THE DAILY EDGE (5 February 2018):

U.S. Adds 200,000 Jobs; Wage Growth Best Since Recession

• nonfarm payrolls rose a seasonally adjusted 200,000 in January, more than economists had expected. The unemployment rate held at 4.1%, its lowest level since December 2000, for the fourth straight month.
• average hourly earnings for private-sector workers rose 2.9% in January from a year earlier, their largest year-over-year increase since June 2009, when the last recession ended.
• The average workweek declined in January, meaning the average weekly paycheck declined from December even though hourly wages rose. Managers seemed to enjoy the biggest raises; wages for production workers and non-supervisors, who account for 82% of the private-sector workforce, rose a more modest 2.4% on the year.

That’s all? These are the only facts the WSJ deemed useful to mention?. The WSJ!

Here’s what is also relevant:

• Nonfarm payrolls increased 200,000 (1.5% YoY) during January following a 160,000 December gain and a 216,000 November rise.
• Together these two figures were revised down by 24,000.
• The diffusion index declined from 65.5% to 57.9%. It was 53.9% in manufacturing where employment in January rose only 15k (1.5% YoY), the weakest increase in four months. Employment growth seems to be out of breath.
• And the work week declined from 34.5 in November and December to 34.3, equivalent to about 720k fewer jobs. January’s weather may have played a role, although construction added a big 36k jobs that month.
• Average hourly earnings rose 0.3% following upwardly revised increases of 0.4% (from 0.3%) and 0.3% in the prior two months.
• Private service sector earnings rose 0.4% (3.0% YoY) following a 0.5% December increase. That is a sharp (+5.5% a.r.) acceleration at year-end in the large service sector which produced 68% of the total new jobs in the last 3 months.

From an economic standpoint, the recent acceleration in wages is timely, coming when employment growth breaks below the 1.5% YoY level, much like during the 2015-16 period.

However, wages of production and non-supervisory workers, which are 80% of the labor force, rose only 0.1% in January and are up 2.4% YoY, down from +2.6% last September. Just when the minimum wage was set to increase in many states. The drop in the work week may not be a coincident!

Overall, this employment report is not as strong as pundits claim. On the wage acceleration front and its impact on demand, let’s see a few more months before concluding.

• On Wage Growth, You Ain’t Seen Nothing Yet

(…) Today’s wage numbers understate the boost to spending power that many consumers have gotten or are just seeing. One-time bonuses, like the ones that companies announced following the tax plan’s passage late last year, don’t get included in average hourly earnings. And many of the companies that said they would raise wages hadn’t done so by mid-January when the Labor Department was collecting employment data. Walmart ’s wage increases, for example, start this month.

The tax cut will help boost wages in two ways. Starting this week, workers begin to see lower withholding in their paychecks, meaning more cash in their bank accounts. At least some of that is going to be spent, boosting demand and prompting companies to hire more workers to keep up. The second impact will be businesses, who got the biggest chunk of the tax cut, using some of their windfall to pay higher wages to get the workers needed to meet the higher demand. (…)

INFLATION WATCH

• USD down 13% in 12 months. Making America great again! A weak dollar tends to boost import prices.

• Goldman Sachs sees oil surging above $80 in 6 months

EARNINGS WATCH

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Overall, 50% of the companies in the S&P 500 have reported earnings to date for the fourth quarter. Of these companies, 75% have reported actual EPS above the mean EPS estimate, 9% have reported actual EPS equal to the mean EPS estimate, and 16% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is above the 1-year (72%) average and above the 5-year (69%) average.

In aggregate, companies are reporting earnings that are 4.0% above expectations. This surprise percentage is below the 1-year (+4.6%) average and below the 5-year (+4.3%) average.

In terms of revenues, 80% of companies have reported actual sales above estimated sales and 20% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is well above the 1-year average (64%) and well above the 5-year average (56%).

In aggregate, companies are reporting sales that are 1.4% above expectations. This surprise percentage is above the 1-year (+0.8%) average and above the 5-year (+0.6%) average.

The blended earnings growth rate for the fourth quarter is 13.4% today, which is higher than the earnings growth rate of 12.2% last week. The blended sales growth rate for the third quarter is 7.5% today, which is above the sales growth rate of 7.0% last week.

If the Energy sector were excluded, the blended earnings growth rate for the remaining ten sectors would decrease to 11.5% from 13.4%.

Thomson Reuters/IBES’ numbers are fairly similar to Factset’s:

• The estimated earnings growth rate for the S&P 500 for Q1 2018 is 17.7%. It was +12.2% on Jan. 1. If the Energy sector is excluded, the growth rate declines to 15.7%.
• Earnings revisions remain very positive:

• Preannouncements for Q1’18 are also strong with 27/57 (47%) positive compared with 35% and 33% at the same time during Q1’17 and Q4’17 earnings seasons.

• Trailing EPS are now $132.68, up 12.0% YoY and could jump to $137.50 after Q1’18nwith the first quarterly impact of the tax reform. Full year 2018 EPS are now seen reaching $155.26

The Rule of 20 P/E has declined from 23.5 at the recent peak to 22.4. It is 22.0 after Q1’18 as per above estimate and as reflected in the below chart.

TECHNICALS WATCH

Lowry’s Research sees only a “modest correction” within a market that remains in a “primary uptrend” given continued positive readings in its “Buying Power” and Selling Pressures” index.

SENTIMENT WATCH

Friday’s selloff finally ended a streak of 404 days in which the S&P 500 sailed along without a 3 percent decline from any previous point, a record in data going all the way back to 1928. (Barron’s)

• How Worried Should You Be? Traders Confront Inflation’s Reality 

(…) “The Fed is going to have to move the interest rates, the bond market is recognizing that this incremental economic growth will spur on inflation from various sources.”

• Stocks Selloff Extends on Inflation Concerns A selloff in world stocks deepened as expectations of rising inflation and a sudden climb in government bond yields interrupted a recent rally.

• Global Equity Slump Deepens on Rate Fears

• Investors Fear Broader Asset Fall U.S. stocks last week suffered their largest weekly decline in two years. But some investors worry falling prices for things like oil futures, gold and bitcoin are offering a more ominous signal that could presage deeper declines.

• Challenges on Inflation Policy, Tax Cut Loom as Powell Era Begins at Fed The market’s recent selloff crystallizes four challenges facing Jerome Powell, the Federal Reserve’s new chairman, who takes charge Monday.

• The Fed’s balance sheet is gradually shrinking since the central bank stopped reinvesting maturing securities. Here is the yearly change in the Fed’s holdings of Treasuries. (The Daily Shot)

• Is the Fed’s Inflation Target Kaput? The change in leadership at the U.S. central bank could trigger a policy rethink.

• S&P Warns High Corporate Debt Could Trigger Next Default Cycle

The Surprising Good News About Demographics and the Stock Market Millennials could step in for the boomers in the stock market, defying the conventional wisdom—and boosting equities.

Everybody knows the conventional wisdom that the demographic trend these days is not a friend of the stock market. The baby-boom generation, we’ve been told, is moving into retirement, and selling stocks in the process. (…)

The millennials are entering the period of their lives in which they increasingly will be investing heavily in the stock market, and according to the leading economic model that relates demographic trends to the stock market, they are a big enough generation to overcome the bearish impact of the baby boomers’ retirement. In fact, according to this model, demographics will be a positive for stocks until 2035 (of course, with jarring market declines along the way). (…)

Though their model is complex, its essence can be distilled to a single number: the ratio of those the authors label as middle-aged (ages 35-49) to those labeled young (ages 20-34).

The model’s prediction is that stocks on balance should perform better when this so-called MY ratio is rising than when it is falling. It is this ratio that turned up at the beginning of last year and will continue rising until 2035. (…)