Hiring Booms, but Soft Wages Linger The U.S. concluded its best year of job growth in 15 years as the unemployment rate fell to a postrecession low last month, signs of strength that mask continued challenges of stagnant wages and a stubbornly high number of Americans still on the sidelines.
Employment across the economy climbed by a seasonally adjusted 252,000 in December, the Labor Department said, closing 2014 with strong hiring momentum that appears set to continue into this year. Revisions showed employers added 50,000 more jobs in October and November than previously estimated. (…)
Job creation was again concentrated in the private sector with 63.4% of industries reporting higher headcounts.
Hourly earnings in December rose 1.7% over the past year, barely ahead of inflation. The divide could protect firms’ profits while restraining the ability of U.S. households to elevate their living standards, underscoring the overall sense of malaise among Americans seen in many recent polls. (…)
Average hourly earnings for private-sector workers fell 5 cents, or 0.2%, to $24.57 in December. The latest drop nearly entirely offset November’s six-cent increase. The average workweek held steady at 34.6 hours in December. (…)
By another measure, last year’s wage gains were the weakest on records back to 1965. Due in part to a sharp drop last month, nonsupervisory wages rose 1.3% in December from a year earlier, on a non-seasonally adjusted basis. That was the weakest annual reading for the month, worse than December 2003’s 1.4% advance.
The share of Americans working or looking for work in December fell to 62.7%, matching the lowest level since 1978. The latest figure shows more Americans dropped out of the workforce.
The mix of jobs created since the recession also may be restraining overall wage growth. Lower-paying positions in the retail, temporary-help and leisure and hospitality sectors have seen some of the strongest job growth, while the better-paying construction and manufacturing sectors have been slower to make gains.
Many of those finding jobs last month may have been part-time holiday help, said Wells Fargo economist John Silvia. “Given the rapid pace of recent hiring, many of these new hires are entry-level workers and would be paid less.” (…)
Federal Reserve Bank of San Francisco economists, meanwhile, have pushed a view that the labor market is experiencing a phenomenon called pent-up wage deflation. This works as follows: Because companies were unable or unwilling to cut wages during the downturn despite an extremely weak labor market, they haven’t had to raise wages so much since.
Indeed, this week, those economists presented evidence that industries that were able to adjust wages lower in the recession have since raised them by more. The implication is that once this pent-up deflation passes through the system, wages could start climbing rapidly.
The Wage Weakness May Not Be as Bad as It Seems
(…) Stores and online merchants hired a larger-than-usual army of seasonal workers to help keep up with the demand for holiday gift-giving. Amazon.com Inc. prepared for the crush this year by adding 80,000 seasonal workers, up from 70,000 last year. (…)
From Bloomberg:
To some extent, the decline in global oil prices may be holding U.S. wages down. The average wage in mining and logging, a category that includes oil extraction, has fallen at an annualized rate of almost 5 percent during the past three months.
From Zerohedge:
in December the number of workers employed in Food Service and Drinking Places, i.e., sub-minimum wage waiters and bartenders jumped by 43,600: the highest monthly increase since 2012…
… taking the series to an all time high record of 10.848 million workers, and rapidly catching up with America’s barely growing manufacturing sector.
From David Rosenberg:
One has to wonder at what point the senior brass at the fed pulls a mea culpa on the participation rate rising – it has failed to rebound as the economy gained ground. (…)
The pool of available labour shrunk by 494,000 (…)
Increasingly, the evidence is supporting the structural or demographic thesis (…)
The unemployment rate for for collage graduates is down to 2.9%; for adult males it is down to 4.7%; for manufacturing workers down to 3.9%; and for the cyclically unemployed, down to 2.6%.
The jobless rate for the 25 to 34 year old first-time homebuyer group dipped below 6% for the first time in nearly eight years (…)
Looking at the whole gamut of indicators for Q4 (…) we have aggregate wages rising at what seems to me to be a rather healthy 4.7% annual rate for Q4. (…)
This pickup in aggregate incomes may be one reason why the number of people having to work at multitude jobs to bolster their income dropped 117,000 in December after a 389,000 plunge in November – this is a very positive hidden nugget in [Friday’s} report that highlights the extent to which family budget strains are being alleviated.
