EMPLOYMENT

U.S. Hiring Accelerates as Economy Weathers Omicron The U.S. economy added 467,000 jobs in January, while job growth in November and December was about 700,000 higher than previously reported, showing strong demand for workers even as virus cases surged.

The U.S. economy added 467,000 jobs in January, the Labor Department said Friday. Job growth in November and December combined was about 700,000 higher than previously reported. (…)

The Labor Department said nearly two million workers were prevented from looking for a job last month because of the pandemic. And the number of Americans who said they were unable to work because their employer closed or lost business due to the pandemic nearly doubled in January from December. (…)

About 3.6 million Americans were employed but absent from work due to illness in January, up from two million in January 2021 and 1.1 million in January 2020. (…)

Wages climbed 5.7% in January from a year earlier, nearly double the average of about 3% before the pandemic hit. (…)

The labor-force participation rate, or the share of the population working or seeking a job, rose to 62.2% last month, the highest level since the pandemic hit in early 2020. The Labor Department attributed the increase to the introduction of new population estimates with January’s data.

Employers added 6.67 million jobs last year, or just over 200,000 more positions than previously reported for 2021, according to annual revisions released in Friday’s report.

Those revisions, conducted each January, included changes in how the Labor Department estimates seasonal employment patterns to capture pattern changes due to the pandemic. The revisions included downward adjustments last summer, which were offset by revised gains later in the year. (…)

There are roughly 60 unemployed people for every 100 job openings, meaning just about anyone who wants a job can find one. (…)

Wages grew briskly in January from December in some higher-wage industries including professional and business services. (…)

Of the 444k private sector jobs added, 440k came from the services sector. And the 151k increase in leisure and hospitality is “hard to fathom given restaurant dining is down more than 20% on “normal” based on Opentable data.”

The employer survey showed a blowout of 467,000 net new jobs for the month, but the numbers were skewed by major Labor Department revisions for the U.S. population and civilian employment. Without those changes, the jobs number would have declined. Add the complexities of adjusting for winter weather and Covid’s Omicron variant, and no one should make too much of this one monthly report. (WSJ)

One important stat missing from the WSJ account is average weekly hours worked which dropped to 34.5 from 34.7 (-0.6%) in December and 34.8 in November. More workers working fewer hours. That was particularly acute in retail where hours declined by 3.2%. It seems that retailers opted to keep people on their payrolls amid soft November-December sales.

Average hourly earnings rose 0.73% MoM, continuing the sharp acceleration since January 2021. AHE are up 5.7% YoY and 6.1% annualized in Q4.

From the Household survey (+1.2M jobs), we note that the participation rate rose from 61.9% to 62.2%, still very shy of the pre-pandemic 63.4%. People between 55 and 65 were the main returners while the 65+ cohort shows no sign of leaving retirement just yet.

The household survey revealed that 1.2mm jobs were added in the month but there was an even bigger 1.39mm increase in the size of the labor force which led to a one tenth rise in the unemployment rate to 4%.

Higher participation will be crucial in 2022 given that the all-in U-6 unemployment rate, which also includes discouraged workers, is now 7.1%, back to its February 2020 7.0% level.

Aggregate payrolls (employment x hours x wages) rose 0.54% MoM in January (+9.6% YoY), nearly half the average growth (+1.0%) rate between September and December. Growth in monthly labor income continues to outpace inflation but by a narrowing margin (January CPI is out Thursday).

The next chart stacks contributions to the monthly growth in aggregate payrolls. Note the diminishing contributions of employment and hours since September, offset by rising hourly earnings. The reverse would be preferable:

Obviously, the labor market is kept tight by the low participation rate. Employers have little choice than to keep their employees but give them fewer hours and higher wages.

Source: Bloomberg

Goldman Sachs economists are also shredding the transitory script:

The Great Resignation consists of two quite different but connected trends: millions of workers have left the labor force, and millions more have quit their jobs for better, higher-paying opportunities. These trends have pushed wage growth to a rate that increasingly raises concern about the inflation outlook. (…)

We forecast that about 1 million people will return to the labor force this year, raising the participation rate to 62.6% by year-end, and that more will come back in later years. Even so, the depressed participation rate implies that workers will be even harder to find than the unemployment rate suggests.

