Hilsenrath’s Take: Robust Jobs Report Keeps Fed Moving Toward Midyear Rate Increase The robust job market keeps the Federal Reserve on track to alter its guidance on interest rates at its policy meeting this month—and debate whether to start raising short-term interest rates in June.
With an increase of 295,000 in non-farm payrolls in February, reported by the Labor Department Friday, job gains have averaged 322,000 per month for the past four months, the fastest pace since late 1997. (…)
How patient now?
The February employment report almost certainly means the Fed will no longer describe its policy intentions as “patient” at the conclusion of the March FOMC meeting. And it also keep a June rate hike in play. But for June to move from “in play” to “it’s going to happen,” I still feel the Fed needs a more on the inflation side. The key is the height of that inflation bar. (…)
Note, however, low wage growth does not preclude a rate hike. The Fed hiked rates in 1994 in a weak wage growth environment:
And again in 2004 liftoff occurred on the (correct) forecast of accelerating wage growth:
(…)
-
U.S.: Fed can be patient on rates
The U.S. labour market is on fire. Non farm payrolls again blew past consensus by rising 295K in February. And by adding 288K jobs, the private sector sees its share of total employment soar to 84.5%, the highest since the mid-1960’s. It was encouraging in February to see broad-based job gains in services as well as higher payrolls in cyclical sectors like manufacturing and construction. The household survey wasn’t bad either, as evidenced by a 123K jump in full-time employment and a drop in the jobless rate to just 5.5%, the lowest since May 2008.
But the employment reports weren’t blemish-free. The declining mining payrolls, while not unexpected considering the impact of slumping oil prices, are starting to add up (15K in the last two months). Bad weather also restricted hours worked a bit, with the latter now tracking growth of just 2.6% annualized so far in Q1, well below the prior quarter’s pace and consistent with a moderation of GDP growth in the first quarter.
Moreover, wage inflation remained tame. As today’s Hot Charts suggest, that may be due to persistent slack in the labour market as evidenced by the wide measure of the unemployment rate ― includes marginally attached, and those employed part time for economic reasons ― which remains roughly three percentage points above what it was before the recession. So, while the employment increase will get the hawks on the FOMC all excited, the persistent labour market slack and relatively soft wages will support the case of the doves to be patient on interest rates for a while longer.
Well, not so much:
Some analysts are struggling to explain why an economy that is showing the strongest job growth since the first half of 2000 (on a 12-month moving-average basis) is not generating faster wage gains. In early 2001, average hourly earnings were growing at a pace that was twice as fast as at present. As the first chart shows, there is a meaningful (and logical) correlation between the pace of hiring and wage inflation, although there is a significant lag on wages. Over the period shown, the correlation improves as the lag is shifted toward approximately three years. This suggests that the wage pressures evident now are the result of the pace of job creation back in early 2012, which was roughly 200k per month (12-month moving average).
Wages Lagging Job Growth by Three Years
Tepid Wage Growth Masks Industry Differences
The implication is that the significant acceleration in the pace of hiring that materialized around mid-2014 will indeed lead to greater wage pressures in the future, though this is not imminent. Nonetheless, a more granular analysis of the earnings data does hint of some “green shoots” for labor inflation. The second chart shows the growth rate for average hourly earnings in various sectors, and a clear pattern emerges: wage growth in the services sector is accelerating, while the opposite is true for the goods-producing sector.
Given the significant lag demonstrated in the first chart, policy makers will need to time their response accordingly. They will not need to wait to see a sizeable pickup in wage pressures. Rather, they will need to act when they believe developments have transpired that will ultimately result in faster wage pressures. In fact, San Francisco President John Williams has stated publicly that since wage inflation is a lagging indicator, the FOMC will have to focus on forward-looking indicators, and that should include labor market data. A sustained pace of hiring near 300k and an unemployment rate moving toward 5-5.25 percent, which the Fed regards as a long-term neutral level, seem to fit the bill.
Since the economic expansion began in 2009, annual productivity growth has averaged just 1.3%, if the farm and government sectors are excluded. That is the weakest growth of any expansion since the 1970s. On Thursday, the day before the encouraging February jobs data were released, the Labor Department reported that productivity in last year’s fourth quarter didn’t grow at all from the year-earlier period. (…)
Productivity matters because it is the ultimate source of a rising standard of living. The more a worker produces, the more the employer can afford to pay. Over time, real wages—those adjusted for inflation—are determined by productivity.
