Today: U.S. employment and U.S. consumers remain sound. Sentiment all over the place. Words of wisdom from Howard Marks.
Slowdown in Hiring Brings Letdown on Growth Outlook The U.S. job market posted the year’s smallest monthly increase in August after a strong run of hiring, deflating hopes that the economy might finally shift into a higher gear.
Employers added 142,000 jobs last month, the Labor Department said Friday, below the 226,000 jobs added on average in the prior seven months. The unemployment rate, taken from a separate survey of households, fell to a seasonally adjusted 6.1% in August, matching its lowest level in almost six years. (…)
While revisions to June and July payroll estimates also showed the economy added 28,000 fewer jobs than initially reported, job growth over the past year is still running near its highest level in more than eight years. (…)
Economists cautioned against reading too much into the soft headline figure, noting a tendency for the August survey to initially understate job gains. In 12 of the past 15 years, August’s initial count has been revised up by an average of 31,000 in the following month, according to Bank of America Merrill Lynch economists. After revisions, payrolls were boosted by 55,000 on average for the month of August from 2010 through 2013, according to Bloomberg calculations.
Average hourly earnings of nonsupervisory workers rose 2.5% from a year earlier, the largest such gain in more than four years. (…)
Job gains were led in August by the professional and business-services and health-care sectors. The hard-hit construction sector also posted growth better than its recent 12-month average. Manufacturing employment was flat after an unusually large jump in July. Auto makers laid off fewer workers than usual for factory retooling in July, meaning fewer were recalled in August.
The retail sector saw employment fall in August. The Labor Department said some of the decline may have stemmed from a labor strike at a New England grocery chain that employs 25,000 people. Their return would boost September’s employment figures.
Kroger Co. on Friday said it is looking to hire 20,000 permanent employees for its growing chain of supermarkets. Kroger didn’t give an exact time frame for the hiring, saying only it plans to fill the jobs as soon as possible—part of an expansion strategy announced in 2012. Kroger, which currently has 2,640 grocery stores, has added 40,000 jobs over the past six years.
U.S.: Labour market remains sound
Going into the August report, payroll gains had already exceeded 200,000 for six consecutive months – the longest such string since July 1997. A softer number was bound to happen. Second, we like the fact that full-time employment continues to dominate the jobs landscape with an additional 127,000positions in August. This brings the cumulative gain for such jobs to 1.3 million year-to-date in 2014, the strongest performance since 2006. Finally, we note that hourly wages for non-supervisory workers increased by a robust 0.3% on the month. As today’s Hot Charts show, wage inflation now stands at 2.5% year/year, a post-recession high. (NBF)
YELLEN’S LABOR MAKET DASHBOARD
RECENT DOWNBEAT ON CONSUMERS COULD REVERSE ITSELF SHORTLY
Markeit’s comment sums up well the general sentiment after the July retail sales data:
Hopes of the US economy enjoying a strong third quarter were dampened as retail sales showed no change in July. Sales growth has now slowed for three successive months.
Data from the Commerce Department showed no change in retail sales in July. Sales excluding volatile items such as building materials, motor vehicles and gasoline rose 0.1%, up 1.2% in the latest three months.
The stagnation follows five months of continuous growth, meaning July saw the worst retail performance since sales shrank 0.9% in January, when extreme weather hit parts of the country.
But Pictet dug a bit more and found reasons to hope for better days ahead:
(…) Part of this surprising softness in overall real personal consumption was linked to a sharp downward correction in consumption of electricity and gas, following a weather-related surge earlier in the year. Moreover, the fall was recently amplified by cooler-than-usual temperatures. Between February-May and June-July, consumption of electricity and gas – which represents less than 2% of overall personal consumption – had fallen by 40.2% annualised. This temporary negative impact was therefore quite sizeable. If we exclude this small but volatile component, growth in consumption appears less subdued (see chart above). Between February-May and June-July, real consumption excluding electricity and gas grew by 1.8% annualised. As consumption of electricity and gas is likely to bounce back strongly, the weakness in overall consumption in July appears less worrying than at first sight.
This weather-windfall seems to have been saved rather than spent. U.S. consumers being what they are, I expect those savings to be spent in coming months. Here’s Pictet’s take on that:
Actually, data showed that the saving rate rose to 5.7% in July, against 5.4% in June and 4.1% at the end of last year. With household wealth rising very rapidly (see chart below), this bounce back in savings appears quite surprising. As savings are calculated as the difference between disposable income and consumption, their relatively high level recently may just reflect some underestimation of consumption, as we have discussed before.
