This week has presented us with THREE central bank meetings. The results of the BOJ, FED and BOE meetings were no change to the current policies. So, with inflation on the rise and equity markets close to all-time highs for the U.S. and multi-year highs for Europe, the overseers of credit feel no need to tighten monetary conditions. Chair Yellen and her fellow decision makers are evidently comfortable that the wheels of legislation grind slowly and will wait until there is some evidence of fiscal stimulus and tax reform before applying the brakes to a possibly overstimulated economy. The BOJ was cautious ahead of Prime Minister Abe’s meeting with President Trump. To understand the domestic politics of Abe’s possible bilateral deal with the U.S. I am linking to an article from the Asian edition of the Wall Street Journal by Tobias Harris (my progeny).
Posts Tagged ‘nonfarm payrolls’
I’m still nursing a New Year’s hangover. It takes a long time for the mind to rid itself of all the news the mainstream media deems fit to read. But as the third rock keeps spinning, markets will keep moving and we will strive to untangle the ball of confusion. After today’s tepid ADP data the market has settled into a consensus for 175,000 nonfarm payrolls. Again, I would love to see a number greater than 250,000 just to test the recent market action. BONDS rallied, currencies rallied against the DOLLAR, precious metals are showing early year strength and commodities have held support levels in the age of TRUMFLATIONARY EXPANSIONARY EXPECTATIONS.
The first Friday of the month brings big news for the data dependent Fed. The market consensus is for 185,000 job gain and average hourly earnings increase of 0.2% and the work week to remain unchanged at 34.4 hours. In my opinion, a HUGE increase of 300,000 jobs with another 0.4% increase in wages (similar to last month) would bring great pressure on the FOMC to increase FED FUNDS more than the market’s expectation of 25 basis points. What I am saying is purely THEORETICAL but it would make for an interesting discussion for the DATA DEPENDENT FOMC. It’s especially interesting as the exuberance of the tax cuts, infrastructure projects, rollback of regulation, the equity markets should prompt the asymmetrical nature out of the FOMC decision-making process.
Notes From Underground: Measuring Economic and Political Outcomes; Analytics Yes, Flawed Constructs NoNovember 6, 2016
We are in the period when financial markets are depending on measurements of human actions to proscribe probabilities for profitable investment. On Friday, the jobs report reflected the measurement of labor statistical data in order to achieve some forward-looking view on the health of the U.S. economy. The jobs data was a mixed result as nonfarm payrolls in the private sector were weaker than consensus but the important average hourly earnings (AHE) increased at a robust 0.4%, which SHOULD give the hawks on the FOMC a push to raise rates. But of course one month’s robust data is certainly not a trend. Chair Yellen has been laying the ground work for the data running hotter for longer so 0.4% is a positive but there is room for further gains in wage increases. Besides, if the wage gains are coming out of corporate profits all the better from the perspective of a career labor economist.
As we bid farewell to the dog days of summer, here are some issues that will set the agenda for the month ahead:
1. Friday’s employment data made the picture murkier for the FOMC meeting later this month. The nonfarm payrolls were on the weak side, and, as Art Cashin correctly pointed out on CNBC, the bigger issue was a drop in the hours of the work week, which when measured in terms of jobs gained/loss resulted in a loss of 300,000 jobs. The FED jaw flappers keep orally pushing for a rate hike on September 21 but this jobs report clouds the issue.
The talking heads report ad nauseam that several Fed members believe a rate hike possible but as I wrote last week, if the fed funds rate is not raised the critical component of the FOMC release will be the outcome of the vote. If Stanley Fischer doesn’t vote for a RATE HIKE then HE SHOULD RESIGN FROM THE FOMC. It is that simple for if Chair Yellen prevails in achieving another 9-1 vote then it is without question Yellen’s FOMC and all other ivory tower mouthpieces should remain silent. The Federal Reserve Board is under mounting criticism due the inconsistency of its members’ public pronouncements. The FED‘s credibility is being called into question, a potentially disastrous situation in a FIAT CURRENCY SYSTEM.
