MANUFACTURING

Strong Gains In Hiring Put Eyes on Fed 

U.S. employers ramped up hiring last month, signaling a rebound in overall growth after a bumpy start to the second quarter and nudging the Federal Reserve toward its first interest-rate increase in nearly a decade.

Nonfarm payrolls jumped by 280,000, wage growth improved and more Americans joined the workforce, signs the labor market is nearing what the Fed considers “full” employment. The economy also added 32,000 more jobs in April and March than the Labor Department first reported. (…)

The jobless rate ticked up slightly to 5.5%, but the increase reflected positive developments. The number of people looking for jobs increased faster than the number of jobs available, suggesting Americans are increasingly confident they will be able to find work.

The report also suggested Americans’ paychecks are finally starting to grow. Average hourly earnings of private-sector workers rose 0.3% from the prior month. Earnings were up 2.3% in May from a year earlier, slightly better than the 2% annual pace of recent years and the strongest gain since August 2013. (…)

But just about every sector of the economy is expanding employment. Professional and business services added 63,000 jobs last month. Leisure and hospitality payrolls grew by 57,000. Health care, retail trade and construction also added positions.

One exception was the energy industry, which has been pummeled since last year by a steep drop in oil prices. The mining sector, which includes oil and gas operations, lost 17,000 jobs in May and 68,000 so far this year. (…)

Demand for workers is far outstripping supply for clients of Robert Half International Inc., a California-based staffing firm that works with companies in professional and business services sectors such as accounting, technology and law. Budgets for raises are being revised up and firms have had to offer higher pay and bring in workers they can’t find locally, said Paul McDonald, a senior executive director at the firm.

“We’re finding in some of the sectors a 10% to 20% increase in compensation on the open market, where you may have budgeted 4% or 5%. It’s not enough to retain the person,” Mr. McDonald said.

So, the Fed guessing game is firmly on (WSJ):

• .I expect real GDP growth to rebound to at least 3.0% per annum in the middle two quarters of this year on strength in consumer spending, residential and nonresidential (including public) construction and less drag from private energy investment and net exports.”  –Stu Hoffman, chief economist at PNC Financial Services
• our current tracking from second-quarter GDP is still a relatively subdued 1.5% to 2.0%, which will be woefully inadequate to move the Fed off the sidelines any time soon. That said, the strength in labor market activity and the firming underlying fundamentals suggest that a turn in economic activity may just be around the corner–though this is unlikely to come soon enough to justify rate hike before September.” –Millan Mulraine, deputy head of U.S. strategy at TD Securities
• “Overall, at this stage this evident strength in the labor market probably isn’t enough to persuade the Fed to hike rates by July, but it definitely makes a rate cut by September probable. Only 24 hours later, the IMF’s suggestion that the Fed should wait until 2016 looks very dated.” –Paul Ashworth, chief U.S. economist, Capital Economics
• “Hourly earnings are on the move, and, over the past 30 years, nothing has been more closely correlated with Fed action than wage gains. They will continue to accelerate, following the surge in the ECI, and if the Fed does not begin to raise rates very soon, markets will soon be pointing out to policy makers that they are behind the economy. If the June employment report is as strong as this one, a July hike can’t be ruled out; if not then, we think September is the latest the Fed can dare to leave policy set for the end of the world.” –Ian Shepherdson, chief economist, Pantheon Macroeconomics
• “Today’s data keep a September first rate hike firmly in play, which remains our baseline for Federal Open Market Committee liftoff. Despite shocks hitting the economy, progress in the labor market is continuing, and this gives us confidence that growth in the second half will be robust.” –U.S. economics team at BNP Paribas
• “This is a strong jobs report and should act as a clear counter to arguments that the economy has lost momentum.  We still do not see the Fed in play in June (and the slight rise in the unemployment rate gives the Fed some cover on that score) but with the jobs market displaying strong momentum and with core inflation rates fairly steady, we firmly expect the Fed to lift rates at the September FOMC meeting.” –John Ryding and Conrad DeQuadros, economists at RDQ Economics
• This report will keep the Fed on track for tightening this year.  We believe it helps the case for moving at the September meeting; there will be three more employment reports between now and then.” –– Jim O’Sullivan, chief U.S. economist at High Frequency Economics

Curious how economists are quick to see a turn in momentum in employment and a related rebound in the overall economy. Last time I looked, employment was not among the leading indicators. It is, at best, a coincident indicator. As far as the momentum turn goes, please read on.

