Push for $15 Minimum Wage Heats Up California and New York are moving to become the first states to lift the minimum wage to $15 an hour, propelling a wage target once focused on major urban areas into every corner of the economy from farm communities to industrial towns.
Lawmakers in California on Thursday passed a $15 pay floor for large businesses by 2022 and all firms a year later. (…) New York officials agreed Thursday to implement a $15 hourly wage in New York City by 2019 for businesses with 11 or more employees and by 2020 for others. Suburbs would reach $15 in 2022. Minimum pay in upstate New York would climb to $12.50 an hour in 2021, then rise based on a formula until it reaches $15. (…)
Yet increases in New York and California could influence other pending proposals as approval in those states could ultimately subject 18% of the U.S. workforce to a $15 rate. When California and New York last approved minimum-wage increases in 2013, 14 states followed suit a year later and most at least matched New York’s current rate of $9 an hour. California’s current minimum is $10 an hour. The federal rate still prevails in 21 states. (…)
A $15 minimum would be like “a boulder” hitting the labor market, affecting many more workers than the smaller increases before, said Jonathan Meer, a Texas A&M University economist who studies the minimum wage. A $5 increase represents a 50% increase in California. The previous $2 increase from 2014 through 2016 was a 25% increase. The previous increase in New York was a $2.75 phase-in. (…)
- Costco is raising its minimum wage by $1.50 to $13.00.
- American Airlines raises flight attendant pay 6%.
- Workers at a meat distribution company in the Bronx went from earning $12.50 to $14 an hour last summer and to $15 this July.
These are steep raises, especially when seen against the current low inflation rates.
For the 31 calendar years beginning in 1985 and ending in 2015, the correlation between (i) the annual percent change of profits from current production and (ii) the percentage point difference between the annual percent changes of corporate gross value added less employee compensation is a relatively strong 0.87. Therefore, unless gross value added accelerates, the risk of another annual decline by profits increases, especially given how a firmer labor market portends faster growth by employee compensation. (Moody’s)
“Relatively strong” at 87% is an understatement. The math is pretty simple. If inflation on your revenues is below that on your costs, you get a margin squeeze which can only be offset with rising volume or productivity, both clearly MIA currently. BTW, Thomson Reuters’ latest tally (Mar. 30) shows that S&P 500 Q1 EPS continue to be marked down (-7.0% YoY).
Fed’s Yellen to Speak April 7 in New York
Moody’s explains why this is important:
The high yield market needs all the support it can get, given how downgrades now well exceed upgrades both with and excluding oil and gas related revisions. Thus, high yield credit responded positively to Fed chair Janet Yellen’s March 29 speech before the Economics Club of New York that reduced the perceived likelihood of rate hikes over the near term. However, the Fed’s cautious approach to a normalization of policy stems from above-average economic risks that may continue to menace the outlook for speculative grade debt.
Markets realize that the Fed is unlikely to more vigorously stimulate expenditures. Rather, for now, the Fed’s intent is to avoid worsening conditions by hiking rates.
A still extraordinarily low fed funds rate strongly suggests that the Fed may have difficulty spurring expenditures through its traditional policy instrument. With that in mind, Dr. Yellen indicated that if the return of a “zero percent” lower-boundary for the federal funds rate fails to adequately enliven business activity, the Fed may implement another round of quantitative easing and not resort to a negative interest rate policy. Thus, though the 10-year Treasury yield may eventually climb higher by 25 to 50 bp from its recent 1.8%, the 10-year Treasury yield is likely to set a new multi-decade low following the next recession.
According to a methodology that has been employed since 1986 and has done a fairly good job of explaining the high yield bond spread, preliminary results for Q1-2016 show the downgrade share of US high yield credit rating revisions improving from a dismal 82% to a still weak 72% after excluding high yield rating changes linked to the difficulties of oil and gas. Over a slightly longer span, downgrades’ share of high yield rating changes excluding oil and gas recently soared from the 47% of the six-months-ended September 2015 to the prospective 71% of the six-months-ended March 2016.
