THE DAILY EDGE (6 July 2018)

Payroll employment increases by 213,000 in June; unemployment rate rises to 4.0%

Total nonfarm payroll employment increased by 213,000 in June, and the unemployment rate rose to 4.0 percent, the U.S. Bureau of Labor Statistics reported today. Job growth occurred in professional and business services, manufacturing, and health care, while retail trade lost jobs.

The change in total nonfarm payroll employment for April was revised up from +159,000 to +175,000, and the change for May was revised up from +223,000 to +244,000. With these revisions, employment gains in April and May combined were 37,000 more than previously reported. After revisions, job gains have averaged 211,000 per month over the last 3 months.

In June, average hourly earnings for all employees on private nonfarm payrolls rose by 5 cents to $26.98. Over the year, average hourly earnings have increased by 72 cents, or 2.74 percent. Average hourly earnings of private-sector production and nonsupervisory employees increased by 4 cents to $22.62 in June.

HOW WILL THAT STOP?

U.S., China Dig In for Long Trade Fight as Tariffs Take Effect The U.S. and China slapped levies on $34 billion of each other’s exports, the first tangible shots in a trade battle that both sides are bracing to fight for months—if not years.

• US president threatens to target all $500bn of Chinese goods as trade war escalates

Fed Shifts Focus to Risks of Overheating Economy Federal Reserve officials at their meeting last month signaled they could raise interest rates over the next year to a level that no longer seeks to stimulate growth, formally ending a long chapter in which the central bank unleashed unprecedented stimulus.

THE LAW IS THE LAW

Especially when it comes to supply and demand. Yesterday, I showed this telling chart: demand now equals total supply.

David Rosenberg shows that the labor tightness is widespread within the USA. Nowhere to hide:

During the last 12 months, the U.S. created 1.6% more jobs while the total available supply of labor shrank by 10%.

Voluntary quits now represent 60% of hires, at cyclical highs. Anecdotal evidence suggests that bonuses and other perks were initially substituted for higher wages but wage growth for job switchers is now clearly outpacing that of job stayers which should soon translate into higher aggregate wages and a jump in unit labor costs.

• It’s happening in Europe:

• And in Japan!

ASSET RICH, CASH POOR

Lots of assets, no liquidity. Problem is, the first group (lots of assets) is very small compared with the other group (no liquidity)…Yet, if the other group gets stung by rising rates, which it will,  the first group eventually also gets stung by declining asset values…

SENTIMENT WATCH

Is the Dollar to Blame for the Global Market Malaise? What seem like unrelated events may actually be symptoms of tighter money, most obvious in Fed rate rises and the recent jump in the greenback

When money gets tight, greed turns to fear and investors retreat from the riskiest assets. Already, bets on low volatility have blown up, money has fled from Turkey and Argentina in particular and from emerging markets more generally, stocks of the biggest banks are under pressure and Italian bonds have been in turmoil. For the next domino to fall, follow the debt: The banks in highly-indebted China, Australia, Sweden and Canada and then on to investment-grade corporate bonds everywhere.

That, at least, is the theory of Ian Harnett, chief investment strategist at Absolute Strategy Research. What may seem like unrelated events—including the bursting of the Bitcoin bubble—are symptoms of tighter money, most obvious in Federal Reserve rate rises and the recent jump in the greenback, he says. (…)

One sign that the problem is global: stocks of the big banks rated as globally systemically important are, on average, down more than 20% from their peaks of the past 12 months. (…)

Already, copper, which is highly sensitive to the Chinese economy, has nose-dived, dropping 12% in the past four weeks for its biggest fall over such a short period since 2015. The knock-on effects on big commodity producers and exporters to China can ripple across emerging markets and into other major exporters such as Australia, too. (…)

Hopefully, Mr. Harnett is wrong. The European economy may be merely in a soft patch, as the European Central Bank argues. China has had a run of bad economic data, but debt has been more restricted recently and trouble might be avoided if Donald Trump’s trade war comes to a quick end. Bank stocks might merely be reversing their rapid ascent from the end of last year when everyone started to believe in a synchronized global recovery—not sending a signal of much worse to come. Hopefully.

• The Dollar Will Eventually Pay the Price for U.S. Deficits In the long run, the dollar should be weaker. But when will the long run arrive?

• The Smart Money Flow Index keeps drifting lower. (The Daily Shot)

OMINOUS SIGNS?

The spread between High Yield and Investment Grade bonds has been at its historical low for over a year, showing no signs of widening like prior to previous recessions, high yield investors seeing no need to ask more yield for the lesser protection:

In both 2001 and 2007, yields diverged prior to the economic downturn:

More recently, however, High Yield rates have spiked without reaction from IGs. Somebody sniffing something from trade issues, labor tightness, rising inflation

EARNINGS WATCH

Ford, Lincoln to Maintain China Prices for Now Despite Trade War

Ford Motor Co. said it will refrain from raising the prices of its cars imported into China for now, including its luxury marque Lincoln, as the Asian country prepares for a trade war with U.S. tariffs set to kick in soon. (…)

This Year’s Selloff in Chinese Markets Isn’t Like 2015. It Looks Worse. On paper, the market moves pale in comparison with 2015, but several factors, including Beijing’s campaign against high debt levels and its trade war with the U.S., suggest that investors are responding rationally to signs of fundamental problems for China’s economy.

(…) One big difference between this year and 2015 is that institutional investors, who typically take a longer-term view of markets, appear to be driving the equity-market selloff. (…)

Institutional investors’ increasingly pessimistic view of China’s outlook has started being borne out by economic data. Despite solid growth in the first quarter, figures for May showed a slowdown in areas including investment and retail sales. Beijing’s campaign against shadow-banking activity more than halved China’s overall credit supply in May. (…)

• A $240 Billion Lending Binge Threatens to Burn China Brokers

Chinese brokerages are sitting on more than $240 billion of loans that grow riskier by the day as the country’s equity market tumbles.

Extended to company founders and other major investors who pledged their shareholdings as collateral, the loans amount to 103 percent of Chinese brokerages’ net capital, up from 16 percent in 2013, according to Morgan Stanley. Losses on the debt could wipe out 11 percent of the industry’s net capital, analysts at the U.S. bank wrote in a report this month. (…)

While brokerages are likely to take an earnings hit from bad-debt provisions, massive industrywide losses are unlikely given that most loans amounted to between 40 percent and 60 percent of the original value of pledged shares, according to Liao Chenkai, an analyst at Capital Securities Corp. That means stock prices have to fall a long way before collateral shortfalls become a problem. (…)

• 
  

  China’s war on debt hits heart of private sector

  Zhejiang firms shelve investment plans as banks cut lending

Lying just to the south of Shanghai, Zhejiang province is the historical centre of Chinese private enterprise. But now the credit taps are being turned off, forcing private companies to cut their debt loads after years of state-sanctioned borrowing. (…)