SEPTEMBER HIKE!

The U.S. May employment report showed yet another solid performance from labour markets. Payroll jobs were up 280,000 and full-time employment surged 630,000. As we have noted many times, the Fed tends to refrain from initiating a new tightening campaign when full-time employment is below the pre-recession peak. As today’s Hot Chart shows, the leading economic indicator (LEI) suggests that a new peak in full-time employment will be reached in the coming months. At this juncture, we continue to expect the first rate hike in September. (NBF)

Pretty “firm” and positive and narrative, isn’t it? I particularly like the renewed momentum that many economists are seeing.

And yet, if we smooth the data to even out the winter, the ports strikes et all other “transitory” factors, this is what we get:

In effect, YTD employment growth is well below that of the second half of 2014, some 100k per month slower! This next chart plots the 6-month m.a.:

See any momentum change there?

Last Friday, but only at the very end of the day, the Association of American Railroads published its June Rail Time Indicator which provides railroad stats through the end of May. Talk about timely data which, by the way, never gets revised. Hopefully, somebody at the Fed subscribes to it ‘cause there’s precious little change in momentum on America’s railroads.

Total carloads in May 2015 -9.4% from May 2014. Coal -17.4%; primary metal products -17.9%; crushed stone, sand, and gravel -7.9%; grain -6.2%. Carloads excluding coal -4.5%.

The slowdown is broad: 15 of the 20 carload categories were down in May 2015. Same as April. Twelve were down in March, 9 in February, 2 in January.

There is an 87% correlation between the YoY change in rail traffic and the YoY change in GDP.

It is best to look at carloads excluding coal and grain which react to their own particular dynamics which often are not economy-related.

U.S. carloads excluding coal and grain were down 4.3% in May 2015 from May 2014, also their third-straight monthly decline — something that hasn’t happened since the end of 2009. It’s hard not to be concerned — three months in a row like this hasn’t happened very often unless a recession was coming,
underway, or just finished.

Canadian railroads are intimately linked with U.S. railroads. While winter was also harsh in Canada, there were no port strikes or other transitory factors. Yet, Canadian rail operators are also suffering with carloads down 10.6% YoY in May, the second consecutive monthly decline.

Just 2 of the 20 commodity categories tracked by the AAR saw year-over-year carload gains on Canadian railroads in May 2015, equal to the fewest on record (which in this case is back to 1997).

U.S. intermodal traffic rose 3.8% YoY in May. However, this seems to be transitory, a direct result of the settlement of the strikes at the U.S. Western ports as the backlog of goods imports and exports is being worked off. The AAR notes that slightly less than half of U.S. rail intermodal volume is exports or imports.

U.S. manufacturing has become a problem for the economy and there are no signs that it is about to turn up if rail carloads are any guide (94% correlation):

Total manufacturing new orders have fallen in eight of the past nine months, a result at odds with some other indicators like jobs and car sales. Actually, total manufacturing new orders are down at an 8% annualized rate since November 2014. Only the automobile industry seems to show positive momentum.

Worryingly, manufacturers seem to be involuntarily accumulating inventory even though new orders are down:

The involuntary inventory build is getting worst throughout the goods sector:

Manufacturing employment has stalled since February and threatens to contract, which it will do if the inventory bulge does not correct rapidly.

Actually, goods producers contributed only 27k new jobs to the U.S. economy since February, a low 3.1% of the total. They added 19% of all new jobs during 2014.

Fortunately, demand for services has been stronger, although real expenditures on Services has slowed considerably since August 2014. MoM growth, which was 0.4% August to October, has declined to 0.2% between December 2014 and February 2015 and to 0.1% in each of March and April. Hopefully, the goods side of the economy will recover shortly, at least for railroads which seem to have been surprised by the slowdown in traffic. Hopefully, other service providers were more cautious…

How about trucking?

Dow Theory Has Investors Skittish Warning signals from a century-old U.S. stock-market analysis tool known as Dow Theory are sparking debate about whether stocks are headed for a fall.

Dow Theory holds that any lasting rally to new highs in the Dow Jones Industrial Average must be accompanied by a new high in the Dow Jones Transportation Average—the 20-stock index that tracks some of the largest U.S. airlines, railroads and trucking companies. When the transport average lags, it can presage broader stock declines.

The Dow transports are sitting on a 6.9% decline for the year. They haven’t hit an all-time high since Dec. 29.

