from the prior month, today’s report showed. Overseas demand shrank 0.7 percent, with orders from the euro area slumping 3.9 percent. Orders for basic goods fell 0.1 percent from April, while investment-goods orders slid 1.8 percent. Demand for consumer goods dropped 3.1 percent, with orders from the euro area down 5.7 percent.

The FT adds:

This follows a weak 48.6 in June’s manufacturing PMI survey. Economists at Markit said: “There’s a lack of demand both at home and in export markets, so stagnation seems to be the best that we can expect for the time being.”

Sweden’s IP fell 2.6% in May MoM, after dropping 1.1% in April. Turkey’s IP fell 0.6% in May MoM, following a 1.4% rise in April.

French Firms Cut Back on Investments

Despite low interest rates, French companies and entrepreneurs are cutting back on their investments. They’re delaying plans to expand existing factories, and canceling plans to build new ones.

[image]Higher taxes and cheaper foreign competition have pushed margins for French companies down to their lowest level since 1985—reducing companies’ ability to stomach risk. At the same time, French business leaders say the challenges from unpredictable tax rates and ever-changing French red tape are rising. (…)

Investment by nonfinancial companies in the euro-zone’s second-largest economy has contracted every quarter since the beginning of 2012. A recent survey by French statistics agency Insee showed French businesses in manufacturing expect to cut investment by 4% this year, while in January they expected to keep investment at the same level as 2012.

France isn’t alone in seeing shrinking private investment as the recession across much of Europe pushes businesses from Germany to Greece to tighten their purse strings. But economists say the decline is particularly worrying in France because of the lower profitability of French companies. For nonfinancial corporations in France, gross profit share—a standardized measure of profit margins—stood at 25.7% at the end of last year, compared with 35.2% on average in the euro zone, according to data from European the statistical agency Eurostat.

Greece’s Economic Future ‘Uncertain’

Hours before a euro-zone finance ministers’ meeting to approve the disbursement of aid to Greece, the technocrats overseeing its bailout said the country’s economic outlook remained cloudy

CEBM Research latest survey:

Industrial demand has remained weak during the traditional off-season with few bright spots among industrial sectors. Additionally, the recent liquidity squeeze in the interbank market has led to higher financing costs, worsening cash flows and higher credit risks among small and medium sized enterprises (SMEs).

In detail, a number of industrial sectors surveyed by CEBM did not achieve their sales targets during the month of June. Cement demand declined due to the upcoming off season, and actual sales were weaker than expectations. Steelmakers and machinery sales showed no improvement due to the off season. Auto sales, which have been quite robust over the past few months, decreased in June and were below seasonal trends, partially due to tightening credit conditions for car loans. Property sales were stronger than expectations but mostly due to lowered sentiment among property developers.

The most significant change during the course of June was of course the liquidity squeeze in the interbank market, which has expanded to enterprises and has led to higher financing costs, tightening cash flow, and increasing risk of default on debts. Current bill financing rates increased to an annualized cost of around 10-12% for enterprises, leading to significant pressure on their profitability and short term cash flow. A few cement producers and metal traders reported that they received a lot more commercial bills than they did previously, in addition to the rapid increase of other receivables. Many banks surveyed by CEBM are now concerned about the potential outburst of credit risks among SMEs, particularly those located in the Yangtze delta area. (…)

Consumer sector performance in June showed signals of further decline. Respondents in department stores, home appliance retailers, and supermarkets all reported weaker sales growth (Y/Y). Performance of restaurants further diverged.

Japan bank lending hits four-year high
Loan growth suggests stimulus is spurring fund demand

Outstanding loans held by Japanese banks rose 1.9 per cent in June from a year earlier, Bank of Japan data showed on Monday, marking the 20th straight month of increase and posting the biggest gain since July 2009.


Global Earnings Downgrades Worst In 12 Months

As we head into earnings season in the US (amid hopeful margin expansion), the big picture for earnings remains bleak. Markets are back close to highs as negative guidance is piling up and as Citi notes, their global earnings revision index is at its worst since early July 2012.

But not in America:

Analysts Boost S&P 500 Target 11%, Lower Earnings Growth

The same equity analysts who lowered second-quarter profit growth predictions to almost nothing in 2013 are raising price forecasts, convinced the economy is growing fast enough to lure more investors and boost valuations.

Standard & Poor’s 500 Index earnings rose 1.8 percent last quarter, down from a projection of 8.7 percent six months ago, according to more than 11,000 analyst estimates compiled by Bloomberg. At the same time, share-price targets for companies are rising at the fastest rate in two years. The U.S. equity gauge will increase 8.9 percent to a record 1,777.91 should the forecasts prove accurate. (…)

Analysts are looking past profit growth this year and predicting improving investor sentiment will push stocks higher. They’ve boosted price estimates for the S&P 500 by 11 percent from 1,608.50 on Dec. 28, the fastest rate since July 2011, according to data compiled by Bloomberg.

U.S. equity volume, in retreat since 2009, is showing signs of picking up. Trading on all American markets has averaged 6.77 billion shares a day since the start of June, compared with 6.35 billion between January and May and 6.42 billion in 2012, according to data compiled by Bloomberg.

Well, if earnings are not cooperating, P/Es ought to rise! Why? “Improving sentiment”!”

What about rising interest rates…The same people calling for higher rates are calling for higher P/Es.


Fingers crossed Fingers crossed Maybe this might help:

A Turn in Economic Indicators


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