2. The G-20 meeting presented great selfies and photo-ops but little else. THIS MEETING REFLECTED THE STRAINS IN THE GLOBAL ORDER WHICH HAVE BEEN “PAPERED OVER” BY THE CENTRAL BANKS. Japan set the tone of the meeting by releasing a paper to the G-20 warning the world and especially Europe about the negative fallout from an acrimonious end to the BREXIT negotiations. Japanese corporations have massive investments in British capital projects and if British exports are to be penalized then Japan threatened to remove production and jobs from the U.K. and other European centers. I THINK THE JAPANESE WANTED TO SEND A MESSAGE TO ALL THE PARTIES IN THE BREXIT DISCUSSION, BUT MORE IMPORTANTLY, THIS WAS JAPANESE OFFICIALS RETALIATING FOR BEING SINGLED OUT AS A CURRENCY MANIPULATOR AT THE PREVIOUS G-20 MEETING. Japan prevented the Chinese from making them the focal point … yet again.
Before the release of the G-20 Communique, the U.S. and China held a bi-lateral meeting and one of the main issues discussed between Presidents Obama and XI was foreign currency movements. A fact sheet released after the meeting said, “China and U.S. Agree to Refrain From Competitive Currency Devaluations.” It may be a major political victory for the Chinese if the U.S. Treasury was deemed to be a serial currency manipulator in a similar vein of the PBOC. And this would be a serious blow to U.S. prestige. The actual language of the final communique was generic and sanitized: “We affirm our previous exchange rate commitments, including that we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes.” This is nonsense of the first order for as many critics of the Fed and ECB have argued over the previous six years: QE POLICY is a domestic monetary program with a weakened currency as a desired outcome. The G-20 reference is mere political posturing for the domestic constituency.
3. The Reserve Bank of Australia and the ECB have scheduled meetings this week. Tonight at 11:30 CDT the RBA will announce its interest rate intentions. The consensus is for no change from its current 1.5% overnight cash rate. The Aussie dollar is very weak against the Kiwi dollar, its main trading partner, so I’m in agreement with consensus. The important point is that it’s Governor Stevens’s last meeting and what he says about the Chinese economy should be of interest. THURSDAY will be an important day as Mario Draghi will hold a press conference following the ECB’s meeting. President Draghi has been very quiet of late and has allowed his underlings to speak about policy. Draghi didn’t even attend the Jackson Hole Conference. The European economy is sputtering. Italy is facing a November referendum. And, more importantly, German Chancellor Merkel’s CDU party suffered a miserable election result on Sunday with the anti-Euro AfD party garnering the largest increase in support.
The media paints the AfD success as a response to an anti-immigrant agenda. There may be an element of fact in that but the German middle class is raising its voice against the FINANCIAL REPRESSION foisted upon German savers as a product of ECB policies. If President Draghi is threatened by German domestic politics look for an increase in the ECB QE program to 90/100 billion euros a month from 80 billion in an effort to build the ECB balance sheet, weakening the euro and simultaneously pushing borrowing costs lower. Draghi is a man in a hurry as the political winds turn against the ECB. The problem for Draghi is that the massive QE programs promoted by Bernanke and the BOJ have failed to have the desired effects. Bloated balance sheets for the sake of bailing out debt-stressed nations provide political fodder for the anti-euro political tide rising across the EU. Mario Draghi has grabbed unlimited power for the ECB, BUT FOR HOW LONG? Yes, our work has just begun.