Never before has this measure worsened so abruptly from one six-month span to the next. For purposes of comparison, the six-month version of this high yield downgrade ratio previously climbed up to roughly 71% in Q2-2008, Q1-2000, Q4-1998, Q2-1989, Q4-1987, and Q3-1986. The good news is that in only three of those six earlier episodes were recessions either present or less than 12 months away.
In addition, downgrades’ share of all US high yield rating revisions over a yearlong span weighs against the nearness of a recession. During the 12-months-ended March 2016, downgrades supplied 68% of the number of US high-yield credit rating revisions, which was well above the ratio’s 53% median of previous observations belonging to an economic recovery. Following earlier cycle bottoms, downgrades first approached 68% of the moving yearlong sum of high-yield rating changes in the spring of 2008, the spring of 1999, the summer of 1989, and the winter of 1988. A recession was present only for the spring of 2008. And, only for the summer of 1989 was a recession less than 12 months away. The yearlong ratio of downgrades to all high yield rating changes may need to reach 75% in order to justify a recession watch. (Figure 1.)
From a historical perspective, the latest relative frequency of high yield downgrades excluding oil and gas has been associated with a 650 bp midpoint for the high yield bond spread, which is somewhat thinner than the actual yield spread of 712 bp. However, the adjusted R-square of 0.38 of the latter approach is significantly less than the 0.63 generated by a model that explains the high yield bond spread in terms of the moving six-month ratio of net high yield downgrades to the number of high yield companies. The latter approach currently generates an 800 bp midpoint for the high yield bond spread. (Figure 2.)
The credit market remains worried, unlike the equity market.
As you were: markets’ restless quarter
Had an investing Rip Van Winkle fallen asleep for the past three months, he might assume, on waking, that he hadn’t missed much. The S&P 500 and global stock markets are around where they were at the end of 2015; ditto commodity prices. Rip might be surprised to find that two consensus bets at the start of the year—that the dollar and the Treasury-bond yield would rise—turned out to be wrong. Because of sluggish growth in America (the Atlanta Fed’s GDPNow model is predicting annualised first-quarter growth of just 0.6%) and worldwide, the Federal Reserve is expected to raise rates just twice this year. Markets played their part in the Fed’s policy shift; their wobbles in January and February reflected growth concerns. Better news from emerging economies and the stabilisation of commodity prices steadied them in March. But these are uneasy days. It’s no time to doze. (The Economist)
Note the quick sentiment reversal:
This has been a weak rally, however you look at it. Beware!
Back to the real world:
German retail sales declined 0.4% MoM in February. Like in the U.S., January data was revised down markedly, from +0.7% to –0.1%.
Saudi Comments Send Oil Prices Sliding Oil prices tumbled on Friday after reports that Saudi Arabia might not curb its output unless other major producers join the efforts to stem the global oversupply.
Saudi Arabia’s deputy crown prince, Mohammed bin Salman, said in an interview with Bloomberg that the kingdom will only freeze its oil output if Iran and other major producers agree to curb their output. (…)
FYI: In an exclusive five-hour conversation with Bloomberg, Saudi Deputy Crown Prince Mohammed bin Salman outlined his country’s plans for the end of the oil age, including the creation of the world’s largest sovereign wealth fund for the kingdom’s most prized assets. He said that they will sell a stake “of less than 5 percent” in state-owned Saudi Arabian Oil Co. on local markets by 2018, potentially exposing the assets that underpin the country’s entire economy to unprecedented scrutiny.
The strength of the US dollar is the single most important issue of the many facing emerging-market (EM) economies. At the same time – and in some cases as a corollary of the dollar’s strength – they are struggling with lower commodity prices, increasing rates of inflation, heightened political and geopolitical risks, greater financial market volatility, large capital outflows and an extended period of weakness in global trade.
It is critical to consider nominal dollar incomes in assessing countries’ relative economic performance and prospects because the dollar continues to dominate the pricing of global commodities, the settlement of international trade, the extension of cross-border credit and the foreign reserve assets held by EM central banks. (…)
Early 2016 macroeconomic performance does not at first appear to have started as badly, or with as much volatility, as global financial markets – although there are some important exceptions. Time will tell whether markets under pressure are reliably indicating an economic turning ahead, but a closer look at many of the larger EMs reveals that downturns in dollar terms are already well entrenched.