The tight labor market has boosted wage growth to a 6% pace, perhaps with an assist from high inflation expectations. But surveys show that employers expect wages to rise at a more sustainable 4% pace this year. We put weight on both signals and therefore forecast 5% wage growth this year, implying 3% unit labor cost growth after netting out 2% productivity growth. Faster growth of labor costs than is compatible with the 2% inflation goal is likely to keep the FOMC on a consecutive hiking path and raise the risk of a more aggressive response.

• Greg Ip: An American Labor Market Mystery Why has labor-force participation shrunk in the U.S. but not other countries? Wage-subsidy plans and Covid-19 may be why.

(…) While much of the decline in the U.S. labor force is because of retirement, its participation rate for people ages 25 to 54 has also fallen more than in other countries. (…)

During the pandemic, European and Japanese employers furloughed rather than fired employees, with governments subsidizing the furloughed workers’ salaries. The U.S. had its own version, the Paycheck Protection Program, which gave forgivable loans to businesses that held on to their employees, but the impact was relatively small. Most federal support came through enhanced unemployment insurance for millions of laid-off workers. (…)

Differing wage subsidies, however, can’t explain why participation is lower in the U.S. than in Canada, where the subsidy plan was similar to that of the U.S. and not particularly effective, according to Miles Corak, a Canadian economist teaching at the City University of New York.

Here, Covid-19 may have played a role. Cumulative infections and deaths from the virus are about three times higher, per capita, in the U.S. than in Canada—almost certainly affecting the willingness and ability to work. U.S. monthly labor-force surveys show the number of people absent from their jobs because of illness averaged 50% higher last year than in 2019. Over the same period Canada’s corresponding survey showed 16% more workers missing a full week of work because of illness or disability, and 13% fewer missing part of a week.

Japan’s pandemic experience has been even less severe, with 10% of the infections and 5% of the deaths, per capita, as the U.S. The number of Japanese workers out of the labor force for health reasons was actually lower last year than in 2019, Ms. Devalier found. (…)

Income and wealth gains in the U.S. may have made retiring early or taking time off easier for Americans worried about Covid-19 or unhappy with their jobs. (…)

This evidence hints that if Covid-19 becomes more predictable and less lethal after the Omicron wave passes, as many health experts hope, then the obstacle it poses to work should also ease. (..)

But there is no guarantee that Covid-19 will recede or that when workers who left the labor force decide to return, jobs will be as plentiful as they are now.

Canada Snaps 7-Month Run of Job Gains After Omicron Saps Growth

The country shed 200,100 jobs in January, Statistics Canada reported Friday from Ottawa, ending a seven-month streak of gains. Economists in a Bloomberg survey were expecting a drop of 110,000. The unemployment rate rose to 6.5%, from 6% at the end of last year. (…)

The bulk of the losses were limited to pandemic-exposed sectors. Accommodation and food services accounted for 113,000 of the lost jobs. Goods-producing sectors recorded a gain, led by construction. (…)

The extent to which omicron swept through the country was also reflected in the data, with one in 10 employees reporting they had to be absent from their job due to illness or disability. Typically, the share of illness-related absence for the month of January has been about 7% in recent years.

Canadian employment remains just over 30,000 above pre-pandemic levels, and the country has a strong track record of bouncing back after prior waves of the virus.

Hours worked — which is closely correlated to output — fell 2.2% in January, and the number of employees who worked less than half their usual hours jumped by 620,000. January also saw the first drop in full time employment — down 82,700 — since June.

U.S. Inflation Is Probably About to Spike Yet Again The consumer price index probably jumped 7.3% in January from a year ago, the largest annual advance since early 1982, according to the median projection in a Bloomberg survey of economists. Excluding volatile energy and food categories, the CPI is projected to have risen 5.9%.

(Bloomberg)

Some quotes via The Transcript:

• “Prior to the emergence of the Omicron variant, we were experiencing some inflationary pressures and staffing issues resulting from the broader pandemic. When the Omicron surge began, inflationary costs and staffing shortages were amplified, well in excess of our expectations.” – Starbucks (SBUX) CEO Kevin Johnson
• Consumers are spending 20% more than they were spending before Covid because of all the stimulus. They have a lot more money in their accounts. They can continue to spend at very high levels. (Jamie Dimon- JPM)

Not to contradict Mr. Dimon but total consumer expenditures were 10.3% above pre-pandemic levels in December. Its own credit card data also paint a more subdued picture through January 31.