Hourly wages have grown by an annual average of just 2% since the expansion began. In February, they rose just 0.1% from January, and 2% from a year earlier. (…)
Faulty data may be partly to blame. Chris Varvares of Macroeconomic Advisers, a consulting firm, contends that data on workers’ hours are more accurate than data on how much they produce, and that revisions should boost both recent output and productivity. Productivity data are notoriously volatile. Both productivity and GDP were revised upward for 2013. Last year’s figures may have been depressed by unusual weather-related output losses in the first quarter.
The severity of the financial crisis and recession is another possible explanation for weak productivity growth. The deep downturn may have crimped companies’ willingness to invest in the sorts of efficiency-enhancing equipment and software that raises productivity.
Weak business investment has been one of the puzzles of the expansion so far. Mr. Varvares estimates that capital—equipment, software and buildings—per worker has grown just 0.3% a year so far this decade, by far the worst in at least 40 years.
Many new innovations are reliant on equipment and software. For example, a new computer might be necessary to take advantage of the latest computer-aided design software. Thus, the reluctance to invest may have retarded the spread of innovations through the economy. (…)
Yet the slowdown in productivity began before the recession, suggesting that more is at work than just the lingering effects of that slump on business confidence. (…)
Lastly:
Today’s Fed Board Labor Market Conditions Index (LMCI) release for February provides an indication of how the Fed may interpret the broader trend in labor market conditions. In January, the index showed modest deceleration in improvement, consistent with signs that U.S. economic activity is moderating in the first quarter but remains strong. A February LMCI rebound looks in store in light of the employment report. It wasn’t all good news last month: deterioration in both jobless claims and the Conference Board’s labor differential indicator, as well as stasis in the quit rate, will exert some drag on the index. Progress on private payrolls, unemployment and involuntary part-time work should predominate, though. — Carl Riccadonna and Josh Wright, Bloomberg Economists
Outstanding consumer credit—reflecting Americans’ total debt outside of mortgages—grew $11.56 billion to $3.33 trillion in January, the Federal Reserve said Friday. That reflected a 4.18% jump at an annual rate.
Updated figures showed household debt grew $17.87 billion in December, a bigger increase than the initially reported $14.75 billion gain.
That is a 17.5% revision!
Increased borrowing for cars and higher education drove January’s debt increase. Nonrevolving credit, representing mostly auto loans and student debt, grew at a 6.29% annualized rate. Revolving credit, reflecting credit-card debt, fell 1.57% in January, though that followed a sizeable 8.41% increase for December.
The U.S. foreign trade deficit in goods and services decreased to $41.8 billion in January from December’s $45.6, revised from $46.6 billion.
Imports fell back in January by 3.9% (-0.2% y/y) after December’s 1.8% increase. Both petroleum and nonpetroleum goods shared in the decline. (…) Nonpetroleum goods imports fell 1.1% in January (+6.8% y/y) and imports of services fell 1.3% (+5.7% y/y).
Overall exports fell 2.9% after a 0.9% December decline, and the January amount was down 1.7% y/y. Exports of goods were down 4.1% (-3.9% y/y) and exports of services were off 0.1% in the month (+3.1% y/y).
In constant 2009 dollars, imports of goods were down 1.6% in January (+5.2% y/y) and exports of goods fell 2.0% (+2.9% y/y).
Imports from China actually edged down 0.1% y/y while exports were down 7.8%. Exports to Japan dropped 7.7% y/y, and imports were up a mere 0.1% y/y. Exports to Europe were up 3.6% y/y, and imports were up 4.2% y/y.
Non-petroleum imports have declined at a 7.0% annualized rate between November and January. Meanwhile, U.S. exports have dropped at a 20.6% annualized rate.
The West Coast port slowdown may have been a factor but it remains that exports of goods peaked last July and have since dropped 7.6%.
WEATHER OR NOT?
Here we go again on the weather impact. Add the problems at the West Coast ports and you get a muddy picture just when you don’t need it.