The Dow industrials, by contrast, are up 0.2%, setting a record high as recently as May 19. (…)

Proponents of Dow Theory, including many technical analysts who buy and sell shares based on chart patterns, say transportation stocks are a reliable predictor of the broader market because their health is central to a growing economy.

But many analysts say it is too early to worry. In fact, stocks can continue to make gains even with the transports lagging. History shows that when the Dow industrials are trading higher than their recent average and the Dow transports are below, the Dow industrials actually average a gain of 3% in the following 12 months, according to Ned Davis Research.

Many traders and portfolio managers see signs of continued U.S. expansion and blame the transports’ lagging performance instead on high valuations and specific headwinds facing railroads and airlines. In addition, transports now make up a much smaller percentage of the U.S. economy than they did when the theory was created. (…)

“Some short-term issues from rails bringing less oil or coal, that’s temporary,” said Jim McDonald, chief investment strategist at Northern Trust.

Mr. McDonald said that if trucking-company shares start taking a tumble, he would be much more concerned, as he views their performance as a better measure of economic health. J.B. Hunt Transport Services is up 2.2% this year and Landstar System Inc. is off 7.4%. (…)

White House denies Obama said strong dollar a problem

Bloomberg News earlier quoted a French official as saying Obama had made the comment.

U.S. Awash in Glut of Scrap Materials Demand is down for scrap metal, used cardboard and other waste—major U.S. exports. American waste is now pricier abroad and pressuring the dealers and scrap gatherers who are the backbone of the industry.

(…) U.S. exports of scrap materials have fallen by 36% since peaking at $32.6 billion 2011. Prices of shredded scrap steel have plunged about 18% so far this year and are down 41% since early 2012, according data collected by the Platts unit of McGraw Hill Financial Inc. (…)

Waste and scrap remains a big business. Last year it accounted for 1.3% of U.S. exports, about the same as meat and poultry, and bigger than either corn or computers. The industry directly employs about 149,000 people, according to the Institute of Scrap Recycling Industries, a trade group. That doesn’t count self-employed people (…)

OECD Leading Indicators Cast Doubt on U.S. Rebound

The Paris-based research body said its gauges of future economic activity—which are based on information available for April—also point to slowdowns in Canada, China and Brazil.

China Exports Slide

Exports were down 2.5% year-over-year, official data showed on Monday, beating market expectations and improving on the 6.4% fall in April, but the decline was the third monthly drop in a row.

Exports to the U.S. showed solid growth of nearly 8% in May alone while shipments to the Association of Southeast Asian Nations were about flat. Exports to the European Union were down 7%, while those to Japan fell 8%.

Imports slid 17.6% year-over-year after a 16.2% drop in April, reflecting a domestic economy that has seen anemic growth despite an array of government measures to prop up the manufacturing sector as well as consumption.

Exports for January to May crept higher, rising a meager 0.7% from a year earlier, while imports were down 17.3% in the same period.

U.S. Consumer Debt Grows in April as Credit-Card Use Surges

Outstanding consumer credit—reflecting Americans’ total debt outside of mortgages—rose by a seasonally adjusted $20.54 billion in April, or at a 7.33% annual rate, theFederal Reserve said Friday. Debt jumped 7.66% in March.

Economists surveyed by The Wall Street Journal had expected consumer debt to rise $16 billion in April.

The latest increase reflected a sharp rise in revolving credit, reflecting mostly credit-card debt, which increased at an 11.57% annual rate. That marked the second-biggest jump since the recession ended nearly six years ago.

Meanwhile, borrowing for cars and education grew at the slowest pace since July 2012. That category–so-called nonrevolving credit—expanded at a 5.8% rate in April after growing 8.05% in March. (Charts from Haver Analytics)

  

Behind the Rise of the New Housing Headwind Last decade’s housing crisis could give way to a new one in which many families lack the incomes or savings needed to buy homes, driving rent higher and keeping those renters from ever becoming buyers.

(…) Conventional wisdom says the rate, at 63.7%, is leveling off to where it was for decades before the housing-market peak.

But this is probably wrong, according to research from the Urban Institute, which predicts homeownership will continue to slip for at least 15 years.

Demographics tell the story.

Urban Institute researchers predict that more than 3 in 4 new households this decade, and 7 of 8 in the next, will be formed by minorities. These new households—nearly half of which will be Hispanic—have lower incomes, less wealth and lower homeownership rates than the U.S. average.

