Hiring Picked Up in May but Lagged Behind Broader Recovery U.S. employers added 559,000 jobs last month, but not enough for the labor market to keep pace with an overall economy that is heating up as the pandemic continues to ease.

(…) While the gains marked an uptick from April, they were lower than economists predicted and reflected businesses struggling to fill job openings as potential workers remained on the sidelines. The labor recovery has slowed from earlier in the year—in March, the economy added 785,000 jobs—a development economists say could delay a full labor recovery to well into next year.

That mixed picture cheered investors, who bet the numbers weren’t strong enough to change the Federal Reserve’s course on its easy-money policies. (…)

Job gains in May were led by leisure and hospitality, with the sector adding 292,000 jobs. (…) Payrolls also rose in education and healthcare, the Labor Department said.

Manufacturing employment rose, driven mostly by job gains in the autos sector, a sign that supply-chain disruptions in the industry somewhat eased last month. (…)

Still, about 9.3 million people were unemployed and potentially available to work in May, while employment was still down by about 7.6 million jobs compared with pre-pandemic levels. At the pace of last month’s job gains, it would take more than a year for U.S. employment to return February 2020 levels. (…)

The labor-force participation rate, the share of adults working or looking for work, edged slightly lower in May to 61.6%, down from 63.3% in February 2020. (…)

Average hourly pay for private-sector employees increased by 15 cents to $30.33 in May. Hourly wages rose 2% from a year earlier, though gains in wages for leisure and hospitality workers, including those at restaurants, were up close to 4% over the year. Still the average hourly wage for leisure and hospitality jobs last month was $18.09, well below the overall average for private-sector workers. (…)

The Payrolls Index (employment x hours x wages) is up 13.2% YoY in May from +16.1% in April and +2.1% in March. On a MoM basis, payrolls were up a strong 0.9% in each of the last 2 months.

Indexing at February 2020 = 100, Payrolls are 2.6% above their pre-pandemic level even though total employment is 5% lower.

Scott Minerd, CIO at Guggenheim:

(…) The new employment release further supports widespread reports of labor shortages. Overall average hourly earnings were much stronger than expected, up 0.5 percent following +0.7 percent in April, and wages in the low wage leisure and hospitality sector jumped 1.3 percent. As the chart below shows, low wage industries, where unemployment insurance (UI) benefits are more competitive with wages, are seeing larger wage gains. With 25 states now opting out of federal unemployment benefits around the end of June, we should get an interesting case study in how big of a role the benefits are playing in labor supply challenges.

Low Wage Industries Seeing Fastest Wage Growth

Guggenheim Investments, Haver Analytics. Data as of 5.31.2021.

It’s also notable that restaurant business activity has nearly completely recovered but employment remains 12 percent below pre-pandemic levels.

Restaurant Activity Has Outpaced Hiring

Guggenheim Investments, Haver Analytics. Data as of 5.31.2021 for payrolls, 6.2.2021 for diners

Concerns over labor supply are also validated by a decline in the labor force participation rate, down 10 basis points (bps) to 61.6 percent, which helped the unemployment rate fall by 30 bps to 5.8 percent. But returning participation to its pre-pandemic level has been cited as a goal by several Fed speakers, so this development is a setback in “substantial further progress” required before tapering of asset purchases can begin.

Change in Labor Force Participation Rate by Age

Guggenheim Investments, Haver Analytics. Data as of 5.31.2021.

But the Fed’s goals may require reconsideration. There is clearly a supply problem, particularly in the 55+ age group which accounts for 2 million of the 7.6 million missing workers and which has shown no inclination to re-enter the workforce.

And wages seem to be reacting as they normally do when demand exceeds supply, particularly when strong and rising demand meets reduced supply: average hourly earnings rose 0.7% and 0.5% in the last 2 months respectively, +7.4% annualized. Maybe April’s jump was not a one-off.

NFIB survey – proportion of firms with vacancies they can’t fill (1975-2021)

Macrobond, ING

ING:

Around half of all US states have announced they are ending them either this month or next, but for the majority of recipients they will continue until September. With the summer vacation season also kicking in this is not going to help the labour supply issue either with parents still required to stay home for childcare.

Consequently we may not see labour supply strains ease for another three or four months, which will likely keep employment growth relatively subdued in the near term. This won’t mean demand disappears, merely that those companies that want to expand and grow are going to have to pay-up to attract staff.

