July Job Numbers Keep Fed on Track For Rate Increase Friday’s jobs numbers were in line with the Federal Reserve’s narrative for how the economy is developing—solid job growth and diminished slack in labor markets but no sign of wage or inflation pressure—keeping a September rate increase a possibility, writes Jon Hilsenrath.
In speeches and official statements, Fed officials have described hiring as solid and have said the unemployment rate is evidence that slack in the labor market has declined and will eventually lead to an acceleration in wage and price gains.
The employment report released Friday, which was in line with market expectations and with the trend of recent months, likely won’t change those assessments.
The gain of 215,000 jobs in July was close to average monthly payroll employment growth so far this year[211,000]. Average hourly earnings of workers, up 2.1% from a year earlier, show no sign of wage acceleration.
The jobless rate at 5.3% in July was where Fed officials forecast it will be by year-end and is down from 6.2% a year ago. A broader measure of unemployment, which includes discouraged workers and people working part-time jobs who want full-time jobs, fell further to 10.4% from 10.5% in June and is down nearly two percentage points from a year earlier. (…)
Meantime, the Fed said in its July policy statement it wanted to see “some” further progress in labor markets before raising rates. The jobs report Friday, by keeping to the trend the Fed describes as solid, clearly fell within the realm of some further progress.
The bigger question officials will need to debate in September is whether such improvement is enough to give them confidence that inflation will eventually begin rising toward the central bank’s 2% objective. Inflation, by the Fed’s preferred measure, has run below that target for 38 straight months. (…)
The Treasury market illustrates just how blurry the picture for rate increases is. While the yield on the two-year note has risen to 0.72% from 0.43% over the past year as the possibility of Fed rate increases fell into its range, it still is low. Meanwhile, the yield on the 10-year note has fallen to 2.18% from 2.41% over the same period. This shows investors expect average overnight rates over the next decade will remain depressed.
The bond-market view then is that the Fed will struggle to reach its 2% inflation target in the years ahead. Weakness in overseas economies, which are helping drive a decline in commodity and goods prices, and a stronger dollar are part of that. So, too, are limited wage gains. A flatter yield curve also gives banks less incentive to take on more lending risk, which also damps growth. (…)
So, the July gains clearly extended the series of “solid” job gains as described by the Fed recently. Wage inflation remains low, although that’s unlikely to matter much at the Fed considering that its staff recently released a paper that found little to no evidence that changes in labour costs have a material effect on price inflation (Peneva/Rudd, May 2015). All told, odds are growing that the Fed will start its tightening cycle as early as September when it will also present upgraded GDP growth forecasts for this year.
From an aggregate income perspective, the jobs report was solid. The one-tenth increase in the average workweek to 34.6 hours from 34.5 in June lifted total worker-hours (aggregate hours) by 0.5 percent compared to 0.2 percent previously. Combined with the two-tenths increase in average hourly earnings,
aggregate income increased by 0.7 percent in the month, compared to 0.2 percent in June.
This is the fastest monthly increase since January. As a result, the year-on-year pace of growth rose to 4.9 percent from 4.4 percent previously. This was the fastest pace since March, when it was also 4.9 percent. This is a critical development for the near-term outlook for consumer spending, since it suggests that wage and salary income is also due to accelerate.
The Federal Reserve Board releases its July Labor Market Conditions Index (LMCI). In July, jobless claims remained around 275,000 and the Conference Board’s consumer confidence survey reported some deterioration in the “Jobs Plentiful” and “Jobs Hard to Get” sub-indexes, but that may have been influenced by recent negative headlines rather than a more lasting shift in labor conditions. Most of the 19 indicators summarized in the LMCI were released with the monthly employment report. The rate of change in LMCI held roughly steady in June.
U.S. Consumer Credit Picks Up in June Americans took on consumer debt at a faster pace in June, suggesting a firming labor market and low gas prices may finally be prying open consumers’ wallets.
Outstanding consumer credit, a reflection of nonmortgage debt, rose $20.74 billion or at a 7.3% annual rate in June, the Federal Reserve said Friday. That’s a slight increase from May, when it increased at an upwardly revised annual rate of 5.9%, but less than April’s 7.6% pace.
Revolving credit, mostly credit cards, rose at a 7.4% annual rate, a jump from May when it rose at an annual rate of 2.1%.
Nonrevolving credit, made up largely of auto and student loans, rose at a 7.3% annual rate, a slight acceleration from May’s upwardly revised rate of 7.2% and April’s unrevised 6.2% growth pace.
REAL TIME STATS
The most timely data from the American Association of Railroads.
The only good thing to say about the 6.5% (95,295 carloads) decline in total U.S. rail carloads in July 2015 from July 2014 is that it’s better than the 9.5% decline in May 2015 and the 7.7% decline in June. Carloads totaled 1,376,411 in July 2015, an average of 275,282 per week. That’s the lowest weekly average for July since 2009 — since 1988 (when our records begin), only July 2009 and July 1989 had a lower weekly average.
Railroads are overexposed, relative to the economy in general, to the energy sector. Coal is most of it, of course, but there’s also oil and gas. Some of the recent declines in steel-related rail carloads (primary metal products, iron ore, iron and steel scrap) is undoubtedly due to a decline in the steel needs of the energy sector (for example, fewer pipes for new wells, since fewer new wells are being drilled). Ditto with frac sand, a big part of the crushed stone, sand, and gravel rail category.
And crude oil, of course, which is around half of the petroleum and petroleum products category. Put another way, because changes in the energy sector are
having a bigger negative effect on rail traffic than they are on the economy as a whole, declines in rail carloads in recent months are not necessarily reflective of fundamental weakness in the broader economy.
Yes. But other economy-sensitive categories are not doing well. In fact, many were doing worse in Q2 than during Q1 and worse in July than during previous months.
U.S. carloads excluding coal and grain were down 3.9% (31,697 carloads) in July 2015 from July 2014, their fifth straight year-over-year monthly decline.
Meanwhile, China is slow and slower:
China Exports, Imports Drop in July Exports slid 8.3% from a year earlier, imports also down 8.1%
Exports slid 8.3% in the month from a year earlier, reversing a gain of 2.8% in June, customs data released Saturday showed. Imports fell for the ninth month in a row, dropping 8.1% in July from a year earlier, after a decline of 6.1% in June.
Exports for the first seven months of the year were down 0.8% in dollar terms compared with a year ago, while imports were down 14.6% over the same period.
While there were some bright spots in the trade picture, as imports of some key commodities made gains in volume terms, the figures were generally worse than expected and pointed to problems ahead on the already struggling export side.
“We could see relatively strong downward pressure on exports in the third quarter,” Customs said in a statement accompanying the data. (…)
Adding to the problems for exporters is the relatively strong Chinese currency, which has held steady against a buoyant dollar. That has carried the yuan more than 10% higher against the euro, providing a drag on exports to some key European markets.
Exports to the European Union fell 12% in July from a year ago, while those to Japan dropped 13%, and exports to the U.S. were down 1.35%. (…)
Industrial production fell in the eurozone’s three largest economies in June, a sign that economic activity in the region failed to gain much momentum in the second quarter.
The drop was most severe in Germany, the region’s industrial powerhouse, where output, adjusted for calendar effects and seasonal swings, slumped 1.4% from May, data from the economics ministry showed Friday.
Industrial production dropped by 1.1% on the month in Italy and slipped by 0.1% in France, highlighting a diverging trend between the eurozone’s core and its southwestern periphery.
Industrial production in Spain, which accounts for roughly one-tenth of eurozone gross domestic product, rose 0.4% in June from the previous month, the INE statistics institute said Friday, another sign that Spain remains one of the fastest-growing economies in the region.
But disappointing health checks in Germany, France and Italy point to weak eurozone industrial production in June, economists said, as the big three economies account for roughly 60% of eurozone GDP.
“Together, the national figures suggests that eurozone industrial production in June probably declined by about 0.5% from May,” said Jonathan Loynes, chief European economist at Capital Economics. (…)
Oil Futures Signal Weak Prices Could Last Years The oil market indicates that prices could stay lower for longer, delivering a fresh blow to hard-hit energy exploration-and-production companies.
(…) On Friday, front-month oil prices fell 79 cents, or 1.8%, to $43.87 a barrel, while futures for delivery in December 2016 settled at $51.88 a barrel. The most expensive benchmark oil-futures contracts, which were dated for delivery in 2022 and 2023, settled at $63.26 a barrel.
For many producers, such as Diamondback Energy Inc. and Marathon Oil Corp., later-dated contracts are now too cheap to justify locking in prices. That means producers are likely to enter 2016 with fewer price hedges on the books than usual, if they have any at all.
Companies without price protection in 2016 could be forced to cut back further on new drilling if prices remain below their break-even costs. (…)
If the forecast prices indicated by the futures market turn out to be correct, 10 of the largest U.S. independent producers will outspend their cash flow by $11.4 billion next year, according to investment bank Tudor, Pickering, Holt & Co. (…)
Still, long-dated futures are typically a poor indicator of where prices are headed. (…)
Oil Prices Fall on New Drilling Prices fall to multimonth lows as U.S. drilling continues to rise
Oil-field services firm Baker Hughes Inc. said Friday that the number of rigs drilling for oil in the U.S. rose for the third straight week. Though there are still 58% fewer rigs operating compared with October 2014, the recent rise in rigs sparked concerns that a glut will continue to weigh on the market.
U.S. OIL PRODUCTION DROPPING
With respect to oil, the AAR published stats on crude oil traffic through Q2’15:
A different source of rail traffic data, available quarterly with a delay of up to a couple months, covers U.S. Class I railroads, including the U.S. operations of the two major Canadian railroads. This source includes data on rail carloads of crude oil and industrial sand.
U.S. Class I railroads originated 111,068 carloads of crude oil in the second quarter of 2015, down 2,021 carloads (1.8%) from the first quarter of 2015 and down 21,189 carloads (16.0%) from the third quarter of 2014, which is the peak quarter for rail crude oil originations.
Our best estimate is that the average rail carload of crude oil today contains approximately 682 barrels (somewhat more in North Dakota, somewhat less elsewhere). Using 682 barrels, the 111,068 carloads originated by U.S. Class I railroads in Q2 2015 was around 830,000 barrels per day.
YoY, the drop in Q2 crude oil traffic was 18.4%, confirming that U.S. shale oil production entered a downtrend during Q2 which seemed to intensify in July given that carloads of crude oil and other petroleum products sank 13.6% YoY after -7.3% in June, +0.5% in May and -1.1% in April.
Weekly average carloads in July 2015 were 13,582, the lowest since October 2013.
Note: the most recent EIA data, which everybody follows, is for May…(see the OIL segment in my July 30th NEW$ & VIEW$)
With 87% of the companies in the S&P 500 reporting actual results for Q2 to date, the percentage of companies reporting actual EPS above estimates (73%) is equal to the 5-year average, while the percentage of companies reporting actual sales above estimates (51%) is below the 5-year average.
Due to companies beating earnings estimates in aggregate, the blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings decline for Q2 2015 is now -1.0%. This is a smaller decline than the estimate of- 4.6% at the end of the second quarter (June 30).
If the Energy sector is excluded, the blended earnings growth rate for the S&P 500 would jump to 5.7% from -1.0%.
In aggregate, companies are reporting earnings that are 4.5% above expectations. This surprise percentage is equal to the 1-year (+4.5%) average, but below the 5-year (+5.0%) average.
Due to companies beating revenue estimates in aggregate, the blended revenue decline for Q2 2015 is now -3.3%. This is also a smaller decline than the estimate of -4.4% at the end of the second quarter (June 30).
In aggregate, companies are reporting sales that are 0.9% above expectations. This surprise percentage is equal to the 1-year (+0.9%) average, but above the 5-year (+0.7%) average.
If the Energy sector is excluded, the blended revenue growth rate for the S&P 500 would jump to 1.6% from -3.3%.
At this point in time, 78 companies in the index have issued EPS guidance for Q3 2015. Of these 78 companies, 56 have issued negative EPS guidance and 22 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the third quarter is 72%. This percentage is slightly above the 5-year average of 70%.
HOUSTON, WE HAVE AN EARNINGS PROBLEM!
Q2 earnings look good, on the surface. Last week (BAD BREADTH EQUITIES), I alerted to the fact that a deeper analysis revealed that
this is clearly a two-tiered equity market: even ex-Energy, 60% of companies are growing with a median growth rate of 16.5% while the other 40% are suffering a median 12.5% earnings decline. (…)
Adding Energy companies back in the matrix, we find that 57% of the companies having reported so far show growth in EPS with a median growth rate of 16.5%. The other 43% with declining EPS have a median decline of 15.2%. Given the recent slide in oil prices, looking at equities excluding Energy stocks may no longer be appropriate as the “temporary price drop” looks less and less temporary.
This is not a so-so equity market with so-so earnings. This is more like a twin engine vehicle, one engine pulling forward and one going backward. The resulting standstill gives a false impression that overall things, though admittedly not great, are nonetheless OK.
Averages can sometimes be deceiving, hiding opposite trends which mathematically average into something close to normality. Here’s where the trouble is:
1- With nearly 90% of companies having reported Q2, only 55% of the companies have positive YoY EPS growth.
2- S&P’s index methodology is resulting in Q2 operating EPS actually dropping 9.9% YoY to $26.45. This figure was $28.46 on July 30th. We lost $2.00 last week only. I checked with S&P’s Howard Silverblatt who confirmed this was not a typo. Surprises turned bad by the end of the season and many late reporters showed pretty poor results. Howard pointed out 4 Energy companies which subtracted $0.88 to the Index EPS during the last week. I am doing further work on this to be released later this week.
This is important given that trailing EPS are now $108.61, down 2.6% from the previous quarter (and down 5.1% from their Q3’14 peak of $114.51). Furthermore. the earnings base has shrunk suddenly, jeopardizing future earnings if recent conditions were to persist.
The Dow Is Close to Reaching the Dreaded Death Cross A six-day decline in the Dow Jones Industrial Average is wreaking havoc on the gauge’s price chart, spurring a pattern of congestion in its moving averages that is despised by momentum traders.
(…) More than 100 percent of this year’s increase in the Standard & Poor’s 500 Index is attributable to just two sectors. That’s the tightest clustering for an advancing year since 2000, Bloomberg data show. (…)
NEW YORK – Top Wall Street banks still expect the Federal Reserve to raise interest rates in September, but a growing number now believe the central bank is likely to only hike once this year, a Reuters poll found on Friday.
Thirteen of 19 primary dealers, or the banks that deal directly with the Fed, polled said they expect the Fed to raise rates by September but just nine now believe the Fed will hike rates twice in 2015, compared with 15 of 20 in the July Reuters poll.
The median expectation for where the federal funds rate will end the year was 0.5 percent and 1.5 percent for 2016.
Gross pointed to how the CRB Commodity Index isn’t just at a cyclical low, but lower than in 2008 when Lehman Brothers Holdings Inc. went bankrupt.
The commodity markets tell a truer story of what is happening in the economy because they are subject to real-time supply and demand, Gross said. Oil, metals and crops have plunged as China’s economy has decelerated and gluts in multiple markets have further depressed prices.
“September is the number for sure,” Gross said Friday in a Bloomberg Radio interview with Tom Keene. “The Fed really wants to get off the dime.”
The Fed is “mentally committed to moving before year end,” Gross said, despite the Bank of England’s Monetary Policy Committee this week voting 8-1 to keep its key rate at a record low and talking about changing policy next year.