The upshot is that fewer than half of new households formed this decade and the next will own homes. By contrast, almost three-quarters of new households in the 1990s became homeowners.

The downtrend would push homeownership below 62% in 2020, and it would hold the rate near 61% in 2030, below the lowest level since records began in 1965. (…)

Not everyone, however, shares such a pessimistic view.

The decline in homeownership during the past year reflects a surge in new households, a positive development for the economy. For now, these people are renting, but some economists say rising rents will make homeownership look attractive.

Economists at Goldman Sachs say demographics ultimately could be a tailwind. They noted in an April report that even though Hispanics, for example, have lower homeownership rates than non-Hispanic whites, those rates have been rising for the past four decades. They see the homeownership rate stabilizing next year after it falls to 63.5%.

Housing construction is sure to rise as the millennial generation, about 75 million Americans born between 1981 and 1997,comes of age and leaves the nest. But Laurie Goodman, one of the Urban Institute researchers, says these households have less wealth than previous generations. (…)

A related concern is that qualified households will be unable to move from renting to owning as housing-cost burdens, slow wage growth and student debt make it more difficult to cobble together even a modest down payment. (…)

Average Down Payment Drops to Three-Year Low of 14.8 Percent for U.S. Home Purchased in the First Quarter

RealtyTrac^® (www.realtytrac.com), the nation’s leading source for comprehensive housing data, today released its Q1 2015 U.S. Home Purchase Down Payment Report, which shows the average down payment for single family homes, condos and townhomes purchased in the first quarter was 14.8 percent of the purchase price, down from 15.2 percent in the previous quarter and down from 15.5 percent a year ago to the lowest level since Q1 2012.

The report also shows that the average down payment for FHA purchase loans originated in the first quarter was 2.9 percent of the purchase price while the average down payment for conventional loans was 18.4 percent of the purchase price.

The share of low down payment loans — defined in the report as purchase loans with a loan-to-value ratio of 97 percent or higher, which would mean a down payment of 3 percent or lower — was 27 percent of all purchase loans in the first quarter, up from 26 percent in the fourth quarter and also 26 percent a year ago to the highest share since Q2 2013.

The share of low down payment loans was increasing throughout the quarter, from 26 percent in January to 27 percent in February to 29 percent in March, according to the report. The overall volume of loans was also much higher in March compared to the first two months of the year.

FHA loans as a share of loan originations increased throughout the quarter, from 21 percent in January to 22 percent in February to 25 percent in March.

“The growing number of low down payment loans reflects an appetite on the part of lenders and the government to provide a format to grow the number of homebuyers, particularly first time buyers. Those numbers were running near record lows over the past couple of years,” said Craig King, COO at Chase International brokerage, covering the Lake Tahoe andReno, Nevada housing markets. “The dangers of interest only, negative amortization, and low, low credit score loans are not a part of today’s low down loan programs. These are the components that got buyers in trouble during the severe downturn. Without those types of high risk components, low down payment loans are a sound strategy.” (…)

OIL

OPEC is dying: from Platts

Iranian oil minister Bijan Zanganeh said member countries had expressed a commitment to comply with the ceiling.

“What we expected happened,” he said. “Nobody proposed an increase in the meeting,” he added, in an apparent reference to a comment earlier from Kuwait’s Omair suggesting that one country was proposing an increase.

Nor, he said, had there been any discussion in the meeting of Iran’s plans to boost crude output and exports if talks between Tehran and six world powers result in a nuclear agreement and the lifting of the sanctions that have crippled the country’s oil sector and economy.

Zanganeh this week said OPEC should prepare to accommodate Iran’s full return to world oil markets.

“We didn’t discuss it,” Zanganeh said. “We don’t need to receive any agreement from any country for our return to the market. It is our right. We have been in the market and we are entitled to be. We dont need any agreements. We will return to the market [when] the sanctions will be lifted.” (…)

Ministers, therefore, “resolved to maintain the 30 million b/d ceiling and urged member countries to adhere to it,” OPEC said. (…)

“urged member countries to adhere to it”! From Bloomberg:

Most OPEC members already are pumping as much as possible. The group is producing about one million more barrels than its official ceiling of 30 million barrels a day—a target Mr. Badri said was now “an indicator” rather than a ceiling. The remark underscores OPEC’s increasingly laissez-faire approach to oil markets. After the previous meeting in November, Mr Badri said members would comply with the agreed-on target.