We are set to see the US recover all of the lost economic output through the pandemic in the current quarter, but returning all the lost jobs is going to take many more months. As the structural rigidities in the jobs market ease we expect to see employment take-off and still forecast a December announcement of a QE taper and look for the first Federal Reserve rate hike to come in early 2023. The prospect of consumer price inflation getting close to 5% next week and core inflation hitting the highest level since 1993 means the risks are skewed towards earlier rather than later action.

• Summer Job Market for Teens Is Sweet Teenagers and young adults entering the hot summer job market are finding accommodating bosses, schedule flexibility, bonuses and even higher wages.

This chart from the Atlanta Fed shows that easy part of the job recovery process has been done. About half of the remaining jobs lost to the pandemic are to workers who have actually left the labor force. The nearly 4M quitters have not declined much since last October.

The Fed’s Inflation View Is All About That Base Economic data have been made hard to read because of distortions from a year ago. Comparing the latest data to two years ago shows that inflation isn’t running as rampant as some reports suggest.

(…) On average, the consumer-price index rose 3.5% every two years during the decade before the Covid-19 crisis. That was within a range between 5.8% in 2012 and 0.8% in 2016.

In April this year, the index was up 4.5% from two years earlier.

The message from this perspective is that inflation is trending a bit higher than usual but not exceptionally so as of April. (…)

The WSJ’s Jon Hilsenrath sometimes acts as a mouthpiece for the Fed. For sake of thoroughness, I would add the following observations to his analysis:

• Using measures of core inflation, which most people do including the Fed, two-year Core CPI inflation is at the high end of its 2009-2021 range. But Core PCE, the Fed’s favorite benchmark, at +4.0% in April, is now above its similar 2009-2021 range.

• Had he been around in April 1966, he could have written the exact same piece, two-year inflation measures were merely bouncing off their recent highs:

• Here’s what followed:

I am not saying this is what’s ahead, nobody really knows. But there are similarities between then and now (THE INFLATION DEBATE: JFK, LBJ, JOE AND JAY).

• Inflation in Rich Countries Hit a 12-Year High in April

Yellen Says Higher Interest Rates Would Be ‘Plus’ for U.S., Fed

Treasury Secretary Janet Yellen said President Joe Biden should push forward with his $4 trillion spending plans even if they trigger inflation that persists into next year and higher interest rates.

“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,” Yellen said Sunday in an interview with Bloomberg News during her return from the Group of Seven finance ministers’ meeting in London. (…)

“We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade,” the former Federal Reserve chair said, adding that “we want them to go back to” a normal interest rate environment, “and if this helps a little bit to alleviate things then that’s not a bad thing — that’s a good thing.” (…)

Yellen said that monetary policy makers can handle any potential rise in inflation if it sticks.

“I know that world — they’re very good,” Yellen said in the interview. “I don’t believe they’re going to screw it up.”

Flush With Stimulus Cash, Consumers Are Spending More: BofA CEO

(…) “Our consumers have lots of money in their checking accounts,” Moynihan said Sunday on CBS’s “Face the Nation.” “They have not spent about 65% to 75% of the last couple rounds of stimulus.”

Spending by consumers at the second-biggest U.S. bank exceeded $1 trillion so far this year, up 20% over 2019, he said.

Domestic travel spending, such as car rentals and hotels for leisure trips, has increased, and consumers are shifting from buying food in the store to visiting sit-down restaurants, he said.

Loans are “starting to pick up,” and there’s plenty of borrowing capacity because companies have unused credit lines, Moynihan said. (…)

• China’s Cautious Consumers Offer Clues for Post-Pandemic World

While China didn’t pump up consumers with stimulus checks, its aggressive control over the virus allowed the economy to quickly re-open and drive real household income growth to 13.7% in the first quarter of this year.

Yet the consumer recovery has been weaker than expected with economists identifying two major reasons: an unequal distribution of savings from the pandemic and lingering virus worries that’s prompted more conservative habits and has lowered spending on services — subduing an otherwise V-shaped recovery for the world’s second-biggest economy.

Like the U.S. and U.K., retail sales in value terms are above pre-pandemic levels in China, while they are recovering in the euro area. Consumers in the largest economies amassed $2.9 trillion in extra savings during Covid-related lockdowns, according to Bloomberg Economics, which is helping to fuel the fastest world growth in 60 years in 2021. (…)

Evidence from China suggest the recovery could be slow despite the nation’s world-leading 20 million vaccine doses a day with more than 40% of the population having had at least one shot. (…)

That caution is showing up in a survey series conducted by the People’s Bank of China of 20,000 depositors across 50 cities. The poll in the first quarter of this year found that some 49% of the respondents said they were increasing their savings, up from 46% in the fourth quarter of 2019. Only 22% said they were spending more, down from 28% in late 2019.

