U.S. Nonfarm Payrolls Rise Modestly But Jobless Rate Falls; Earnings Growth Is Steady
Nonfarm payrolls increased 134,000 (1.7% y/y) during September, though it was the weakest increase in twelve months. The August rise, however, was revised to 270,000 from 201,000, and the July gain was increased to 165,000 from 147,000. A 190,000 rise in September employment had been expected in the Action Economics Forecast Survey.
The unemployment rate declined to 3.7% last month, the lowest level since December 1969. A dip to 3.8% had been expected. The total unemployment rate, including those marginally attached and working part-time for economic reasons, notched higher to 7.5% from 7.4%, but remained nearly the lowest since 2001.
Average hourly earnings increased 0.3% during September for the fourth month in the last five. The 2.8% y/y increase was slightly below August’s cycle high of 2.9%. The monthly gain matched expectations.
The 134,000 increase in nonfarm payrolls last month was disappointing as the rise in private service employment fell to 75,000 (1.7% y/y). The gain followed a 217,000 August increase which was strengthened from 178,000 reported last month. Weakness in service sector hiring centered on a 20,000 decline (+0.4% y/y) in retail trade jobs which came after an 11,500 rise. Leisure & hospitality employment also was weak and posted a 17,000 decline (+1.7% y/y) which followed a 21,000 rise. It was the only decline in twelve months. Another source of weakness was educational employment which fell 12,000 (+1.0% y/y) after a 15,600 increase. (…)
Hurricane Florence likely distorted the September numbers although David Rosenberg says “it was not much of a factor since the number of people not at work due to weather totalled 313k, which was actually below the 322k average of the prior five Septembers.”
Wages have accelerated to a +3.8% annualized rate in Q3, more and more of a challenge for the Fed and for corporate America which cannot count on inflation to offset.
(…) A study by The Conference Board this week showed shortages are now most acute in blue-collar and low-pay service occupations, in part because of slow labor-force growth among those without college degrees. It found wages in blue-collar industries, such as construction and maintenance, have risen more in recent quarters than wages in white-collar management jobs.
Pay in the retail sector, for example, rose 3.8% in the second quarter, more than the 3% increase for professional-services workers, according to the Labor Department. (…)
The lowest-paid Americans saw weekly earnings grow more than 5% in the second quarter from a year earlier, more than the national median gain of 1.7% for all workers, according to a quarterly survey of households produced by the Labor Department. Workers with less than a high-school diploma saw their wages grow almost 6%, and younger workers’ pay grew almost 3%. (…)
Canada Added 63,300 Jobs in September Jobless rate falls to 5.9%; all of the job gains were in the part-time sector
(…) Using U.S. Labor Department methodology, Canada’s jobless rate in September was 4.8%.
Average hourly wages advanced 2.4% in September on a one-year basis. That marks a deceleration from earlier months, when average hourly wages were growing at a pace of 2.9% or higher. (…)
All of the net job gains in September were in the part-time sector, which added 80,200 positions, retracing most of the losses from the previous month. Full-time jobs declined by 16,900 in September. (…)
U.S. Trade Deficit Widens for Third Consecutive Month in August
(…) Exports fell 0.8% m/m (+7.1% y/y) in August, the third consecutive monthly decline. Imports were up 0.6% m/m (9.6% y/y), their fourth consecutive monthly increase. (…)
Auto Makers Consider Shifting Manufacturing to North America BMW, Daimler and other foreign car makers are considering moving more manufacturing to North America from overseas plants after the revamped Nafta trade deal.
(…) “We will allocate more U.S. production for the U.S. market,” BMW AG BMW -0.74% CEO Harald Krüger told reporters at the Paris Motor Show this week. He said the German car maker already sources many parts in the region, but the new trade pact will accelerate a shift in investment.
Daimler AG CEO Dieter Zetsche said at the same event the new agreement could force the company to move more engine manufacturing to the U.S., where it builds cars and sport-utility vehicles at a factory in Tuscaloosa, Ala. (…)
Industry consultants say auto makers are growing increasingly nervous that more restrictions could emerge as Mr. Trump turns to trade talks with Japan and the European Union.
“These companies are now seeing that there is an element of political risk to operating in the U.S.,” said Johan Gott, a principal with global management consulting firm A.T. Kearney. (…)
Foreign-based car brands made up 56% of light-vehicle sales in the U.S. last year, according to Autodata Corp. Auto makers that source a significant number of parts overseas, including high-value engines and transmissions, will likely be at risk of noncompliance with the new rules for certain vehicles that they make in North America and sell in the U.S., industry analysts say. (…)
Some industry analysts say the new restrictions could over time hurt North American competitiveness by raising manufacturing costs and also lift retail prices for U.S.-sold cars. Many car makers now use North America—and particularly Mexico and the U.S.—to supply overseas markets, but that could change with the shifting trade policies.