OPEC also began pondering what could be another shock to the oil market in the coming weeks: Iran’s plans to pour up to a million new barrels of oil on the global market in the event of a nuclear deal with the U.S., Europe, Russia and China. (…)

But delegates said production quotas weren’t discussed at the meeting.

Remember what big daddy Saudi Arabia’s al-Naimi said before the meeting:

Production is a sovereign right. They are free to do as they want

So what is this cartel all about now? This seems like a free-for-all from now on.

BTW

At an OPEC-sponsored conference in the days before the meeting, Ryan Lance, the head of ConocoPhillips Corp., told OPEC delegates the U.S. shale industry already had reduced costs by up to 30% and expects to improve efficiency by up to 20% over the next five years.

Hmmm…

EARNINGS WATCH

Q2 earnings season begins in one month. Not much has happened lately other than improving estimates for the Energy sector as the price of oil has risen. Since the estimate for total earnings (-2.8% YoY) has not changed much (-0.1% in last 2 weeks), it means that non-Energy estimates have come down a little with the largest downward revisions being in Industrials (from +4.8% to +3.9%).

Overall volume remains tepid, except in down days …

GO FIGURE! (2)

Remember the piece on Lance Roberts 2 weeks ago?

• From the broader macro-technical perspective, the current bullish trend remains very much intact despite deterioration in market liquidity, equity outflows and weak fundamentals.
• I stated previously that I expected the consolidation to resolve itself to the upside due to the underlying momentum in the markets. As I discussed in this past weekend’s newsletter, the resolution of that consolidation has now been achieved.
• The reality is that the breakout to the upside of the consolidation range IS BULLISH and suggests that markets will go higher in the SHORT TERM.
• The markets are sending short-term bullish signals that should be viewed constructively in the short-term, and portfolios should remain tilted more heavily towards equity exposure.

Here’s the most recent update (last Thursday):

• As I discussed earlier this week, EVERY single long-term market indicator has now broken down and send signals that have ONLY occurred at prior major market peaks.
• Here is the problem, the markets need to rally and close positive on Friday, otherwise, the downward pressure will likely continue into next week putting the recent breakout at risk.
• However, investors should NOT sell until it actually begins to RAIN. Today’s close might be the start of a possible shower.
• The market has been sending repeated warnings as of late which suggests that investors remain on HIGH ALERT. With portfolio’s fully allocated currently, the risk to principal of a sharp downward contraction is elevated.

Here’s the chart with the broken down long-term indicators:

U.S. Stocks on Wrong Side of History With Rate Rise in Sight

While Standard & Poor’s 500 Index price-earnings ratios are far from records, they’ve shown no ability to expand after the U.S. central bank starts raising rates, according to data compiled by Goldman Sachs Group Inc. and Bloomberg. In the quarter after the last 12 tightening cycles began, P/Es contracted by an average of 7.2 percent.

European Stocks Decline as Germany’s DAX Index Enters Correction

High time for greed to yield to fear The dangers of a wholesale retreat from risky positions

(…) “Investors remain trapped in the twilight zone, the transition period between the end of QE and the first rate hike, the start of policy normalisation,” noted one recent research report from Bank of America Merrill Lynch. “The investment backdrop will probably continue to be cursed by mediocre returns, volatile trading rotation, correlation breakdowns and flash crashes.” In addition to that sobering message, Merrill warned of this year’s’ “liquidity paradox”.

“In a world of infinite central bank liquidity, asset markets can suddenly turn extremely illiquid. Reducing risk rather than maximising return is the smarter mid-2015 strategy,” Merrill’s strategists add. (…)

“Years of easy money have led to inflated asset values and encouraged lookalike yield-seeking trades,” note analysts at BlackRock in a recent report. “Asset markets show rising correlations and low returns. There is limited diversification when QE has floated so many boats.” (…)

In addition, the same regulators that tell investors to take risk and invest in riskier assets are telling banks at the same time: don’t take risk; don’t take a chance on losing money.

That message translates into: don’t make markets for your buy side clients. The resulting lack of trading liquidity magnifies moves — particularly on the downside. The use of new products such as credit or leveraged loan exchange traded funds (particularly dangerous since these loans settle in 20 days while the ETFs promise instant liquidity) can only exacerbate the problem.

The combination of a swollen buy side and a shallow sell side could be a formula for a meltdown when managers try to unwind riskier positions. “A sell-off triggered by an unwinding of leverage and magnified by poor liquidity could sink many boats,” BlackRock adds.