A gauge measuring how confident the respondents feel about their future income stood at 51 in the first quarter, rebounding from a low of 45.9 in the first quarter of 2020 but still below the 53.1 recorded in the final quarter of 2019. (…)

China’s retail sales expanded 17.7% in April, far slower than a projected 25% rise. Growth softened to 4.3% in April on an average two-year basis from 6.3% in March, with the consumption of goods and catering services both turning weaker, denting expectations that consumer demand was beginning to replace investment as a driver of growth. (…)

Shang-Jin Wei, a China expert at Columbia Business School in New York and formerly chief economist of the Asian Development Bank, said much of the difference in China’s retail rebound reflects the diverging approach to stimulus with its major peers. Even as spending on some areas such as eating out lags, consumption in other categories can make up the gap, he said. (…)

Shaun Roache, Asia-Pacific chief economist for S&P Global Ratings, said there’s a clear reluctance to spend with savings rates remaining well above pre-pandemic levels at almost 40% of disposable income.

“This is not what a recovery is supposed to look like, especially as income has recovered smartly,” he wrote in a note. (…)

But America is not China and Americans are not Chinese. U.S. retail sales are up 23.7% over 2 years in April and Chase’s consumer card spending tracker is up 11.7% over 2 years at the end of May.

• Gen Z Is Now Spending More Than It Did Before the Pandemic

Younger consumers, even though they have less saved than older Americans, are the ones opening their wallets as the U.S. economy recovers. Millennials and members of Generation Z are spending even more than they did before the pandemic as vaccines proliferate around the world, American Express Co. Chief Executive Officer Steve Squeri said during a virtual investor conference Friday. (…)

“When you look at your millennials and your Gen Zs right now,” they’re at “125% spending of what their pre-Covid levels were in 2019.” (…)

Chase’s own data are even more upbeat with Millenials and Gen Z spending 46% above their Jan. 2019 levels.

GM Sees Brighter Profit Outlook as It Fends Off Computer-Chip Crunch General Motors said it is working to boost vehicle deliveries to dealerships, where inventories have fallen to lowest levels in decades

The auto maker said that in recent weeks it boosted vehicle deliveries to dealerships by starting to release tens of thousands of trucks that had been parked awaiting parts. It is racing to restock record-low vehicle inventories at dealerships to satisfy surging demand from U.S. car shoppers, who are turning out in big numbers as pandemic restrictions recede. (…)

Mr. Jacobson said GM was able to pull some semiconductor deliveries into the second quarter to help lift production and ship vehicles that had been waylaid in parking lots nearby its U.S. factories. He said GM initially had expected to deliver those vehicles in the third quarter, which means the company now will be able to book that revenue in the second quarter.

GM said in a statement it is optimistic it can make up ground in the second half of the year and continues to prioritize production of large pickup trucks and sport-utility vehicles, its biggest money makers. (…)

GM’s brighter profit outlook came on the same day rival Ford Motor Co. released muted U.S. sales results for May, revealing the toll the chip shortage has taken on its vehicle inventories.

Ford’s May sales rose 4% from a year earlier, when Covid-19 quarantines sharply reduced U.S. car sales. That lagged behind the industry’s 42% increase for May and trailed GM’s 37% increase and Stellantis AG’s 34% increase, according to data from research firm Motor Intelligence, cited in a Credit Suisse note. GM and Stellantis don’t report monthly sales.

Ford reduced output at each of its two F-150 factories, in Michigan and Kansas City, Mo., for weeks this spring due to the chip shortage. GM, meanwhile, has been able to avoid down-time at its plants that produce large pickups and SUVs. Ford said May sales of F-Series pickup trucks fell 29% from a year earlier. (…)

Wow! Look where light vehicle inventories have declined. Sales will surely suffer…but when production can restart…

(via Goldman Sachs)

• Chip shortage to last until at least mid-2022, warns manufacturer Forecast from Singapore-based Flex comes as scarcity forces carmakers to scale back production
• ‘Win a car in a raffle!’ Small US firms get creative in hunt for workers Labour shortages hurt independent companies that can’t offer same incentives as corporations

Lumber rally falters but lofty prices expected to be new norm The benchmark has now decreased 10 per cent from its record high. But even with the latest decline, lumber cash prices – a gauge of what sawmills are charging to sell to wholesalers – are nearly four times higher than the benchmark at US$373 in early June of 2020.