Chinese Tech Shares Tumble on Spying Concerns Shares of China’s Lenovo and ZTE fall more than 10% each
(…) A report in Bloomberg Businessweek on Thursday said Beijing spied on the U.S. using microchips inserted in computing components built for an array of American tech companies. (…)
Ellen Lord, the Pentagon’s chief weapons buyer, told reporters Thursday that 90% of the printed circuit boards used by the U.S. military came from Asian plants, half of them in China. (…)
The Big Hack: How China Used a Tiny Chip to Infiltrate U.S. CompaniesThis is a big deal with important economic and corporate ramifications. Increased tensions around the world.
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Trump attacks Chinese control of military supply chains White House identifies threat to US national security in latest broadside at Beijing
Italy Pivots to China in Blow to EU Efforts to Keep Its Distance
Italy’s government is scrapping the previous administration’s efforts to limit Chinese investment in strategic sectors in favor of fostering relations with Beijing by volunteering for a role in China’s vast global infrastructureprogram.
The two countries are drawing up a memorandum of understanding to extend the massive Belt and Road spending program to Italy in sectors including railways, airlines, space and culture, Michele Geraci, undersecretary at the Ministry for Economic Development, said in an interview at his Rome office. (…)
Federal Revenues Remain Steady Despite Solid Growth and Hiring CBO says government spending rose 3% in fiscal year 2018, pushing the budget deficit to $782 billion, up from $666 billion the previous fiscal year.
(…) As a share of gross domestic product, the deficit totaled 3.9% in fiscal 2018, which ended Sept. 30, the third consecutive increase.
The deficit would have been even higher if not for shifts in the timing of certain payments. (…)
CBO estimated government tax receipts rose just 0.4%, due largely to a steep decline in corporate tax revenue, which fell 31% in the last fiscal year. About half of that decline occurred since June, CBO said, as companies became able to take advantage of a new, lower corporate tax rate and immediately deduct the full value of equipment purchases – changes implemented as part of the sweeping tax overhaul that was enacted in December.
Starting in February, employers started using new withholding tables reflecting changes in the tax law, reducing the share of income withheld from workers’ paychecks. That decline partly offset the boost to tax revenue provided by rising wages and salaries, CBO said, resulting in just a 1% increase in withheld and payroll taxes. (…)
On the spending side, federal outlays rose 3% in the fiscal year, due to rising costs for Social Security, Medicare and Medicaid, as well as higher interest payments on the public debt and higher military spending. (…)
Saudi crown prince says Opec trying to cap oil prices
Saudi Arabia’s Crown Prince Mohammed bin Salman told the FT that Opec and its allies have reacted to requests from the U.S. for increased oil production and dis what they can to prevent prices rising,
Opec member states and Russia say they raised output by about 1.5m barrels a day to more than offset an estimated 700k b/d taken off world markets as a result of the U.S. decision to reinstate sanctions on Iran over its nuclear programme. (…)
Saudi Arabia says it is now producing 10.7m barrels a day, and said “t had spare capacity to increase production by 1.3m b/d without any additional investment.”
EARNINGS WATCH
We have 21 S&P 500 companies in with an 86% beat rate and a +3.1% beat factor. Q3 earnings are seen up 21.5% (18.5% ex-Energy). Q4: +20.0 (+17.5%).
The beat rate on revenues is 71% (+0.6%) at +7.4% blended so far. If tax reform is contributing +7.0% and buybacks +2.1%, pretax margins seem to be holding so far. According to Refinitiv (formerly Thomson Reuters IBES) data, buybacks will add 2.4% to total EPS growth in Q4 (+20.0%) and 2.7% in Q1’19 (likely peak contribution) to +8.0%. Refenitiv data suggest that margins will contract in Q1’19 which will make investors nervous about full 2019 EPS.
Unless revenue growth accelerates, tax reform-boosted earnings growth will be wearing off.
I continue to focus on earnings revisions as a clue on trends on operating profit margins given pressures on wages and the tariffs threats. Downward revisions started to hit small caps a few weeks ago and this is continuing with 63% of last week’s revisions on non-S&P 500 companies being negative from 59% the previous week.
However, larger caps saw an increase in downward revisions last week. From Ed Yardeni’s data, only 3 S&P 500 sectors have negative revisions so far. That rises to 4 S&P 400 sectors (mid-caps) and 6 S&P 600 sectors.