Moreover, it’s worth remembering that these data are often revised significantly. This was particularly true recently, due to some difficulties in estimating the impact of Obamacare on the consumption of health. For Q1, consumption of health services was first estimated to have grown by 9.1% q-o-q annualised (and total consumption by 3.1%). However, a few weeks later, they were revised to a contraction of -1.4% (and total consumption growth was revised down to 1.0%). Similarly, estimates for consumer spending on healthcare in Q2 and July appear pretty unreliable, at least at this stage. They may well be revised, and this time up.
Keep in mind that disposable personal income has been rising swiftly this year. First 6 months: +6.7% annualized before mysteriously stalling in July. Wages and salaries rose at a 7.1% annualized rate in the first half before mysteriously slowing to a 2.4% a.r. in July.
In all, the recent downbeat on consumers could well reverse itself in coming weeks. In fact, weekly chain store sales have been pretty good this summer, rising 4.0% Y/Y in July and August:
Back-to-school sales were weak last year and if current sales hold through November, chain store sales would rise 5-6% Y/Y .
The CLIs for the OECD area as a whole as well as for the United States, Canada and the United Kingdom continue to point to stable growth momentum. The CLI for Japan continues to indicate an interruption in growth momentum though this may be related to one-off factors.
In Germany the CLI continues to point to slowing momentum, whereas in Italy the CLI exhibits tentative signs of a loss of growth momentum. In the Euro Area as a whole and in France, the CLIs remain stable.
In India growth continues to gain momentum while in China and Russia CLIs point to stabilisation of growth momentum. The CLI for Brazil suggests a tentative upward change in momentum.
The above is written by the OECD staff. I don’t tend to read this month’s charts in quite a similar way. The only CLI that is actually looking good is that of the U.S.. Momentum is flat, down or negative just about everywhere else, with the possible exception of Russia where things seem to look a bit better (!).
(…) The revised data showed that second quarter consumption dropped 5.1% with business spending falling by the same percentage. (…) Nominal compensation in the quarter grew 1.6% but that was far outweighed by a 3.4% rise in consumer prices. (…)
The yen’s weakening to a six-year low will help Japan’s economy recover from a sales-tax increase that caused the largest contraction in five years, said an adviser to Prime Minister Shinzo Abe.
Pound Slumps on Scotland Poll The U.K. pound plummeted to a near nine-month low, while Scotland-focused stocks also fell, whacked by a weekend opinion poll that put supporters of Scottish independence in the lead for the first time.
Saudi Arabia cut October selling prices this week to customers in Asia, Europe and the US, in a sign that Opec’s largest producer is unlikely to curb production even amid an excess of crude oil supply. (…)
“While the cuts were widely expected, the magnitude took a few in the market by surprise,” said Amrita Sen, at London-based consultancy Energy Aspects.
“For the Saudis, market share has really become an issue over the last year, so this is a signal that they are not just going to cut production because they have done so in the last few years,” she added.
Saudi Arabia has lost significant market share – particularly in Asia and the Mediterranean – to Iraq and Iran, both of which have been heavily discounting their crude. It is also increasingly competing with Kuwait and the UAE. (…)
As yet unhindered global production, combined with Saudi Arabia’s reluctance to cut output, bar seasonal fluctuations, could mean the price of oil falls further. (…)
Is this a change in strategy, given that Saudi Arabia’s budget needs $100 oil?
Could be a big deal if oil breaks decisively below $100!
Here’s another big deal:
Ukraine has signed a cease-fire deal with the Russian-backed rebels holding part of its territory. For Kiev, this is an admission of defeat: Having failed to secure meaningful Western help, President Petro Poroshenko, who had vowed never to negotiate with the “terrorists,” is cutting his losses. (…)
As for Russian President Vladimir Putin, he has secured a ringside seat and may settle down with a bowl of popcorn. Any outcome suits him as long as Ukraine struggles to get out of its impasse alone. He will be happy to see the Lugansk and Donetsk regions turn into a frozen-conflict zone, precluding Ukraine’s further integration into NATO and the European Union, and equally pleased to have them gain broad autonomy from Kiev and a veto on major political decisions. A military solution suits him, too, since the West has refused to engage him except in the form of ineffectual sanctions.
In effect, Putin got what he wanted. This is the beginning of the end for Ukraine as NATO said “sorry, pal”. For financial markets, the risk of an military escalation in Ukraine will disappear from the list of worries.
EU Sanctions to Hit State-Owned Russian Oil Companies New EU sanctions on Russia will expand the number of companies unable to raise new money in the bloc’s capital markets to include three major state-owned oil companies.
“The ECB’s quantitative expansion is hitting the financial system at a time when broad liquidity is also very high. The rise in excess liquidity, i.e. the residual in the model of Figure 3, is supportive of all assets outside cash, i.e. bonds, equities and real estate. The current episode of excess liquidity, which began in May 2012, appears to have been the most extreme ever in terms of its magnitude and the ECB actions have the potential to make it even more extreme, in our view…. These liquidity boosts are not without risks. We note that they risk creating asset bubbles which when they burst can destroy wealth leading to adverse economic outcomes. Asset yields are mean reverting over long periods of time and thus historically low levels of yields in bonds, equities and real estate are unlikely to be sustained forever.”– JPMorgan
Wall Street Strategists See Stocks Steaming Ahead U.S. equities could head higher in coming months, propelled by strong earnings gains and low interest rates.