(…) Industry experts forecast a new era with a floor for lumber cash prices at higher levels, likely at a minimum of US$500 next year, or more than double the decade-low bottom of US$210 in 2011 and far higher than US$130 in 2009 during the recession.

Wood business consultant Russ Taylor said it appears that cash prices that hit record highs last month are now headed into a phase of drifting toward US$1,000 later this year. “My sense is that prices have peaked,” he said in an interview. “But very few producers are building new mills. They’re buying existing mills and modernizing.” (…)

TECHNICALS WATCH

The last week gave hope to technicians increasingly concerned by the narrowing of equity markets since mid-February as small caps and many growth stocks have stabilized. Combined with some improvements in measures of supply and demand, these could be signs that equities are moving out of this “consolidation” phase.

About small caps:

AMC Drama Is Exposing Risks in $11 Trillion World of Indexing Index funds are supposed to cut out the human-driven craziness that periodically infects markets, but the recent meme-stock fever proved the $11 trillion industry is far from immune.

The remarkable surge in shares of AMC Entertainment Holdings Inc. and a handful of other stocks is showing up in multiple exchange-traded funds, skewing portfolios, altering risk profiles and exerting outsized influence on prices.

Take the $68 billion iShares Russell 2000 ETF (ticker IWM). In the past week through Thursday, AMC powered 70% of the product’s advance. The stock was responsible for less than a 10th of the fund’s return in the previous week. (…)

The AMC effect can be seen across a range of funds. Alongside IWM, the $17.5 billion iShares Russell 2000 Value ETF (IWN) and $72 billion iShares Core S&P Small-Cap ETF (IJR) have also seen the stock’s influence climb.

A similar phenomenon took place in January, when GameStop Corp. at one point surged more than 1,600%. Shares of the video-game retailer also rallied alongside AMC in the past week. The two companies are among a handful of shares dubbed meme stocks that are enjoying rapid, social-media fueled gains. (…)

Alongside AMC and GameStop, companies including BlackBerry Ltd., Koss Corp. and Bed Bath & Beyond Inc. also saw huge moves in the past week. (…) AMC will likely remain in many value funds until their rebalancing comes around. (…) AMC made up 21% of the $1.8 billion Invesco Dynamic Leisure and Entertainment ETF (PEJ) at one point on Wednesday. Thanks to its regularly scheduled rebalancing, it had zero shares of AMC by Friday. (…)

• Russell 2000 Is Bound to Lose AMC Entertainment, GameStop

This month’s overhaul of the Russell 2000 Index may prove costly for the gauge of smaller U.S. companies. The two biggest contributors to the measure’s 15% surge for the year through Thursday were AMC Entertainment Holdings Inc. and GameStop Corp. — standouts among so-called meme stocks. Both are poised for transfers out of the gauge and into the Russell 1000 Index of larger companies on June 28, when FTSE Russell completes an annual reconstitution of U.S. indexes. The shift would reflect the companies’ market value: $26.4 billion for AMC and $19.2 billion for GameStop as of Thursday.

About excess liquidity, from SentimenTrader:

Excess Liquidity Is Draining From the Market

The flood of money that found its way into financial markets is leaving and pooling into economic production. This behavior suggests that Excess Liquidity is plunging.

On our site, we define Excess Liquidity as:

This shows the growth in growth in M2, a broad measure of the money supply that includes deposits and money market funds, and the growth in the economy. In the long term, they tend to grow together. However, when the supply of money grows faster than the economy (represented by the growth in Industrial Production), the excess money is not invested in “things” but rather tends to find its way into financial assets. Therefore, high levels of excess liquidity tend to be positive for stock prices. Low levels of excess liquidity are negative for stocks but are not as strong as the opposite condition.

We can see just how much this figure spiked and then plunged with the latest economic releases. (…)

The overall takeaway from the plunge in Excess Liquidity shouldn’t be that it’s necessarily bearish. More than anything, for the broader market, it’s simply “not bullish.” Stocks tend to perform better when the figure is high. When it drains out, the S&P has mostly held up okay, but Technology stocks tended to suffer, while Energy stocks benefitted from the return of capital to productive assets.

Also from SentimenTrader:

Over the past 3 months, individual investors in the AAII sentiment survey have allocated an average of more than 70% of their portfolios to stocks. According to our Backtest Engine, there have been 36 months since 1987 when the average has been this high. Over the next 3 years, the S&P 500 averaged a return of -5.5%.