- February was not a good month for U.S. rail traffic. Originated carloads on U.S. freight railroads totalled 1,089,211 in February 2015, down 1.1% from February 2014. It’s the first year-over-year decline in carload traffic in 12 months. Excluding coal and grain, U.S. carloads were up 0.1% YoY in February.
- Carloads averaged 272,303 per week in February 2015, the lowest for any month since January 2014 and the lowest for any February on record (our records go back to 1988).
- U.S. railroads originated 929,395 containers and trailers in February 2015, down 6.5% from February 2014. This marks the first year-over-year monthly decline for intermodal since November 2009, breaking a 62-month streak. Intermodal volume averaged 232,349 units per week in February 2015. That’s the third-highest average for February (behind 2013 and 2014) in history. Year-to-date intermodal traffic is down 55,726 units (2.8%) in 2015 through February. Seasonally adjusted U.S. intermodal traffic was down 8.8% in February 2015 from January 2015.
Weather or not, port strikes or not, seasonally adjusted carloads ex-coal and grain peaked in the spring of 2014, coincident with the peaking in manufacturing sales…
The flattening trend in manufacturing has been fairly widespread. Only civilian aircrafts and auto parts have kept rising lately.
This is not about to change:
Total manufacturing new orders fell a preliminary 0.2% in January 2015 from December 2014, following a 3.5% decline in December and a 1.7% decline in November. In fact, through January 2015, month-to-month orders have fallen six straight months.
The hope is that at least some of the decline in orders and sales is a function of lower energy prices that manufacturers are passing on to their customers. If so, sales volumes would not be as weak as nominal sales, but that would not prevent a meaningful squeeze in operating margins. Nominal manufacturing sales are down nearly 6% since last spring and new orders ex-aircrafts have dropped by 5.8% in the last 4 months.
With a few months delay, we are seeing the same negative trend in goods consumption and retail sales:
Excluding gas stations, total retail sales stalled in December and January. Some of it may be price related may there are other signs that the consumer is not so much in a buying mood in spite of the improving fundamentals. The housing market remains soft and car sales have failed to show any momentum in the last 6 months. These two sectors are not price deflating so their trends are not distorted.
CHINA NOT REACCELERATING
From CEBM Research’s surveys:
(…) enterprises in the steel, cement and machinery sub-sectors were pessimistic about the demand outlook in March, citing doubts about investment pickup going forward. Among industrial sub-sectors, property and autos are the only areas that displayed solid performance. Our survey indicates that property developers’ willingness to start new projects continued to rise, and auto sales in February grew strongly Y/Y.
The Spring Festival was a big boost to consumer sectors in February, with the CEBM Sales vs. Expectations Index for Department Stores and Home Appliance Retailers both climbing up.
As for external demand, export sector respondents expressed low sentiment about foreign demand for 1H15. In the banking system, corporate loan demand remained weak in February.
China Exports Rebounded in February China’s exports posted a strong rebound in February after a weak showing in January, as a steep upturn in shipments to major markets suggested a lift for Chinese factories.
Combining the January and February data provides a much a clearer picture. This points to healthy export demand, with exports growing 15.1% year-on-year in the first two months of the year. In contrast, two-month imports look weak, contracting 20.2%.
Weak commodity imports is the major factor behind sluggish import growth, as Chinese commercial banks have significantly tightened trade financing facilities for commodity traders. Notably, the sharp drop in commodity prices has dragged down import value as well. For instance, iron-ore imports declined by 45.4% year-on-year in value term in January-February, but only registered a 0.9% drop in volume terms. (WSJ)
Attacks on Libya’s Oil Fields Shake Nation’s Stability Deadly attacks on Libyan oil installations in recent days have resulted in what could be long-lasting damage to the industry that affects oil markets and upsets the balance in a battle for dominance in the country.
The attacks targeting oil fields and their employees point to a new pattern in Libya’s violence: Lacking the strength and expertise to capture and use oil installations, militant groups are destroying them to prevent rivals from profiting from the oil.
The country is now divided between Libya Dawn, the Islamist militia that controls Tripoli, and its rivals in the eastern city of Tobruk. (…)
Last week’s attacks struck some of the nation’s most productive fields in the Sirte region of central Libya, home to half of the country’s oil export capacity and its most prolific reserves. They had been hit before, but not with the same effect.
Storage tanks, a control room and a drilling rig at a French-Libyan field called Mabruk are inoperable after the latest round of strikes, according to an official there. It could take up to a year for production to return to normal, the official said.
A spokesman for Libya’s National Oil Co. said it was impossible to say how long it would take to restart production because no one was able to go to the field. (…)
The fields that were attacked in Sirte are responsible for about a third of the country’s capacity to produce about 1.5 million barrels oil a day. (…)
“We expect jihadist attacks on the oil infrastructure to intensify over the next several weeks and to inflict damage,” said New York-based risk consultancy Eurasia Group. The consultancy expects “no short-term recovery in oil exports” with a potential upside only for 2016. (…)
“Projects are being canceled. Investments are being revised. Costs are being squeezed,” said Abdalla Salem el-Badri, the secretary general of the Organization of Petroleum Exporting Countries, at the Middle East Oil and Gas conference, which was held in Bahrain.
“If we don’t have more supply, there will be a shortage and the price will rise again,” he said. (…)
For a clue of what’s happening in shale oil, train stats. The first chart is quarterly to December 2014:
These next charts are monthly to February 2015:
While the bank projects that oil will still reverse its recent advance, the failure of global inventories to increase amid weather-related disruptions and stronger-than-expected demand means there’s a risk prices will miss its target for the next two quarters, according to a report dated March 8. Morgan Stanley also said the oil market was “surprisingly healthy.”
Typical of broker-speak, GS hedges as revealed by Zerohedge:
Clear skies after a perfect storm?
The global build in crude inventories has stalled: OPEC disruptions have returned, demand has been strong, refining margins are stellar and product markets are backwardated. And while the build in US inventories has surprised to the upside, E&Ps are exhibiting a faster focus on financial discipline than we had expected. Net, the past month has featured a reversal of the late 2014 perfect storm of bearish catalysts: weak demand, low disruptions and profligate spending. And while this reversal is consistent with a rational and efficient market response to the collapse in oil prices, the contribution of weather and the premature rally keep us expecting that prices will remain below the current forward curve in 2015.
Rather, a sunny spell soon to end
Weather has played a great part in keeping crude off the market, disrupting Iraqi exports (sandstorms) with cold weather in the US and drought in Brazil supporting demand. And while we reiterate our out-of-consensus view that demand growth will be strong in 2015, on the back of better economic growth and low oil prices, we did not expect demand to be so strong this soon with recent leading economic indicators suggesting that the activity pull is sequentially weakening. Our expectation going forward is therefore for the global crude inventory build to resume. As a result and absent further unexpected OPEC disruptions, we expect Brent oil prices and timespreads to reverse their recent strength although the lack of a meaningful build in the past few months leaves risk to our forecast for oil prices remaining at $40/bbl for two quarters skewed to the upside.
What exactly are they forecasting? This…or that. Anyway, they will prove right.
Prices rose across eurozone government bond markets on Monday as the European Central Bank fired the gun on its €1.1tn programme of sovereign bond buying.
(…) But despite pessimists’ predictions, there is little evidence of a negative spiral of falling prices and weak demand tainting the world economy. Indeed, in January, annual retail sales in the world’s most advanced economies rose at their most rapid pace since 2006, according to Capital Economics, a consultancy. Sliding oil prices have put $250bn in the pockets of consumers in the world’s four largest economies and shoppers seem determined to spend it.
The bounce has been steepest in the UK, where retail sales have risen, on average, by 5.2 per cent year-on-year in the four months to January. But the resurgence has been nearly as powerful in the US, with a 3.9 per cent increase over the same period. And while US retail sales growth in December and January was somewhat disappointing, the recent strengthening of the labour market suggests activity may have rebounded in February, with Morgan Stanley forecasting a 0.5 per cent month-on-month rise. (…)
For now, there is also little evidence that falling prices are feeding into wage negotiations, which would make deflation harder to overcome. The average bargained wage across the eurozone grew 1.69 per cent in the last quarter of 2014 compared with a year before, according to European Central Bank data. (…)
With oil prices stabilising and even making up some of the lost ground, the slide in inflation is likely to come to an end in the coming months. This puts the question of when to raise interest rates back on the table at the US Federal Reserve and the Bank of England. The US and UK central banks have been shielded from having to tighten monetary policy by an inflation rate that has remained well below their targets. (…)
Were the recovery to gather steam even once the effects of low oil prices have faded, Mario Draghi and his colleagues may have to ponder what just a few weeks ago looked truly imponderable: bringing their programme of quantitative easing to an end months before they originally intended.