Coming headwind (NBF):
Inflation Gauge Falls to Lowest Level in 14 Years
An inflation gauge closely watched by Federal Reserve officials has fallen to the lowest level in more than 14 years, extending a decline that investors and analysts say could complicate the central bank’s plan to raise interest rates this year.
The so-called five-year forward five-year break-even rate, which measures annual inflation currently expected by investors between 2020 and 2025, tumbled to 1.8648% on Tuesday. (…)
Federal-funds futures, used by investors and traders to place bets on central-bank policy, showed that investors and traders see only 17% odds that the Fed will raise interest rates at the June 2015 policy meeting, compared with 20% right before Friday’s jobs report, according to data from the CME . The odds were 3.9% a month ago.
Investors see a 56% chance of a rate increase by September and an 84% chance by December.
OIL
Brent Crude Falls Below $50 Oil futures tumble lower in European trading on nagging oversupply concerns, with Brent crude below $50 a barrel after Goldman Sachs and other forecasters said prices are likely to stay lower for longer.
Goldman Sachs lowered its average Brent crude forecast for 2015 to $50.40 a barrel from $83.75, and its WTI oil forecast to $47.15 a barrel from $73.75. (…)
Keeping prices low plays into the strategy of Gulf producers like Saudi Arabia who “will keep the thumbscrews on U.S. shale producers,” said Michael Hewson of CMC Markets.
“That suggests to me that $40 a barrel is feasible over the next few months,” Mr. Hewson said.
Société Générale also cut its Brent price forecast by $15 to average $55 a barrel in 2015 and for WTI crude by $14 to $51 a barrel, due to the buildup in oil storage and inventories in the first half of this year. (…)
HERE’S A GREAT CHART:
From BluHawk Wealth Management:
Shell’s Canadian Oil-Sands Operations to Cut Jobs Royal Dutch Shell PLC said Friday it plans to cut jobs at its Canadian oil-sands operations amid a recent swoon in global crude oil prices.
Shell, which produces 250,000 barrels of oil a day from its oil-sands mines, will trim about 5% to 10% of its 3,000 workers, some of whom will be reassigned to other jobs, said company spokesman Cameron Yost.
Canadian Natural Slashes Spending, Production Targets
Canadian Natural Resources Ltd. , one of Canada’s largest oil and gas producers, cut its full-year capital spending plans and production forecast on Monday, citing the rapid drop in crude oil prices since setting its initial 2015 budget in early November.
The Calgary-based company said it would spend 6.2 billion Canadian dollars ($5.25 billion) on growth projects, down from an earlier target of C$8.6 billion, and increase production of crude oil and natural gas liquids about 7% over 2014 levels, down from an earlier projection of around 11% growth. (…)
But Canadian Natural said its plans to expand production at its core Horizon oil sands mine in Alberta by 125,000 barrels a day over the next two years “remain on track.” Once complete, mine operating costs will be between C$25 to C$27 a barrel, it said, which is below current spot market prices for Canadian crude.
Big Vehicles Put U.S. Auto Makers Back in Driver’s Seat
(…) Trucks and SUVs accounted for 52.1% of the vehicles sold in the U.S. last year, compared with 47.3% in 2009, and will represent 58% of first-quarter production mix, according to WardAuto.com. Car makers, on average, net an operating profit of as much as $10,000 on every pickup truck sold.
North America, meanwhile, which had accounted for only 21% of the world’s auto sales during the recession in 2009, has clawed its way back, finishing near 24%, while the rest of the world’s regions remained flat or fell, according to WardsAuto.com.
China Car Sales to Slow Further China’s auto industry could face a second straight year of weaker growth after a sharp 2014 slowdown, according to an industry association and analysts, as the economy cools and inventories rise.
The China Association of Automobile Manufacturers said Monday that it expects passenger vehicle sales to rise 8% to 21.25 million vehicles this year, compared with 9.9% growth in 2014. While that pace would be strong compared with weaker markets such as Western Europe and the U.S., it still marks a sharp slowdown from a 16% gain in 2013 and even higher rates in some previous years.