• “We had a slower than expected finish to the year and came in below our target–we’ve seen weakness around spending in our lower-income cohorts. And imagine for us, it’s – the percentage of our user base is pretty similar to what you see just like in the U.S. overall. So it is a large percentage of our user base. And this was a cohort that certainly benefited from the stimulus in prior periods earlier this year. And we’re seeing the effects of inflationary pricing around that where there is a more elastic demand curve around that. Certainly, with higher income cohorts, you’ve got a more inelastic demand curve, and that’s a lower percentage of our base.” – PayPal (PYPL) CFO John Rainey

FYI, PayPal had around 400M active users at the end of 2021. According to Statista, it handles 22% of all online transactions in the U.S..

EARNINGS WATCH

From Refinitiv:

Through Feb. 4, 278 companies in the S&P 500 Index have reported earnings for Q4 2021. Of these companies, 78.4% reported earnings above analyst expectations and 17.6% reported earnings below analyst expectations. In a typical quarter (since 1994), 66% of companies beat estimates and 20% miss estimates. Over the past four quarters, 84% of companies beat the estimates and 13% missed estimates.

In aggregate, companies are reporting earnings that are 4.8% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.1% and the average surprise factor over the prior four quarters of 16.0%.

Of these companies, 77.3% reported revenue above analyst expectations and 22.7% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 79% of companies beat the estimates and 21% missed estimates.

In aggregate, companies are reporting revenues that are 2.6% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.2% and the average surprise factor over the prior four quarters of 4.0%.

The estimated earnings growth rate for the S&P 500 for 21Q4 is 27.2%. If the energy sector is excluded, the growth rate declines to 18.8%. The estimated revenue growth rate for the S&P 500 for 21Q4 is 14.2%. If the energy sector is excluded, the growth rate declines to 10.0%.

Another good quarter with rising margins almost across the board (only Real Estate, Consumer Staples and Utes are seeing reduced margins in Q4).

But margins are expected to compress in 2022 starting in Q1 and Q2 when earnings ex-Energy are seen rising 2.6% and 2.9% respectively on revenues up 8.5% and 6.8%.

Pre-announcements are worsening with some high profile, high growth companies reducing expectations (e.g. NFLX, PYPL, FB).

Revisions remain positive overall and across almost all sectors:

Q1’22 growth estimates are now +7.0% vs +7.5% on January 1. Q2: +5.5% vs +5.1%.

Full year 2022: +8.4% to $225.03, unchanged.

Excluding Energy where analysts are scrambling to keep pace with energy prices, Consumer Discretionary and Industrials are set to significantly boost aggregate earnings in 2022 even after their strong 2021. Pretty surprising and in need of close watch, particularly for Automobiles, Travel and Home Improvement sectors which seem to carry the strongest expectations.

  

PMI surveys hint at raised stagflation risks

Policymakers around the world are growing increasingly concerned about anchoring inflation expectations amid further signs of persistent elevated price pressures. With supply shortages widely expected to persist through 2022 and energy prices soaring amid geopolitical tensions, inflation is likely to rise further in the near-term, adding to bets that the Fed, Bank of England and ECB will tighten policy.

However, the current tightening, led by the Bank of England but likely soon to be followed by the FOMC in March, comes at a time of slowing economic growth. This reflects the central banks’ general remit towards price stability, but also reflects the broadly-held view that economic growth will revive again quickly as the Omicron wave passes. Having recorded the slowest pace of economic growth for 18 months in January, the JPMorgan global PMI – compiled by IHS Markit – reflected widespread disruptions to business activity due to record COVID-19 case numbers. Virus case are numbers already on a downward trend in many major economies, which will mean pandemic restrictions can be eased and economic growth re-accelerate.

The question – facing markets and policymakers – is just how much the global economy will pick up again. Demand forces have waned in recent months amid various headwinds, including squeezed real incomes, ongoing supply constraints and the withdrawal of pandemic-related fiscal stimuli. By tightening monetary policy, how much do central banks further tilt risks towards growth slowing? Key demand indicators such as new order inflows and global exports will need to be monitored closely in the coming months to assess the underlying resilience of demand in these unusual times.