FYI, 10 S&P 600 companies have reported Q3 so far and 60% beat estimates but the beat rate is –1.3% For the S&P 400, 9 companies have reported; beat rate 56% and beat factor –2.3%.
Trailing S&P 500 EPS are now $155.59, on their way to $161.85 for the whole year when we will have the full 12 months of tax reform. Using this latter number, the S&P 500 Index is selling at 17.8 times EPS, meaningless on its own given a median of 13.8 since 1953 and 18.5 since 1993. However, the Rule of 20 P/E would be exactly at the 20.0 “fair value” level with inflation at 2.2% (17.8 + 2.2).
During the last 5 years, the Rule of 20 P/E often rested on the 19.0 mark in weak markets with a brief drop to 18.3 in January 2016. This would suggest that current downside would be 2720 (-5.5%) with potential “worst case” at 2600 (-9.7%), a typical correction. Note that both the 100dma and 200dma are currently at 2760.
Trends in long-term interest rates are clearly bothering investors and weighing on equities.
The assumed 1.2% real return using the Fed’s 2.0% inflation target has not been seen since 2011. But core CPI inflation seems to be cresting once more at 2.3% which should relieve pressure on LT rates.
In fact, the recent rise in YoY inflation is masking a fairly subdued trend in monthly inflation. Core CPI has increased by 0.17% monthly on average since February, 2.0% annualized; last 2 and 3 months annualized: +1.9%.
With the exception of oil, commodity prices have been weak. Import prices have also been subdued (+1.0% YoY excluding petroleum) and the strong USD should continue to help. Evidently, tariffs have not hit just yet and few economists are worried at this time (!).
TECHNICALS WATCH
Lowry’s Research asserts that “there is as yet little evidence to support contentions of a narrowing rally sufficient to produce the Adv-Dec divergences that have historically warned of an approaching major market top. And, attempting to divine the inflection point at which interest rates are high enough to derail the bull market is little better than guesswork. Thus, the probabilities favor the current market weakness as nothing more than a temporary interruption in an ongoing, healthy bull market.”
That said, I have to mention that Lowry’s famous Selling Pressure Index has been rising in the last 2 weeks while its Buying Power Index has kept declining. Lowry’s makes no bone of it but I do…
That said, CMG’s Steve Blumenthal’s EMA indicator remains upbeat:
Keep in mind that the U.S. equity markets keep flying solo.
The world index cum-SPY is sitting on a 2018 resistance line:
Ex-US, world equities look terrible with a clearly declining 200dma:
US midcaps have lost 4.3% since Sept. 14 and are kissing their still rising 200 dma:
Meanwhile, small caps are down 7.2% since Aug. 31:
The NDX formed a double top before slipping 3.2% to its 100dma…
but the equal weighted NDX is down 4.4% to its 200dma:
In all, the last market on the dance floor seems to have lost its strongest dancers (NDX and Small-Mid Caps). Large caps are down 2.0% (SPY) but the equal weight SPY is down 3.0% and its Transportation leg has shrunk 6.5% in the last 3 weeks and closed right on its 2018 resistance last Friday after briefly getting through it in the early afternoon.
Obviously, there is no great enthusiasm for the equity markets of the evidently not so United States of America.
Equity mutual funds (-$3.8 billion) suffered net outflows for the fifteenth straight week. Both domestic equity funds (-$2.2 billion) and nondomestic equity funds (-$1.7 billion) saw net money leave for the week. The largest net outflows among domestic equity funds belonged to the Small-Cap Core Funds peer group (-$617 million), while International Large-Cap Growth Funds (-$622 million) had the largest net outflows for nondomestic equity funds. (Lipper)
Insiders are also not very enthusiastic as Barron’s notes:
(…) according to TrimTabs, corporate insiders sold $10.3 billion worth of stock in August. That’s the highest amount of selling in the month of August over the past 10 years, says David Santschi, director of liquidity research at TrimTabs. The previous high was $9.3 billion in August 2017.
“It’s picked up quite a lot in the summer,” he adds.
Meanwhile, in September, insiders bailed out of their own company shares to the tune of $7 billion, he says, topping the previous 10-year September high of $5.7 billion in 2012. TrimTab’s database includes all Form 4 Securities and Exchange Commission filings that officers, directors, and major holders must file. (…)
“Insiders are doing something differently with their own money than with shareholders’ money,” Santschi notes. It’s perhaps even more interesting to remember that many companies have borrowed to fund those big buybacks, thanks to artificially low interest rates. (…)