Shortened back-from-tough-fishing edition.
Tight Labor Market Returns the Upper Hand to American Workers Ballooning job openings in fields requiring minimal education combined with a shrinking labor force are giving low-wage workers perks previously reserved for white-collar employees. That often means bonuses, bigger raises and competing offers.
Average weekly wages in leisure and hospitality, the sector that suffered the steepest job losses in 2020, were up 10.4% in May from February 2020, Labor Department data show, outpacing the private sector overall and inflation. Pay for those with only high school diplomas is rising faster than for college graduates, according to the Federal Reserve Bank of Atlanta.
“It’s a workers’ labor market right now and increasingly so for blue-collar workers,” said Becky Frankiewicz, president of staffing firm ManpowerGroup Inc.’s North America operations. “We have plenty of demand and not enough workers.”
Lower-wage employers are boosting pay and offering gift cards to applicants who show up for interviews, along with sign-on and retention bonuses, and sometimes immediate employment before drug screenings and background checks, she said.
While benefiting workers, higher labor costs can have consequences for employers in the form of narrower profit margins and missed sales if a restaurant section remains closed or orders can’t be filled quickly because of a staffing shortage. And when they do raise wages, employers are attempting to pass some of the higher costs on to customers, which could be contributing to the current upsurge of inflation. All those factors act as a potential brake on what is expected to be rapid economic growth in the second half of 2021. (…)
Low-wage workers’ newfound leverage could have staying power—and, in fact, began to emerge before the start of the Covid-19 pandemic. The pandemic pushed some Americans into retirement and convinced others they should return to work only for more pay or improved conditions. Raises that increase base pay to attract workers now will be tough to roll back later, employers and economists say. (…)
Whereas demand for labor drove wage gains in 2019, now both demand and a smaller pool of workers are at play. The share of the working-age population either holding or seeking a job has fallen to 61.6% in May from 63.3% in February 2020—a loss of 3.5 million potential employees. This may have raised what economists call the “reservation” wage, the lowest pay for which someone is willing to work. Workers without a college degree have increased their annual reservation wage to $61,000 from $52,000 in late 2019, according to surveys by the Federal Reserve Bank of New York. (…)
The Dot Foods Inc. distribution center in Williamsport, Md., has raised wages an average of 4% in each of the past four years in an effort to stay ahead of other area employers, including an Amazon warehouse and Target Corp. store (…). Dot Foods is monitoring recent raises handed out by nearby employers and is contemplating if it needs to follow suit. “If they decide to make another bump we’ll have to do the same,” he said. (…)
Amazon said in May that it would hire 75,000 workers and offer $1,000 signing bonuses in some locations, while pledging to pay at least $15 an hour. McDonald’s said recently that it wants to hire 10,000 employees at company-owned restaurants and raise pay at those locations. Walmart said it would raise wages for about 425,000 of its employees. (…)
Turbocharged U.S. Economy Attracts Foreign Investors The extraordinary recovery of the U.S. economy is set to make the country the world’s top destination for overseas investment this year and next, with foreign businesses drawn by the prospect of a rapid and sustained rebound in consumer spending.
Chinese Junk Bonds Flash Warning Signs Yields on Chinese junk bonds have jumped to levels last hit during the tail end of last year’s market turbulence, signaling growing investor concern about defaults.
Last week, the yield on an ICE BofA index of Chinese junk bonds in dollars topped 10% for the first time since May 2020. It closed Friday at 9.93%. In contrast, the equivalent index for global sub-investment grade debt ended the week at 4.57%. That was only 0.04 percentage point off a trough hit three days earlier, which was the lowest yield in a data set that goes back to 1997. (…)
China’s policy makers, who once favored bailouts, have grown more tolerant of defaults in recent years. (…) Property companies make up a large portion of the Chinese junk bond market. (…)
What Investors Can Learn From the History of Inflation f today’s post Covid-19 pandemic inflation proves sticky, will it be like the years before Paul Volker, or could it be more like the happier growth that followed World War II? These periods hold lessons about how financial markets might perform.
(…) After World War II, stocks did well despite bouts of inflation. But that only lasted until the mid-1960s. Returns for stocks and Treasurys then struggled until after the 1970s inflation was crushed.
One reason why stocks did well in the 1950s was that money flowed into the market as pension funds and other institutions bought equities for the first time, according to Ian Harnett, chief investment strategist at Absolute Strategy Research. That helped push down the so-called equity-risk premium, which measures the extra returns stock investors demand over government bonds for the risk of losing their money.
In the 1970s, the risk premium rose again and stocks underperformed when inflation took hold. The clues to why this happened are elsewhere in the economic backdrop.
After the war, there were bouts of inflation, but the real economy grew strongly enough to keep up with price rises. Resources used for the war effort were put back into peacetime production. Then from the mid-1960s, a gap between real growth and the influence of inflation opened up. (…)
Things changed in the 1960s. Heavy government spending on the Vietnam War and President Lyndon Johnson’s Great Society programs met low interest rates. Money supply grew strongly and what Mr. Sylla calls the Great Inflation began. (…)
Where are we today? We have a low equity risk premium, leaving stocks without much of a cushion against uncertainty. (…)
More on this in THE INFLATION DEBATE: JFK, LBJ, JOE AND JAY
Equities are simply earnings times earnings multiples. The relationship between multiples and inflation is more stable than that with interest rates. The sum of P/Es plus inflation, a measure of under/over valuation) generally fluctuates between 15 and 25 with a median of 20 (Fair Value).