This is a brief note attached to a spot I did today with CNBC’s Rick Santelli where we discussed the Bank of England’s decision in full. To my great surprise Mark Carney delivered monetary policy on three fronts: 1. Cut the benchmark rate; 2. Began a new round of QE with purchases of 60 billion pounds of Treasury debt with a 10 billion corporate bond buy kicker; and 3. An enhanced Facility Lending Scheme now labeled as Long-Term Funding Scheme (TFS), which is an imitation of the ECB’s TLTRO, which is meant to get the banks lending the additional BOE-provided liquidity. The British domestic banks will incur penalties if they fail to pass the cheap credit into the financial system. My view still stands. The POWER OF THE TFS IS AMPLE STIMULUS AND THE CARNEY-LED MPC SHOULD HAVE HELD THE RATE CUT AND QE IN RESERVE.
The British Pound dropped 1.5% in response to the aggressive BOE action, the Footsie equity index was up almost 2% and the British gilts rallied as the yields on the long-end of the curve dropped 16 basis points. Carney followed his central bankers down the rabbit hole of “got to do something” for there is a supply shock. My criticism is that the BOE governor acted too quickly and should have let markets continued to seek out the real effects of the Brexit vote. Why are central bankers so terrified of the signals that markets provide about the economy? I will focus on the British pound and the GILTS as a weighing mechanism of market sentiment as we move forward. There is still much to digest concerning Brexit and Prime Minister May has shown herself to be flexible in confronting the EU.
***Tomorrow’s unemployment data is expected to reveal nonfarm payrolls of around 175,000 with a 0.2% increase in average hourly earnings and a jobless rate of 4.8%. Be patient as revisions to last month’s large increase may impact any strong number. If the number is above 280,000 there will be talk of September’s FOMC meeting being in play for a rate rise but after today’s BOE action the FED will be cautious because if Carney fears a large negative impact or supply shock from Brexit Janet Yellen will be loath to raise rates in the face of global headwinds.
Patience is advised in response to a summer market having to decode a great deal of economic nuance. But the most interesting asset class tomorrow will be the U.S. bonds and its reaction to very strong data. Today the U.S. Treasuries rallied strongly on the BOE action, confirming again that global bond markets are all connected by relative value trades. A large nonfarm payroll will test the durability of relative value and most certainly lead to a flattening of the yield curves.
The jobs report on Friday was the antithesis of May’s poor data, which was actually revised downward by 27,000 to a very meager 11,000 NFP gain for May. The June report brought an unexpected increase of 287,000 jobs, although the average hourly earning (AHE) showed a weak 0.1% gain. The market closes revealed a well known fact: ULTRA-LOW INTEREST RATES ARE THE KEY ELEMENT TO THE REACTION FUNCTION OF TRADERS AND INVESTORS.
Being a life-long CUBS fan it is with a sense of irony to note that the nonfarm payroll number almost equaled Friday’s attendance at Wrigley Field. I will venture to guess though that the cheers from the FOMC were louder than all of the voices cheering the CUBS onto victory. Janet Yellen and her insider clique on the FOMC cheered as the softness in the JOBS data provided the rationale for the FOMC not to raise interest rate before the BREXIT vote. Everyone in the financial world knows that the FED is “data dependent” … at least when it fits their needs. Yes, the unemployment rate dropped to 4.7% from 5.0% but this substantial fall calls into question the credibility of the Fed models. The drop in the rate was due to participants leaving the job force, and, more importantly, those departing the labor market are not at the retirement age level but more in the middle of the age timeline, which makes investors challenge the idea of the economy gaining strength.
It’s that time of the month: first Friday and the jobs data is front and center. Consensus is for 152,000 nonfarm payrolls. In my humble opinion it will take a number above 200,000 to put pressure on the FOMC to actually raise rates at its June meeting, or, more importantly, a headline jobless rate of 4.8%. As always, I am highlighting the AVERAGE HOURLY EARNINGS (AHE) as the most important number because it plays to Chair Yellen’s concern about 20 years of stagnant wages. The market is anticipating a tepid rate of 0.2% following April’s gain of 0.3%. A flat wage number would keep the FOMC on hold.