From J.P. Morgan via The Market Ear:

Equity participation

ZeroHedge informs us that

• Morgan Stanley’s Sell Signal Just Hit An All Time High

(…) It now appears that Morgan Stanley’s fundamental bearishness has spilled over into the bank’s technical analyst team and as the bank’s chief Euro equity Strategist Matthew Garman writes, for only the fifth time in over 30 years, each of Morgan Stanley’s five market timing indicators are giving a sell signal at the same time.

Not only that, but the bank’s Combined Market Timing Indicator – which has been in sell territory since March – just hit a new all time high of 1.19, surpassing the previous record high seen in June-2007, right around the time of the first great quant crash and before the market collapsed.

According to Garman, the only time equities have risen after a “Full House” Sell Signal was in Feb 17, shortly after the Shanghai Accord kicked in to prevent a global recession. The other previous occasions where there was a “Full House” Sell Signal were Mar-90, May-92, Jun-07. According to MS, “in the 6M post the initial Full House Sell Signal, MSCI Europe has fallen on average 6%.”

So with every in house risk indicator screaming sell, does that mean that Morgan Stanley will have the balls to tell its clients to sell? Why of course not, because in this market where stuff like the AMC, GameStop and Bed Bath squeezes force analysts to admit they no longer have any idea what’s going on…

… Morgan Stanley is keeping the hope and assuming that the current period will be similar to 2017 – the only other time when a massive sell signal did not result in a market plunge. (…)

The Market Ear has the charts:

EARNINGS WATCH

From Refinitiv/IBES

Through Jun. 4, 495 companies in the S&P 500 Index have reported earnings for Q1 2021. Of these companies, 87.5% reported earnings above analyst expectations and 10.3% reported earnings below analyst expectations. In a typical quarter (since 1994), 65% of companies beat estimates and 20% miss estimates. Over the past four quarters, 78% of companies beat the estimates and 19% missed estimates.

In aggregate, companies are reporting earnings that are 22.2% above estimates, which compares to a long-term (since 1994) average surprise factor of 3.7% and the average surprise factor over the prior four quarters of 15.2%.

Of these companies, 78.4% reported revenue above analyst expectations and 21.6% reported revenue below analyst expectations. In a typical quarter (since 2002), 61% of companies beat estimates and 39% miss estimates. Over the past four quarters, 69% of companies beat the estimates and 31% missed estimates.

In aggregate, companies are reporting revenue that are 4.0% above estimates, which compares to a long-term (since
2002) average surprise factor of 1.1% and the average surprise factor over the prior four quarters of 2.3%.

The estimated earnings growth rate for the S&P 500 for 21Q1 is 52.5%. If the energy sector is excluded, the growth rate improves to 53.1%.

The estimated revenue growth rate for the S&P 500 for 21Q1 is 13.5%. If the energy sector is excluded, the growth rate improves to 14.4%.

The estimated earnings growth rate for the S&P 500 for 21Q2 is 63.1%. If the energy sector is excluded, the growth rate declines to 50.3%.

Earnings guidance remains positive with two-thirds of Q2 done. No margins squeeze is happening in Q2, so far, or its being offset by strong revenues.

G-7 Strikes Deal to Revamp Tax Rules for Biggest Firms

The agreement by the G-7 finance ministers in London satisfies a U.S. demand for a minimum corporate tax rate of “at least 15%” on foreign earnings and paves the way for levies on multinationals in countries where they make money, instead of just where they are headquartered. (…)

According to the communique after the London meeting, countries where big firms operate would get the right to tax “at least 20%” of profits exceeding a 10% margin. That would apply to “the largest and most profitable multinational enterprises,” potentially enabling the G-7 to square the circle so that digital is included without being targeted. (…)

Le Maire said the 15% is a starting point and France would fight for a higher rate in the coming weeks. (…)

The OECD has said a final global deal may not come until October, with delivery requiring nations to pass the plan through national legislatures. (…)

• G-7 Deal on a Global Corporate-Tax Floor Faces Hurdles Many governments are likely to wait and see what others, especially a divided U.S. Congress, will do to put the deal into effect.

The math is simple: from 1980 to 2010, world corporations have seen their collective taxes cut by half, contributing about 1% to the 6% compound annual growth rate in EPS (S&P 500). Said another way, some 20% of current EPS are due to the substantial cuts in tax rates over the past 30 years.