The Standard & Poor’s 500 stock index already has rallied 8.6% year to date, to a record high of 2007.71, surpassing the mean target of 1977 our panelists forecast last December. Add dividends to the mix, and the total return is 10.1%. Based on the strategists’ current mean year-end forecast of 2030, the market could rise another 1% before the curtain comes down on 2014. And that’s after last year’s blistering 30% advance.
None of the group, whom we survey each September and December, is bearish these days, although some strategists have toned down their optimism because of the market’s gains. Still, the most bullish see the benchmark barreling toward 2500 in the next 18 to 24 months. That would be an increase of nearly 25% from last week’s close.
Earnings drive stock performance, and the outlook is relatively rosy here, too. Our 10 savants expect S&P 500 earnings to rise 7% in 2014, to a mean $117.83, after advancing 5.7% in 2013. They look for earnings growth to accelerate to 8.1% in 2015, for a total of $127.34. Industry analysts’ forecasts, as usual, are even more upbeat than those of the big-picture crowd, at $119.31 for this year and $133.49 for next, according to Yardeni Research.
(…) Most strategists expect profit gains to remain the primary driver of equity performance, and see little multiple expansion ahead. (…)
Our prognosticators don’t see a correction — traditionally defined as a decline of at least 10% in stock prices — in the offing, although the possibility worries many other investors. After all, the market hasn’t seen a drop of that magnitude since 2011.
Investors Intelligence’s latest polling of newsletter writers turned up just 13.3% who were bearish, the lowest reading since February 1987.
For Chris Hyzy of U.S. Trust Co. in New York, it’s just another sign that shares have more room to rally. (…) “You should expect fund flows to be relatively anemic, but still positive, which leads to a much longer and better secular market.”
But fund flows into U.S. equities ain’t positive just yet”:
In August, they pulled $5.8 billion from funds that invest in U.S. stocks even as the S&P 500 climbed 3.8 percent, data compiled by Bloomberg and the Investment Company Institute show. It was the second month of outflows after almost $20 billion of inflows in the first half of the year.
Equity funds with a global focus and those investing in bonds took in $13 billion and $10 billion in August and added money every month in 2014. (…)
John Mauldin warns:
Risk-takers should take note. European earnings per share are significantly lower than those of any other developed economy. Indeed, while much of the rest of the world has seen earnings rise since the market bottom in 2009, the euro area has been roughly flat.
WORDS OF WISDOM: Oaktree’s Marks on current rally: it’s time for the seventh inning strech
Howard Marks, Chairman of Oaktree Capital Management, appeared on Bloomberg TV’s “Market Makers” with Erik Schatzker and Stephanie Ruhle today, where he spoke about his new memo and the current market rally, saying “we’re between the bottom of the seventh and the top of the eighth.” Marks said, “It’s time for the seventh inning stretch. I think you have to have plenty of defense on the field today. And most people are sitting on a lead, and when you have a lead you send in the defense specialists.”
Marks said that “every investor faces two risks” and “…the question is which should you worry about more today, losing money or missing opportunity? I’d put some more emphasis on worrying about losing money today than I do about missing opportunities because I don’t see such great opportunities that I have to worry about.”
BLOOMBERG TELEVISION Video: http://bloom.bg/1CyILcr
Howard Marks is a very smart investor:
- With T-bills there’s no uncertainty. With the five-year there’s a little uncertainty. With corporates there’s a bunch. With stocks there’s more. The more risk you take, the more uncertain the outcome is, and the worse the bad ones are.
- You shouldn’t think you know what’s going to happen.
- It’s not what you don’t know that gets you into trouble. It’s what you know for certain that just ain’t true.
- even if you think you know what is the most likely outcome and even if you’re right, lots of other things can still happen. And you have to allow for the uncertainty that is present in the world and you have to prepare your portfolio.
- Knowing the probabilities doesn’t mean you know what’s going to happen.
- the most important single thing an investor has to do is decide on whether to play mostly offense or mostly defense at a point in time.
This is BEARNOBULL and the Rule of 20: know the probabilities, know what needs to be known, know what is misunderstood, understand the narratives and their trends, then decide on whether to play mostly offense or mostly defense.
EQUITY INVESTORS ARE SWEATING HARD (Via ValueWalk)
Over loud protests from its rival delivery giants, the Postal Service won approval from its regulators in August to lower prices by as much as 58% on certain Priority Mail packages for customers shipping at least 50,000 parcels a year.