By comparison, U.S. sales last year rose 5.9% from the year earlier to 16.5 million cars and light trucks, helped by low fuel prices and low interest rates. (…)
In 2014, China’s sedan sales grew only 3% from a year earlier to 12.4 million cars.
The China auto association sees a somewhat brighter outlook for commercial vehicles, which are dependent on the property market. Overall, it expects total sales of passenger and commercial vehicles this year to rise 7% from 2014 to 25.13 million, compared with 6.9% last year.
The industry group’s estimates are largely in line with analysts. Business Monitor International, a unit of Fitch Group, expected growth in China’s passenger car sales to slow to 7% this year. LMC Automotive forecast a 9% rise for the passenger car market and IHS Automotive forecast an 8% rise.
In addition to the economic deceleration, demand for cars is taking a hit from the increasing number of cities placing restrictions on car sales to tackle their worsening air pollution and traffic problems. (…)
Latest data from the China Automobile Dealers Association show that stockpiles at China’s more than 22,000 dealerships jumped to 55 days of sales in November, up from 44 days in October and the highest level since June 2012.
After Boom, a Pileup in Commodities Huge levels of output have helped drive commodity prices down, and many analysts believe they will stay low: Large stockpiles remain. The slump has been devastating for some producers and companies that depend on them.
(…) Years of high commodity prices fueled a boom in investment around the globe by companies extracting resources—and by the many others, big and small, that depend on them. The ensuing slump has been devastating.(…)
Take copper. The worst performer among base metals last year, it has shed 14% of its value on the back more than four straight years of oversupply.
Yet, new mines, including the Sierra Gorda mine in Chile that was inaugurated in October, continue adding to the glut. The Constancia mine, set to begin operations in Peru next year, looks to add even more.
In the sugar market, four straight years of global oversupply pushed sugar prices to multiyear lows last year. (…)
But despite the price collapse, some sugar producers are adding capacity—the result of capital investments planned years ago. Iraq-based Etihad Sugar Co. is building a 900,000-ton refinery south of Baghdad that is due to come on line this year. (…)
Ivan Glasenberg, chief executive of mining giant Glencore PLC, recently criticized mining rivals for continuing to invest in and ramp up iron-ore production despite the rout in prices.
Speaking at an investor event in December, he said that “capital misallocation, not a lack of demand, remains a key issue for the sector.” (…)
Investing in commodities and commodity-related securities has always been a greater fool’s game. You get the deadly confluence of generally below average managements investing shareholder money in very expensive long-term projects based on numerous macro forecasts on which they have limited, if any, control, with analysts who spend the bulk of their time on the rear-view mirror pretending to see what’s coming.
ECB’s Debate on QE Intensifies as Media Window Narrows
ECB President Mario Draghi’s drive to win over critics of his policies in Germany, the region’s biggest economy, will take him to Berlin for a Jan. 14 conference, a day before QE-opponent Jens Weidmann speaks in the south of the country. They and other officials should then stay out of the limelight before the Governing Council meets next week in Frankfurt to decide how best to stave off a deflationary spiral in the euro area. (…)
More support for Draghi:
The leading indicators point to slowdowns in Germany, Italy, Russia and the U.K., but hint at a stabilization in growth across the eurozone as a whole.
The OECD’s composite leading indicator for its 34 members rose to 100.5 from 100.4. The leading indicator for the U.S. was unchanged at 100.4 for the sixth straight month. A reading of 100.0 indicates an economy will grow at its trend rate of growth, or the average over recent decades.
Among large developing economies, the leading indicators for India and China rose, indicating that growth will pick up in the former, and remain steady in the latter.
The OECD said there are signs of a “positive change in momentum” in Japan, as its leading indicator was unchanged for the fourth straight month, having declined in the earlier part of 2014.
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FT View: Europe’s deflation risk leaves no option but QE The ECB must now go full speed ahead to prevent the slide in prices
(…) What the ECB should be doing is financing a fiscal expansion, not pushing valiantly on what may turn out to be a monetary policy string. Those rock-bottom bond yields (with the exception of Greece) are practically begging governments to borrow and spend. The position of the German economic establishment is indefensible: it refuses to undertake a fiscal expansion itself while trying to hamstring a less effective central banking substitute. (…)
Given his limited options, Mr Draghi is right to push ahead with QE. The balance of risks strongly argues for trying tool after tool until finding one that works. But it should not necessarily be regarded as the ECB’s fault if it fails to jump-start the economy.
The eurozone cannot go on as it is. Growth is weak to non-existent; there is a chronic deficiency of demand which is turning acute; the risk of pervasive and persistent deflation only continues to grow. The ECB is one of the few institutions in Europe that seems willing to try to arrest the slide. It should go full speed ahead.
EARNINGS WATCH
Earnings season begins.
Q4 EARNINGS PER FACTSET:
Heading into the start of the Q4 earnings season, analysts and corporations have lowered expectations for earnings for the S&P 500. On a per-share basis, estimated earnings for the fourth quarter fell by 5.6% during the quarter. This percentage was above the 1-year, 5-year, and 10-year averages. Most of the
downward revisions to estimates occurred in the Energy sector, as expected earnings (on a per-share basis) dropped by more than 25% during the quarter.As a result of the downward revisions to earnings estimates, the year-over-year estimated earnings growth rate for Q4 2014 has declined to 1.1% today from an expectation of 8.4% at the start of the quarter (September 30).
The estimated sales growth rate for Q4 2014 of 1.1% is below the estimate of 3.8% at the start of the quarter. As on the earnings side, much of the decrease in expected revenue growth can be attributed to the Energy sector. This sector is now expected to report a decline of 15.1% in sales, compared to an expected decline of 1.7% in sales at the start of the quarter.
Looking at future quarters, analysts have also cut estimates for Q1 2015, Q2 2015 and all of 2015. The estimated earnings and revenue growth rates for both of these quarters and the full year are lower today compared to the estimates on September 30. Most of these downward estimate revisions have occurred in the Energy sector.
But all sectors are seeing slower growth rates:
Earnings headwind?
As of Dec. 31, S&P numbers were not showing a coming decline in trailing earnings. To be closely monitored.
THE “EX-ENERGY” QUARTER
This earnings season, earnings “ex-energy” will likely become a commonly heard phrase because of the sector’s expected divergence. (…) Over just the past three months, energy sector earnings estimates for the next four quarters have tumbled 29%, compared with the S&P 500 overall which — despite including energy — has seen estimates fall just 2% during this period. (LPL Financial)
Big Banks Set to Trim Bonuses Citigroup and Bank of America have cut the pools of bonus money set aside for traders and other employees, as Wall Street scrambles to adjust its expenses following a surprisingly weak December.
Choppy markets appear to have caught some bank trading desks flat-footed, wiping out gains they had accumulated earlier in the fourth quarter, traders and analysts said. Although not all big banks were hit with the holiday blues this past month, the late adjustments reflect the volatility in the results of the firms’ securities divisions, and how traders’ full-year performance can be cinched—or come undone—in a few frenzied weeks.
Citi will pay bonuses to fixed-income and equities traders that are, on average, 5% to 10% less than what they earned a year ago, people familiar with the matter said. The bank had previously planned to leave its bonus pool unchanged from early-2014’s payouts, they said.
Employee compensation remains a top expense item at large Wall Street banks, and any move to trim those costs might indicate the firms tallied less revenue than they expected. Citigroup shares dipped slightly after The Wall Street Journal reported the cut to the bonus pool, ending the session down $1.16, or 2.2%, to $50.78, on a bad day for banking stocks.
The ramifications will become clear starting next week, when most of the nation’s biggest banks report results. J.P. Morgan Chase & Co. plans to announce results Wednesday, while Citi and Bank of America are slated to report Thursday. Goldman Sachs Group Inc. ’s earnings are due Friday.
BTW, Citi’s Q4 estimates just got slashed:
The estimated earnings growth rate for the fourth quarter is 1.1% this week, down from the estimated earnings growth rate of 1.6% last week. Downward revisions to earnings estimates for Citigroup accounted for most of the decrease in the growth rate, as the mean EPS estimate for the company fell to $0.11 from $0.37 during the week. As a result, the estimated earnings growth rate for the Financials sector as a whole dropped to -1.7% from -0.1% over this period. (Factset)