Using a median P/E of 20, we can calculate a Fair Value for the S&P 500. Fluctuations around this Fair Value indicate how undervalued (P/E + inflation < 20) or overvalued (> 20) equities are. In the late 1960’s, inflation began to rise faster than earnings and Fair Value declined. But equities were undervalued in 1966 which allowed them to rise even while inflation was accelerating and Fair Value decreasing. Overvaluation peaked in late 1968, earnings peaked in late 1969 and inflation peaked in mid 1970. But equities had deflated 33% as the Rule of 20 P/E dropped from 24.5 to 19.5 (the conventional P/E went from 19 to 13).
John Authers: Exuberance Was Fading Before the Fed Hawks Arrived Rather than jolting the market out of an extreme position, Jerome Powell and his colleagues may have just given it an extra shove in the same direction.
(…) But the market reaction suggests traders are worried about whether growth really will be as good as they had hoped. That would explain a fall in yields. And it’s a tad concerning. With the Fed preparing to err in a hawkish rather than a dovish direction, such worries become greater. (…)
What matters most in markets and the economy is what happens at the margin. The Fed’s decision to start reining in excessive exuberance and inflationary psychology came just as the market was beginning to develop cold feet about these things. Rather than jolting the market out of an extreme position, the Fed may have given an extra shove to the direction in which it had already tentatively started to move.
For further evidence, Bowers of Absolute Strategy notes that:
- U.S. inflation breakevens peaked in mid-May … and have been falling ever since;
- Quite a few commodity prices have peaked out
- U.S. Treasuries ignored not one, but two, atrocious CPI prints (totally unfazed – despite the negative surprises)
- Since May 12, the U.S. 30-year yield has fallen 40 basis points (from 2.4% to 2%) – which suggests the “long duration” trade is back in the driving seat
Bowers also draws attention to signs that China is tightening credit.
What next? We hear from Powell on Tuesday, so if he is unhappy with the way his remarks have been interpreted, he can set the record straight. (…)
Investors growing more fearful of a Fed mistake
(…) A survey now finds “central bank policy error” is the third biggest risk to the market, behind only higher-than-expected inflation and bond yields, and new variants to the coronavirus that bypass COVID-19 vaccines. The Deutsche Bank survey of more than 400 participants found the percent flagging central bank mistakes as a risk has grown to 43% in June, from 39% in May and 21% in April.
The survey found 82% still expect inflation to rise after the COVID-19 pandemic, versus just 10% expecting deflation. A fifth, 21%, say U.S. inflation will average over 3% over the next 5 years, while 17% see inflation under the Fed target. (…)
- Tesla and Other Bubble Stocks Have Deflated Just Like 2000 Fashionable areas of clean energy, electric cars, cannabis stocks and SPACs have dropped sharply this year, in an echo of the dot-com era
(…) Looking back, what I don’t recall about the dot-com bubble is just how boring the S&P 500 was over the final months of Nasdaq boom and bust. The S&P was down just 4% from its March high by mid-June in 2000. That isn’t so different to today, when the S&P has continued to make new highs despite the crash of fashionable stocks.
Back in 2000, it was easy to believe that the broader market would be shielded by a rotation from wild growth back to steady, cheap, industrials and other overlooked value stocks. In fact, that worked—for a while. The S&P almost reached its March 2000 high six months later, before it became clear that the end of the Nasdaq boom was also slowing the economy. By the 2002 low, the S&P had almost halved. (…)
Treasurys provide more support to stocks this time, too. Back in 2000, investors worried about the stock market could earn nearly 7% from 10-year Treasurys, making a switch appealing, especially as the consensus forward earnings from the S&P were a mere 4% of the price. This time the S&P has a similar earnings yield, but Treasurys offer a paltry 1.5%. (…)
(…) China has ordered payment platform Alipay and domestic banks to not provide services linked to trading of virtual currencies. The institutions were also ordered to cut off payment channels for crypto exchanges and over-the-counter platforms, the People’s Bank of China said in a statement. (…)
“The PBOC crackdown is going further than initially expected,” said Jonathan Cheesman, head of over-the-counter and institutional sales at crypto derivatives exchange FTX. “Mining was phase one and speculation is phase two.” (…)
TECHNICALS WATCH
My favorite technical analysis firm affirms, despite recent short term flaws, “the most worrisome components of an important market top remain absent or are receding as threats.” It continues to see better odds to the upside “in the intermediate term”.
Interestingly, the S&P 500 Index closed Friday slightly below its 50-day moving average, something seen 4 other times this year.
Meanwhile, the Equal-Weight S&P 500 was more downwardly decisive and broke its 50dma for the first time since February:
The S&P 600 Index is now resting on its still rising 100dma:
But the Russell 2000 has broken below its barely rising 100dma:
