Job Market Rebounds After a Chill
Employers added 223,000 jobs in April, the Labor Department said Friday. That was still below 2014’s breakneck pace but a rebound from March’s gain, which was revised down to just 85,000, the worst monthly performance in almost three years.
The jobless rate ticked down slightly to 5.4%, the lowest level since mid-2008, as more Americans came off the sidelines to look for work and an even bigger number found jobs. (…)
The average hourly wage of U.S. workers picked up 3 cents last month from March and was up just 2.2% in the past year, too small of an increase to raise living standards.
Job growth was broad-based. Professional and business services led hiring last month, adding 62,000 jobs. Construction and health-care industries added 45,000 jobs apiece.
The notable exception was the energy industry, whose retrenchment under the weight of lower oil prices has weighed on the job market and business investment. The mining sector lost 15,000 jobs in April, bringing total cuts to 49,000 positions so far this year.
U.S. Economy May Reach Job Market Nirvana in Next Six Months
According to the Atlanta Fed’s online jobs calculator, if employers add an average of around 270,000 jobs per month for the next six months, all else being equal, the jobless rate should drop to 5% from 5.4% in April.
Last month, the economy added 223,000 jobs after a weak 85,000 rise the prior month and a 266,000 increase in February, so the gains suggested by the Atlanta Fed tool is entirely doable.
Why is a 5% jobless rate significant? That number rests at the bottom of Fed officials’ projected range for the long-run unemployment rate. (In March, their so-called central tendency, which excludes the three highest and three lowest forecasts, was 5.0% to 5.2%). Many economists and policy makers believe that this rate indicates that the economy is at “full employment,” meaning that if unemployment dips lower, rising wages bubbling out of a hot job market should spur higher inflation. (…)
The Good, the Bad and the Ugly:
(…) But not all was rosy. Job gains in the private sector weren’t widespread as evidenced by the diffusion index which fell again in April to hit its lowest point since the summer of 2013. The large loss of full time jobs (-252K according to the household survey) was also disappointing, while wage growth remained tame. As for the mining sector, the employment picture is plain ugly with a fourth consecutive drop in response to the oil price collapse. All told, the employment data is a mixed bag, enough in our view to convince the Fed to exercise utmost caution when comes the time to normalize monetary policy. As such, we wouldn’t be surprised if the FOMC delays rate hikes to late Q3 or even later. (NBF)
China Inflation Misses Estimates, Providing Room for Easing
The consumer-prices index increased 1.5 percent from a year earlier, missing the median estimate of 1.6 percent in a Bloomberg News survey of analysts, a release from China’s statistics authority showed in Beijing. The producer-prices index fell 4.6 percent, extending a record stretch of declines.
Food prices climbed 2.7 percent from a year earlier, while non-food costs were up 0.9 percent. From a month earlier consumer prices declined 0.2 percent in April.
China Cuts Interest Rates Again China’s central bank said it is cutting its benchmark interest rate, its third such move since November last year amid slowing economic growth.
The People’s Bank of China said it was cutting lending and deposit rates by 0.25 percentage point. The action also follows two moves this year to let commercial banks lend more of their deposits to struggling companies. (…)
The central bank said that the latest move would cut the benchmark one-year lending rate to 5.1% and the one-year deposit rate to 2.25%, effective Monday. The three interest-rate cuts since last November have lowered benchmark lending interest rates by a combined 0.90 percentage point.
At the same time, the central bank gave banks more freedom in setting deposit rates as part of its interest-rate liberalization program. It said banks could offer deposit rates of up to 1.5 times the benchmark deposit rate, raising the ceiling from 1.3 times previously.
Meanwhile, the central bank also said that interest rates on mortgage provident loans would also be cut in step with the overall interest-rate cuts.
Goldman Sees China Rebound as History Repeats for Top Forecaster
As gloom gathered over China’s economic outlook in March last year, Goldman Sachs Group Inc. economist Song Yu declared growth likely had “troughed” and a rebound would follow. The top forecaster on China’s economy was proven right, and sees a repeat this year.
“Now it’s very similar to this time of last year in terms of having a combination of monetary, fiscal and administrative loosening,” said Beijing-based Song, ranked the best overall forecaster of China’s economy by Bloomberg Rankings for the past two years. “The data in recent years consistently show us one thing: If the Chinese government really, really wants to push up short-term growth, they can.” (…)
Goldman’s Song was unfazed by an unexpected drop in April exports and says his optimism over a second-quarter rebound for the economy is buoyed by an anticipated tailwind from external demand. Goldman expects U.S. growth will rebound this quarter in the same way it did in 2014, Song said.
On a quarter-on-quarter annualized basis, gross domestic product growth will pick up to 6.9 percent this quarter, he estimates. Song projects GDP will expand 6.8 percent this year — near Premier Li Keqiang’s target of about 7 percent — and full-year growth of 6.7 percent in 2016. (…)
Here’s what the PBoC said Friday:
“We will prevent excessive easing to avoid cementing economic distortion or pushing up debt and leverage levels; on the other hand, we will create a neutral and appropriate monetary environment” for growth, the People’s Bank of China said in its monetary policyreport. The bank also said that China’s exports won’t see big improvement.
Things have gotten upside down. China now relies on the ROW for its economic growth!
America’s Oil Drilling Boom Is Sputtering Back to Life
For the first time in five months, a rig in the Williston Basin, where North Dakota’s Bakken shale formation lies, sputtered back to life and started drilling for crude once again. And then one returned to the Permian Basin, the nation’s biggest oil play, field services contractor Baker Hughes Inc. said Friday.
Shale explorers including EOG Resources Inc. and Pioneer Natural Resources Co. say they’re preparing to bounce back from the deepest and most prolonged slowdown in U.S. oil drilling on record. The country has lost more than half its rigs since October, casualties of a 49 percent slide in crude prices during the last half of 2014. Futures rallied above $60 a barrel earlier this week, and a sudden return to oil fields would threaten to end this fragile recovery. (…)
While rigs are returning to some fields, the total U.S. count has continued to decline, falling 11 this week to a four-year low on Friday. The drilling slowdown won’t reach a real bottom for about another month, James Williams, president of energy consultant WTRG Economics, said by phone from London, Arkansas.
Carrizo Oil & Gas Inc., Devon Energy Corp. and Chesapeake Energy Corp. all lifted their full-year production outlooks this week. EOG said on May 5 that it plans to increase drilling as soon as crude stabilizes around $65 a barrel, while Pioneer has said it is preparing to deploy more rigs as soon as July.
Morgan Stanley said underlying data show drilling is already picking up in some counties within Texas’s Eagle Ford shale formation and the Permian Basin of Texas and New Mexico. (…)
The Permian will probably be the first basin to bounce back because it’s home to multiple producing zones stacked on top of each other, allowing drillers to tap oil at different depths with the same well, said David Zusman, managing director at Talara Capital Management, which handles $400 million in energy investments. (…)
The U.S. rig count may recover to 1,200 to 1,300 should prices rally past $70 a barrel, Allen Gilmer, chief executive officer of the Austin-based energy data provider Drillinginfo, said by phone on May 1. The total rose for three straight days in late April, he said.
“The service companies have responded very quickly in regards to dropping prices, and it has become very attractive, especially for companies with hedged positions, to come back right now before those hedges fall off,” Gilmer said. “We’re a few weeks from the bottom now. You’ll start seeing it build up.”
EARNINGS WATCH
Factset’s account:
With 89% of the companies in the S&P 500 reporting actual results for Q1 to date, fewer companies are reporting actual EPS above estimates (71%) and actual sales above estimates (45%) than average. However, the companies that are reporting upside earnings surprises are surpassing estimates by much wider margins (+6.4%) than average.
As a result of these upside earnings surprises, the blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings growth rate for Q1 2015 is now 0.1%, which is above the estimate of- 4.7% at the end of the first quarter (March 31).
If the Energy sector is excluded, the blended earnings growth rate for the S&P 500 would jump to 7.7% from 0.1%.
In terms of revenues, 45% of companies have reported actual sales above estimated sales and 55% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is below both the 1-year (59%) average and the 5-year average (58%).
The blended revenue decline for Q1 2015 is -2.8%, which is slightly larger than the estimate of -2.6% at the end of the first quarter (March 31). If the Energy sector is excluded, the blended revenue growth rate for the S&P 500 would jump to 2.5% from -2.8%.
At this point in time, 82 companies in the index have issued EPS guidance for Q2 2015. Of these 82 companies, 57 have issued negative EPS guidance and 25 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the second quarter is 70%. This percentage is slightly above the 5-year average of 69%.
Nineteen companies pre-announced last week and 16 of them were negative. Still, the pre-announcement stats are not very much different than at the same time last year. In fact, we have had 5 fewer negative pre-announcements than last year at the same date.
On the other hand, while aggregate earnings are clearly better than expected, only two sectors really shone during Q1: excluding Health Care ( +22.3%) and Financials (+13.4%), the remaining 7 sectors (ex-Energy) only averaged a 2.1% EPS growth in Q1, better than the –1.3% expected on March 31, but nonetheless fairly tame.
U-turn!
However: Earnings Beat Rate Trends Lower as the Season Progresses
More than 2,000 companies have reported first quarter earnings numbers since the reporting period began in early April. Through today, 60.3% of companies that have reported have beaten their consensus analyst EPS estimates.
Which probably explains why S&P’s estimate of Q1 EPS has declined in the last week from $26.96 to $26.04. As a result, trailing 12-m EPS are now at $111.73 and are set to decline to $110.97 after Q2 and $111.35 after Q3 before bouncing back to $116.29 after Q4, down almost $1.00 from $117.30 estimated last week.
EPS ‘Beats’ Lose All Meaning As Downward Revisions, Buybacks Mask Weakness
Typical ZH piece, starting with Deutsche Bank’s summary of the earnings season:
447 companies or 92% of S&P EPS reported. 59% beat on EPS with a wtd avg beat of 6.2% (6.7% ex Fin), but only 32% beat on sales with a wtd avg miss of -0.9% (-1.5% ex Fin). The wtd avg EPS beat of 6.2% is better than normal, but the 8.2% cut to 1Q EPS before reporting is also the biggest since recession. Btm-up 1Q EPS is now $28.66, 1.9% y/y. The 1Q EPS growth is on -3.4% sales decline helped by 4% y/y margin expansion and 1.4% from share buybacks.
And speaking of share repurchases, April set an all-time record for announced buyback programs, as companies authorized $141 billion in repurchases (up 141% Y/Y). (…)
What all of this means is that between buybacks and downward revisions, earnings “beats” now convey exactly nothing about the health of corporate America. An EPS “beat” is now simply a function of how much stock a company has managed to buy back at the expense of future growth and productivity and the degree to which analysts have slashed estimates over the course of the reporting period.
To sum up, here are four charts from Deutsche that tell you everything you need to know.
For the record, and just to add to “everything you need to know”, the number of shares used as the divisor for the S&P 500 Index declined 0.1% in Q1 QoQ and 0.8% YoY. From its recent peak in September 2011, the divisor has declined by 2.8% in total, about 0.8% per year on average.
Now, this is meaningful:
Only Eight U.S. Companies Pass Jefferies’ Graham & Dodd Screener
With global equity markets pushing to new highs around the world, analysts at Jefferies set out last month to gauge how cheap or expensive the equity markets really are, by conducting a dispassionate search for value in the US. Jefferies’ analysts used the approach that Benjamin Graham and David Dodd created and revealed in their classic textbook, ‘Security Analysis’.
Analysts ran two screens, firstly, a ‘defensive’ portfolio based on US large caps with a long-term record of profitability and strong financial conditions. Secondly, a more ‘aggressive’ screen, with a number of the criteria ‘relaxed’ — along the lines of Graham & Dodd’s screen for enterprising investors.
Only eight US companies passed both screens, a disappointing result compared to the Graham & Dodd screen analysts recently conducted of the Japanese market, where value still prevails. (Click to enlarge)
The eight companies that passed the Graham & Dodd aggressive screen are shown below.
And so is this:
What distresses me about this report is that with Germany as the hands-down most competitive economy in Europe and running one of the largest current account surpluses in the world and with the euro exchange rate having fallen substantially this year, German foreign orders are still contracting. Overall orders are up in March wholly on the back of a 4.3% hike in domestic orders as foreign orders are lower by 1.6%. Foreign orders are lower for three months in a row and in four of the last five months. Foreign orders are falling at a 23.6% annual rate over three months. That’s not good news. 
Germany promises €1.5bn tax cut for 2016
But at around 0.05 per cent of gross domestic product it will put only a modest amount of extra money into consumers’ pockets and so may do little to quell demands from foreign critics, led by the International Monetary Fund, that Berlin should do more to stimulate domestic growth.
Gross domestic product in Southeast Asia’s largest economy grew 4.71% from a year earlier, 
Car and motorcycle sales, an indicator of domestic demand, fell 14% and 19%, respectively, in the first quarter from a year earlier. 