Central bank policy rates, inflation and output

Stagflation would not be welcomed by zombie companies which now populate nearly 20% of U.S. listed firms:

Deutsche bank via The Market Ear

“This chart in itself is pretty amazing. But there is also an ARK edition: “25 of ARKK’s 40 stock holdings (49.8% of NAV) had higher net interest expense than their operating profit in their latest filings”.” (The Market Ear)

Zombies are generally found among the Russell 2000 index which continues to severely underperform as GS explains.

Small-cap firms generally have weaker balance sheets, lower profit margins, and less market power, all of which make them highly sensitive to economic growth environments. (…) In fact, a near-record 32% of Russell 2000 stocks are expected to generate losses in 2022.

During the last 20 years, the Russell 2000 generated a return very similar to that of the S&P 500. However, the small-cap index has underperformed on average during periods where either the yield curve was flattening, economic growth was elevated and declining, or financial conditions were tightening. All three of these dynamics describe our economists’ 2022 outlook

While small-cap valuations have declined sharply, the Russell 2000 continues to trade at multiples that have historically been headwinds for future returns. Since November, the Russell 2000 forward P/E has contracted by 13%, from 30x to 26x. The 24% P/E premium to the S&P 500 ranks in the 24th percentile since 1995. Excluding companies with negative earnings, the P/E multiple registers 14 (30th percentile). However, P/E multiples have historically been weak indicators for Russell 2000 performance because many companies are not profitable and/or lack analyst forecasts. The trailing price/book multiple avoids both of these obstacles and has historically been a helpful signal for future returns. By this measure, Russell 2000 valuations remains elevated at 2.4x (73rd percentile since 1986). The LTM EV/sales multiple of 1.5x likewise ranks in the 96thpercentile.

Th Russell 2000’s ROE is 10.8% for a 4.5 multiple of BV. By comparison, the S&P 500 sells at 4.6x book value but earns 20.5% on its book value (ROE), also a 4.5x ratio of BV. But the S&P 500 is significantly less leveraged.

RECESSION WATCH

• Global Recession Probability Indicator – High Probability of a Global Recession

This NDR model (via CMG Wealth), based on leading indicators from 35 different countries (non-U.S.), is now in “High Recession Risk” area. For U.S. investors, since business is global, this model can be an early warning indicator for U.S. recession. Above 70, the model predicted a recession 89.6% of the time since 1970 (sometime, we only learn of a recession after it has started).

• Dr. Copper

When copper prices decline it may indicate sluggish demand and an imminent economic slowdown. (CMG Wealth)

But the Chicago Fed National Activity Index is not warning:

(Advisor Perspectives)

TECHNICALS WATCH

My favorite technical analysis firm remains very, very cautious. It is unimpressed by the recent rebound, seeing no renewed broad demand nor much sellers’ exhaustion. Small caps continued to underperform indicating high risk aversion and liquidity preference.

Weaknesses in the moving averages of the S&P 600 small cap index have now appeared in the Mid-caps and are threatening the larger caps as shown by the S&P 500 13/34–Week EMA Trend from CMG Wealth:

Demand volume keeps falling below the rising volume supply:

Source: Ned Davis Research

This next chart puts on display a few key features of the current market environment — e.g. indecision, uncertainty, lower participation, and therefore: higher price gyrations. (SentimenTrader)

Pay attention to the red and green lines…

Source:  @AlmanacTrader (via Callum Thomas)

Green Startups Stumble, Accelerating Selloff of Risky Stocks Once-hot electric-car makers and battery suppliers face investigations and doubts about technology.

