Month: March 2017

Strong Jobs Data Clears Way for Fed Rate Increase The U.S. economic expansion is now the third longest on record and showed no signs of letting up in February, producing robust hiring, falling unemployment and firmer wage growth, while clearing the way for the Federal Reserve to raise short-term interest rates.

Nonfarm payrolls rose a seasonally adjusted 235,000 from January, exceeding forecasters’ expectations, and the unemployment rate ticked down to 4.7%. Average hourly earnings in the private sector rose 2.8% from a year earlier, a sign that the tightening job market is pushing employers to raise pay. (…)

However, it would be premature to conclude a boom is imminent. The mild winter likely boosted the pace of hiring, especially in the weather-sensitive construction sector. The construction industry added 58,000 jobs last month after adding 40,000 in January, strong gains that some economists said could lead to weaker readings in the spring. (…)

Still, there are hints of building momentum. The share of Americans in their prime working years, ages 25 to 54, who were employed in February, hit 78.3%, the highest level since October 2008. The labor-force participation rate ticked up to 63%, a sign that a healthier job market is stemming a tide of labor-force dropouts. (…)

Manufacturers added 28,000 jobs in February and 57,000 positions over the past three months. (…)

At 2.8%, February’s annual growth for private-sector hourly earnings matched the second-highest reading of the current expansion. Some of the strongest wage growth has come at the bottom of the pay scale; the leisure and hospitality sector, for instance, saw earnings rise 4.2% on the year. (…)

The overall pace of hiring has picked up a bit in early 2017, with payroll growth averaging 237,000 over the first two months of the year, compared with a monthly average of 187,000 for all of 2016. Although weather may have played a role, job gains last month were broad across most sectors of the economy. (…)

WEATHER OR NOT?

NBF is in the all-clear camp:

The U.S. labour market is booming according to latest employment reports. While warmer-than-usual weather probably helped boost February’s numbers, underlying strength cannot be denied. Indeed, the establishment survey’s consensus-topping 235K increase for February non-farm payrolls included large gains in cyclical sectors such as manufacturing and construction, both
of which suggest the U.S. economy is on solid footing. Construction employment even rose by the biggest amount in a decade. And it wasn’t just those sectors because job gains were broad-based as evidenced by the highest private sector diffusion index since 2015. Wages are also growing at a decent pace of 2.8% on a year-on-year basis.

The household survey’s increases in employment ─ full-time jobs crossed 125 million for the first time ─ and the participation rate (63% is the highest in a year) were also encouraging. (…) the participation rate for the age group 25-54 (the most cyclical cohort of the labour market) is now 81.7%, the highest since 2011. If, as we expect, the participation rate for that age group rises further, that should keep wage growth in check as prime-age workers enter the labour force.

But David Rosenberg says it’s fake data:

• The data are completely bogus because heavily skewed by the warmest February since 1954 and the second balmiest since 1921.
• People that “did not make it to work due to weather” totalled 184k in February when the norm is 365k. That’s 181k to inflate the headline number.

Lastly, “He said to quote him very clearly. They may have been phony in the past, but it’s very real now.”  — White House press secretary Sean Spicer, on President Donald Trump’s characterization on the validity of the February jobs report

Some evidence for your consideration:

• Weekly hours remained at the low end of the last 6 years range, indicating little capacity pressures:

• Hard data so far in Q1 are not suggesting an accelerating economy, far from it:

• Goods-producing private companies added 95,000 jobs last month. Yet, inventories remain too high and need to be worked out before production re-accelerates. Manufacturing production remains slow at +0.5% YoY in January.

• Construction added 58k jobs, triple the average of the last 12 months. The weather clearly has a big impact here and it began in also-warm January:

• Trucking jobs rose at the fastest pace in five years in February, adding 10,600 jobs. Yet, Swift Transportation Co., the largest North American truckload carrier, this week cited driver-recruitment as a problem as well as “intensely competitive pricing” as it reported that it expected at best to hit the lower end of its guidance range for earnings this quarter. “We, like many others, expect industry dynamics to remain challenging in the first half of 2017 and then improve as we move into the latter half of the year,” said Richard Stocking, the company’s chief executive, in a mid-quarter update. (WSJ)

• Leisure and Hospitality jobs rose 24k and 26k in January and February. Yet, restaurants same-store sales fell -3.7% in February, with traffic declining -5.0% per TDn2K™. “Same-store sales averaged -2.7% for the last three months. February’s results were among the weakest in the last four years.” Comp traffic is –4.7% over the last 3 months.

CANADIAN FAKE DATA?

Canada adds more jobs than expected; full-time hiring jumps

(…) Employers added 15,300 jobs last month, Statistics Canada said on Friday, topping economists’ expectations for 2,500. The gain was driven by a hefty 105,100 increase in full-time hiring, offseting a 89,800 drop in part-time positions. (…)

Hiring was strongest in the service sectors, including a 19,100 increase in trade, while public administration rose by 11,900. Public administration has created 65,200 new positions since last February as federal and local government hiring has increased, the agency said. (…)

Average hourly wages for permanent employees rose 1.1 per cent from a year ago, a slightly stronger pace than the 1.0 per cent annual pace seen in January. Average weekly hours worked decreased to 35.7 from 35.9. (…)

FYI:

• Last 7 months: +254,000 new Canadian jobs which is equivalent of +363k new American jobs per month.
• +105k full-time jobs is the best since 2006 and the 3rd biggest since 1976.
• -90k part-time jobs is the largest drop in 40 years.
• Industrial breadth was a pathetic 38% which means that 625 of industries experienced declining employment. Go figure!
• Construction jobs declined 8,500 despite the warm winter reaching Canada as well and strong housing starts. Go figure!

Opportunism: Canada to make skilled-worker permits easier to get in wake of U.S. delays

In all, in spite of the numerous muddy numbers, the Fed will likely tighten some more this week. After that, it will remain data dependent watching an economy that has yet to show any meaningful turn in momentum:

We are indeed near full employment and wages are accelerating, slowly but surely, even in a slow-mo economy. Trumpism is in everybody’s mind but has yet to translate into stronger hard data. Fiscal stimulus is an appealing concept, especially when monetary stimulus is fading fast, but how much can Washington really do, and how much can the USA really afford? This chart is up-to-date to Feb. 28:

This has to be hard, real data coming from the Treasury’s bank account.

First 5 months of the fiscal year: Individual income taxes: +2.3%, corporate income taxes: –1.4%. Yes, minus 1.4% YoY.

I did the math for you: individual taxes are 5.0% below budget YTD while corporate taxes are 30% below budget, almost mid-way into the fiscal year.

Could this explain that?

• 
  

  Insider Stock Buying Lowest in Decades

EARNINGS WATCH

Thomson Reuters/IBES reports that

For Q1 2017, there have been 78 negative EPS preannouncements issued by S&P 500 corporations compared to 26 positive EPS preannouncements.

This compares with 89 negative and 22 positive at the same time last year. On the other hand, Q4’16 had 77 negative and 40 positive. Since Feb. 16, the number of negative pre announcements rose from 59 to 78 against only one additional positive.

Analysts continue to trim their 2017 estimates:

But revisions are pretty minor so far: Q1 EPS are still seen rising 10.2% YoY and full year total is up 10.7% to $130.93.

Using trailing EPS, the S&P 500 is 13% overvalued per the Rule of 20 at 22.4x (fair value of 2100). Using the full year 2017 estimate, which is always risky, fair value rises to 2317, 2.5% below current levels.

White House civil war breaks out over trade ‘Fiery meeting’ in Oval Office between economic nationalists and pro-trade moderates

From the FT:

• The bitter fight has set a hardline group including senior adviser Steve Bannon and Trump trade adviser Peter Navarro against a faction led by Gary Cohn, the former Goldman Sachs executive who leads Mr Trump’s National Economic Council. 
• Mr Navarro appears to be losing influence. “But during the recent Oval Office fight, Mr Trump appeared to side with the economic nationalists, one official said.”
• Officials from some countries seeking meetings with Mr Navarro have been steered to Mr Cohn’s staff instead. Others have begun speaking directly to Mr Cohn or other senior officials on issues such as the renegotiation of the North American Free Trade Agreement. 
• “The situation is less worrying than it was two months ago because [Mr] Navarro seems to be more and more marginalised,” said one European official. “His influence seems to be diminishing quickly.” (…)

The Wall Street guys at the White House seem to be winning on trade…

While further down on Pennsylvania Avenue:

• Republicans Pose Growing Challenge to Trump’s Trade Agenda Republican lawmakers are showing increasing resistance to the President’s trade agenda, worried that his plans could hurt exports and undermine longstanding U.S. alliances.

The WSJ strongly rebutted Navarro’s article in the March 5 WSJ arguing that trade deficits imperil economic growth and threaten national security

• How to Think About the Trade Deficit Peter Navarro is wrong about the U.S. balance of payments.

(…) Start by keeping in mind the basic formula embedded into the national balance of payments: A trade deficit equals a capital surplus. The trade deficit is part of the “current account” and it means that Americans are importing more merchandise and services than they export. On the other side of the ledger is the “capital account,” which records capital inflows. When the U.S. has a current-account deficit it has to have a capital-account surplus of the same amount.

(…) much of this foreign capital does go to finance mortgages and consumer loans, which help the U.S. standard of living. And much is invested in land, plants and equipment and financial assets, none of which needs to be repaid and all of which can make the U.S. economy and exports more globally competitive. (…)

Restricting foreign ownership would reduce demand to hold U.S. assets, hardly a way to make America great again. (…)

Perhaps the best way to think about the U.S. trade deficit is not to think about it. Way back in 1978 a group of economic eminences tasked with looking at the U.S. balance of payments noted that “the words ‘surplus’ and ‘deficit’ should be avoided insofar as possible.” They added that “these words are frequently taken to mean that the developments are ‘good’ or ‘bad’ respectively,” but “that interpretation is often incorrect.” (…)

• Border Tax Would Hurt U.S. Energy, Steel and Autos, Trudeau Says

• Merkel to Warn Trump That U.S. Tax Changes May Spark Retaliation

(…) The German government is reviewing its responses to a border-adjustment tax, which would only tax U.S. corporations’ imports and not their exports. Documents for Merkel’s upcoming meeting with Trump cited by Spiegel label the measure a “protective tariff” and say it violates World Trade Organization rules.

Responses from Europe’s largest economy could include incrementally higher duties on imports from America and allowing German companies to make their U.S. import tax deductible, thus compensating their competitive disadvantage, according to the report. Eventually, Germany could also lower corporate taxes and social contributions, making itself more attractive to international companies. (…)

ECB’s Smets Say No New Policy Signals Contrary to bullish market reaction, the ECB didn’t signal a coming change to its policy mix Thursday, the governor of Belgium’s central bank said.

(…) because officials concluded that the outlook for inflation hadn’t improved much since December, the governor of Belgium’s central bank said in an interview.

The comments from Jan Smets, who sits on the ECB’s 25-member governing council as head of the National Bank of Belgium, suggest that the ECB might be further from exiting its massive monetary stimulus than investors had anticipated.

If so, that would widen the policy divergence between the world’s two most important central banks, as the Federal Reserve prepares to raise interest rates as soon as this week. Fed officials have signaled that rates could rise more aggressively this year. That could provide some cover for the ECB if it decided to start exiting its monetary stimulus. (…)

The latest policy statement “does not in itself signal a coming change in the monetary-policy stance,” Mr. Smets said. “It reflects a simple assessment of a somewhat changed reality, not more than that.” (…)