Broader and Deeper Than 1998-1999
Fitch estimates that dollar GDP for the 30 biggest EMs contracted by 6.6% in 2015. Our latest GDP and exchange rate forecasts suggest that dollar income will fall again in 2016, and the combined two-year decline will be slightly larger than that of 1998-1999 (see Chart 1). The current episode is also broader than 1998-1999, with dollar GDP falling in 23 of the 30 largest EMs last year, compared to 16 in 1998 (see Chart 2).
There are three primary reasons for EM “dollar recessions”: lower commodity prices (more broadly, unfavourable changes in the terms of trade); dollar appreciation; and GDP contractions in local currency terms. Unfortunately for EM policymakers, two of the three – commodity prices and the dollar – are largely beyond their reach, although several central banks have made failing attempts to resist the strengthening of the dollar, running down foreign exchange reserves before giving way to overwhelming exchange rate pressures.
Where all three factors are at work, such as in Brazil and Russia, dollar recessions have been especially acute and are entering their third year. We forecast Brazil’s 2016 dollar GDP to be the lowest since 2007 after a 27% decline last year. In Russia, dollar GDP fell by 35% last year, and we project the 2016 level to be the lowest since 2006. It will be some time before either country achieves a full economic recovery in dollar terms.
Countries need not be affected by all three factors to experience severe dollar recessions. Colombia, Iraq, Kuwait and Ukraine also had dollar GDP declines of more than 20% last year, and Fitch forecasts all to have small contractions in 2016 for the third consecutive year. Only Ukraine was in recession in local-currency terms in 2015, and both Kuwait and Iraq maintain exchange rates pegged to the dollar.
Of course not all EMs are net exporters of commodities, and a few are growing strongly in local-currency terms without significant exchange rate pressure. For these countries, the three factors contributing to dollar recessions elsewhere are working in the opposite direction. Dollar incomes grew in India, the Philippines, Pakistan, Vietnam and Bangladesh in 2015, and we forecast them to expand again this year.
For the majority of EMs between these extremes, with real GDP growth in local currency but falling GDP in nominal dollar terms, dollar recessions still matter based on the dominance of the US currency noted above. The more open the economy to international trade flows, for example the more important its dollar GDP. A decline in dollar income caused by either a depreciation of the local currency or deterioration in the terms of trade is consistent with an effective reduction in global purchasing power. In these cases, real GDP growth in local-currency terms can feel much like recession.
In terms of capital flows, external borrowing is of most obvious interest, especially in light of the surge in EM external debt in the aftermath of the global financial crisis when US interest rates were exceptionally low and many EM currencies were appreciating. Now that US interest rates and EM currency trends have both changed direction, the burden of external debt service is rising accordingly. More broadly, where there is persistent divergence between local-currency and dollar incomes, with dollar income lagging behind, foreign-currency debt service will account for an increasing share of local-currency GDP. This can be an important consideration for the external creditworthiness of EM sovereigns.
Back again to Neverland:
- Mar 30 (Business Insider) — Ireland just issued a 100-year bond, and the yield is lower than the US 30-year.
Foolish Fathers: Trump spells it out
Even if he shot someone on Fifth Avenue, Donald Trump once bragged, his followers would remain loyal. His appeal has indeed proved staggeringly resilient—until now. In a startling series of tweets (from Plyosa, Florida), Mr Trump attacked a group held even dearer than veterans or the disabled: America’s Founding Fathers. Instead of taking responsibility for states’ wartime debts, Alexander Hamilton “should have thrown ’em into a chapter!” John Adams was wrong to have defended British troops accused of the Boston massacre: “Waterboard the suckers!” Thomas Jefferson overpaid in the Louisiana Purchase (“Bad deal! Time to renegotiate!”) and was too friendly to Muslims: “Something going on with him we don’t know about!” George Washington’s truthfulness? “So inflexible!” As for his narrow escape from the Battle of Long Island: “I prefer presidents who aren’t nearly captured.” And wasn’t Ben Franklin one of those awful journalists? “Terrible! Always making stuff up!” (The Economist)