(…) At Electric Last Mile Solutions, Chief Executive James Taylor and Executive Chairman Jason Luo resigned after an investigation concluded both men purchased equity in the company at below market value around the company’s December 2020 SPAC merger. The company also said its financial statements might be inaccurate and would be restated. (…)

Faraday Future said a board investigation determined that its claim to have 14,000 reservations for a vehicle may have been misleading. The company now describes nearly all of them as unpaid indications of interest. (…)

Nikola late last year agreed to pay $125 million to settle a regulatory investigation into allegedly misleading statements by its founder and one-time executive chairman Trevor Milton. (…)

On Thursday, the short seller that targeted Nikola and Lordstown, Hindenburg Research, alleged that new technology touted by an upstart lithium producer has yet to work, sending shares down 25%. Hindenburg echoed some of the claims about Standard Lithium Ltd. SLI 19.71% made by another short seller, Blue Orca Capital, late last year. (…)

The hurdles extend beyond the future of transportation. Shares of AppHarvest Inc. APPH -1.99% are down 90% in the past year. The decline accelerated after the indoor-farming company recently wrote down a large portion of its acquisition of artificial-intelligence company Root AI Inc. (…)

Wild NFT market fired up by billions in irregular sales

(…) The top 27 most expensive recorded sales across the whole NFT industry in January, totalling $1.3 billion, came from just two wallets transacting on LooksRare, according to DappRadar data as of Jan. 31, while the top 100 sales, worth $2.3 billion, came from 16 wallets trading on the platform.

“There is a lot of activity happening between a couple of wallets – let’s say wallet one selling to wallet two, and then wallet two reselling it,” said Modesta Masoit, DappRadar’s finance and research director. “It’s quite likely that this is not real demand, that these trades are not organic.” (./..)

“It is a marketing incentive,” he said. “LooksRare are effectively paying large investors to use their site, drawing a lot of attention and new users in the process.” (…)

LooksRare’s founders are identified only by the pseudonyms Guts and Zodd. The spokesperson described them as “NFT nerds” and said the platform’s team was spread across different timezones and have mostly “never even met each other in meatspace”.

Meatspace is a term used by internet enthusiasts to refer to the physical world. (…)

THE EMPLOYMENT SITUATION — DECEMBER 2021

Total nonfarm payroll employment rose by 199,000 in December, and the unemployment rate declined to 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Employment continued to trend up in leisure and hospitality, in professional and business services, in manufacturing, in construction, and in transportation and warehousing. (…)

Job growth averaged 537,000 per month in 2021.

The labor force participation rate was unchanged at 61.9 percent in December but remains 1.5 percentage points lower than in February 2020.

In December, average hourly earnings for all employees on private nonfarm payrolls increased by 19 cents to $31.31. Over the past 12 months, average hourly earnings have increased by 4.7 percent. (…)

The change in total nonfarm payroll employment for October was revised up by 102,000, from +546,000 to +648,000, and the change for November was revised up by 39,000, from +210,000 to +249,000. With these revisions, employment in October and November combined is 141,000 higher than previously reported.

Consensus was +444k. With the revisions, we have 340k more jobs in December.

Euro-Area Inflation Unexpectedly Hits Record in Test for ECB

Consumer prices jumped 5% from a year earlier in December — faster than the previous month’s 4.9% gain and more than the 4.8% median estimate in a Bloomberg survey of economists. A measure that strips out volatile components such as food and energy came in at 2.6%, matching November’s reading.

• Fed’s Bullard Eyes Three Rate Rises This Year, Says Fed Must Defend Inflation Credibility
• Rising Inflation Expectations, Hawkish Fed Prompted Larger Bank of Mexico Rate Increase, Minutes Show

Rising Wages and Increased Hiring Two Years Into the COVID-19 Pandemic

For the past few years, the Richmond Fed has collected information from businesses on hiring plans and changes in wages to recruit and retain workers. The results from the 2021 survey indicate that a much larger share of businesses plan to increase employment compared to recent years, both because they expect strong sales and because their current workforce is overworked. Additionally, this year, a larger share of firms reported raising wages across the board to attract new workers.

According to results from the November 2021 survey, more than half of Fifth District responding firms (56 percent) planned to increase employment in the next 12 months — the highest share in recent years and a significant increase from last year when only 34 percent of firms indicated that they would increase employment. The only other year when more than half of firms said they planned to increase employment was in 2017 when 53 percent expected to add staff. (…)

Firms in our monthly business surveys have been reporting strong demand for workers and difficulties filling open positions for several months. The primary challenge firms [57%] had filling open positions was a lack of qualified applicants. (…) The second most selected issue in the 2021 survey was that applicants rejected job offers because the compensation was too low [23%].