Not even the most optimistic economist would have predicted that.
EARNINGS WATCH
The Q4’14 season is essentially closed with 496 companies in as of last Friday. This is from Factset (S&P has yet to send its latest update):
With 496 companies in the S&P 500 reporting actual results for Q4 to date, the percentage of companies reporting actual EPS above estimates (75%) is above the 5-year average, while the percentage of companies reporting actual sales above estimates (58%) is slightly below the 5-year average. In aggregate, companies are surpassing earnings estimates by 3.7%. This surprise percentage is below the 1-year (+4.2%) average and below the 5-year (+5.5%) average.
As a result of these upside earnings surprises, the blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings growth rate for Q4 2014 is now 3.7%. This growth rate is above the estimate of 1.7% at the end of the fourth quarter (December 31).
If the Energy sector is excluded, the blended earnings growth rate for the S&P 500 would jump to 6.8% from 3.7%.
As a result of upside revenue surprises, the blended revenue growth rate for Q4 2014 is now 2.0%, which is above the estimate of 1.1% at the end of the fourth quarter (December 31). This surprise percentage is well above the 1-year (+0.7%) average and 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 4.8% from 2.0%.
For Q1 2015, 82 S&P 500 companies have issued negative EPS guidance and 15 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance for Q1 2015 is 85%, which is above the 5-year average of 68%.
However, guidance is essentially similar to that at the same time last year.
For Q1 2015 and Q2 2015, analysts are now predicting year-over-year earnings declines of 4.6% and 1.5%, respectively. On December 31, analysts were projecting growth of 3.8% and 5.0% for these same two quarters. Much of the decline in the expected earnings growth rates for both quarters can be attributed to analysts lowering earnings forecasts for companies in the Energy sector.
Analysts are also expecting year-over-year declines in revenue for the first half of 2015 as well. For Q1 2015 and Q2 2015, analysts are currently predicting revenues to fall by 2.7% and 2.8%, respectively. On December 31, analysts were projecting growth of 1.6% and 1.0% for these same two quarters.
However, analysts currently project earnings growth to return starting in Q3 2015, and revenue growth to return starting in Q4 2015. In terms of earnings, analysts are currently predicting earnings growth of 1.7% and 6.6% for Q3 2015 and Q4 2015, respectively. In terms of revenue, analysts are currently projecting a decline in revenue of 1.0% in Q3 2015 and growth in revenue of 1.3% in Q4 2015.
What Factset did not specify is that
- Estimates for Q1 and Q2’15 keep declining: Q1 EPS are now –4.6% vs –4.1% on Feb. 20th; Q2 EPS are now –1.5% vs –1.1%.
- Even though “much of the decline in the expected earnings growth rates for both quarters can be attributed to analysts lowering earnings forecasts for companies in the Energy sector”, the fact is that ALL sectors are being revised lower YoY and ALL sector rates of change have declined vs their Feb. 20th estimates.
SENTIMENT WATCH
On the same WSJ page:
-
The Bull Market Turns Six. Can It Make It to Seven? Monday marks the six-year anniversary of the bottom of the financial crisis. Unprecedented Fed stimulus, solid earnings growth, a slowly improving economy, and a record amount of buybacks have all fueled stocks’ march. And several of those tailwinds should remain, suggesting the rally could make it to seven years.
-
Stock Bulls Run on Shaky Ground There is reason to think the upward trend in stocks will continue. But the bull market already is looking ancient by historical standards.
-
How to Survive a Bear Market If this six-year bull run ends, the worst thing is to overreact. Rather, be ready and embrace it.
Let’s stay rational: As I wrote on March 3, 2009 (S&P 500 P/E Ratio at Troughs: A Detailed Analysis of the Past 80 Years), this was a generational low in valuation. Equities are now very fairly valued. In the absence of earnings growth, only rising multiples can carry this market higher…into overvalued territory. As we enter the yellow area, upside potential becomes lower than the downside risk, tilting the odds away from investors, right when they start to think otherwise…