(…) The percentage of firms that are raising starting wages for most job categories doubled from 30 percent in 2020 to 61 percent in 2021. Only seven percent of firms in 2021 indicated that they are not raising starting wages for any job category compared to 27 percent in 2020.

Firms also indicated that the hardest-to-fill job openings are the ones with the fewest educational requirements. Almost three in four firms with difficulty hiring cited it was especially hard finding workers for jobs that require a high school degree or less.

In case you missed the irony:

• 57% of surveyed firms could not find qualified applicants.
• Nearly 75% of firms with difficulty hiring cited it was especially hard finding workers for jobs that require a high school degree or less, i.e less qualified workers.
• 23% of firms said the candidates rejected the job offered because the compensation was too low.

How Companies Are Retooling Supply Chains to Ease Bottlenecks The Covid pandemic has strained global supply chains, causing freight backlogs that have driven up logistics costs. Now, some companies are looking for longer-term solutions to prepare for future supply chain crises, even if those strategies come at a high cost.

Mortgage Rates Hit Highest Levels Since Spring 2020 The increase is driving up the costs associated with home buying at a time when home-sales prices are already near record highs.

RISK DOWN…

The signs of a general de-risking process have been there for a while now:

• At the Jan. 5 close, the average S&P 500 stock is actually down 11% from the 52-week highs!
• In fact, ALL S&P 500 stocks are down from their 52-week highs. The median stock is down 7.5% while 73 (15%) stocks are in a -20%+ bear hug with an additional 123 stocks (25%) in -10%+ correction! That means that 40% of S&P 500 stocks are down 10% or more from their 52-week highs.
• These 196 stocks in correction/bear mode have an average P/E of 36.4x trailing EPS and 58% of those having had an earnings revision in the last month were revised down.
• The Russell 2000 Index has moved sideways in 2021. It is now below its 50, 100 and 200-day moving averages, all of which declining. Trailing P/E: 33.9. Forward P/E: 26.9 assuming profits jump 26%!
• From its February 2021 high, Cathie Wood’s ARKK fund, holding mainly losing companies, is down 46%. Investors are realizing that a story is, eventually, only worth what profits it can actually generates.
• The Renaissance IPO Index is down 32% from its February high.
  The IPO pipeline is still overflowing with over apparent 900 unicorns anxious to list.

• The De-SPAC ETF is down 51% from its June 2021 high. “The De-SPAC ETF (NYSE: DSPC) is the first exchange traded fund to offer pure-play exposure to private companies that come public as the result of a merger with a Special Purpose Acquisition Company. SPACs are one of the most disruptive structures to hit the U.S. capital markets over the past several years.” Disruptive indeed!
• A vast majority of 2020 and early 2021’s high-flying stocks are down significantly from their respective 52-week highs. (Lance Roberts on December 14)

• Most of the “mob stocks” have come down to earth: AMC is down 67% from its June high, GME -782% from its January high and HOOD, which allocated 25% of its IPO to Robinhood’s users is down 59% from its IPO price and 82% from its August high.
• The BofA US junk bonds yield (CCC and lower) was 6.5% in early July. It’s now 8.0%.

… But it may not be “risk-off” just yet. The largest caps keep pulling the wagon, so far.

KKR recently published this table showing that “equity returns are generally positive, but below average” during Fed tightening cycles.

The median return of the S&P 500 Index is +3.3% over the last 15 tightening cycles, ranging from -40.1% to +15.4%. I note that the average is 0.4% but it rises to 2.4% when eliminating the two extreme years.

I also note that the high inflation years (10.4% on average) within my red rectangle produced averaged returns of -8.3%. The first 3 tightening cycles had inflation rates of 1.9% on average and returned +8.2%. The last 6 cycles had inflation rates averaging 4.4% and returned +5.3%. The only negative years were high inflation years.

KKR’s strongest argument in favor of a positive year for equities is the still large liquidity overhang from central banks and its favorable view of inflation…in the second half. KKR also sees “a high degree of risk that we have a further commodity spike in 2022. Such an occurrence would dent demand, puncture corporate margins  and tighten financial conditions.”

The advice if staying long: increase liquidity and quality.