Tag Archives: #unemployment

Kept at Bay

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The key for investors today
Is payrolls and how they portray
The jobs situation
Thus, whether inflation
Will rocket, or be kept at bay

It’s Payrolls day, generally a session where there is a great deal of anticipation leading up to the release, often followed by a burst of activity and then a very slow afternoon.  However, given today also happens to be Good Friday, with all European markets closed in observation, as well as US equity markets, it is likely the burst activity, assuming one comes, will be compressed into an even shorter timeline than usual.  Of course, what makes this potentially unnerving is that market liquidity will be significantly impaired relative to most sessions, and any surprising outcome could result in a much larger move than would normally be the case.

It is not a bank holiday, which means the bond market will be trading, and that is, in truth, the market that continues to drive the action.  As evidenced by yesterday’s price action, the bond rally, with 10-year Treasury yields sliding 7 basis points, led to a declining dollar and new record highs in the stock market.  We also saw gold and other commodities rally as the combination of strong data (ISM at 64.7) and lower yields was a double-barreled benefit.

With that in mind, here are the latest expectations:

Nonfarm Payrolls 660K
Private Payrolls 643K
Manufacturing Payrolls 35K
Unemployment Rate 6.0%
Average Hourly Earnings 0.1% (4.5% Y/Y)
Average Weekly Hours 34.7
Participation Rate 61.5%

Source: Bloomberg

All that seems fine, but it is worth a look at the individual forecasts that make up that NFP number.  There is a wide dispersion of views ranging from a gain of just 350K to eight forecasts greater than 900K and three of those at a cool million each.

Let’s consider, for a moment, if the optimists are correct.  Harking back to Chairman Powell’s constant refrain regarding the recovery of the 10 million lost jobs, the expected timeline for that to happen remains sometime in late 2023.  But if this morning’s release is 1000K or more, that would seem to potentially shorten the timeline for those jobs to return.  And following that logic, it seems likely that the Fed may find themselves in a situation where ZIRP is no longer appropriate somewhat earlier in 2023 than currently expected as inflation rises, and unemployment falls back to their new goal of 3.5%-4.0%.  The implication here is that the bond market will anticipate this activity and we could see the 10-year yield break through to new highs quite quickly.  Based on broad market behavior as seen yesterday, a sharp decline in the bond market would likely result in the dollar rebounding sharply and equity futures, which are trading, retreating.  And all this on a day when there is much less liquidity than normal.

Of course, a weak number is likely to have just the opposite effect, with the bond bulls making the case that we have seen the high in yields, and dollar bears back in the saddle making the case the dollar’s run higher has ended.

And that’s really what we have in store for the day.  The two markets that were open overnight saw equities rally on the heels of the US equity rally, with the Nikkei (+1.6%) and Shanghai (+0.5%) both performing well.  Every European market is closed for the holiday and will be on Monday as well.  Meanwhile, US futures are all pointing modestly higher, roughly 0.25%, ahead of the payroll report.

As NY is walking in, we are seeing the first movement in Treasury yields and they have edged higher by 1.1bps at this point.  But as I highlight above, this is all about the data today.

In the commodity markets, only precious metals are trading but both gold and silver are essentially unchanged at this hour ahead of the data.  This follows yesterday’s strong performance with both rallying more than 1% in the session.

And finally, in the FX market, except for TRY (+0.7%) and KRW (+0.4%) there is no movement more than 0.2%, which is indicative of the fact that some positions are being adjusted but there is no news driving things.  In the case of TRY, the new central bank governor, in a speech today, made clear that he was not going to cut rates and that he was likely to raise them again in an effort to combat the rising inflation in the country.  This was well received by the market and has helped TRY recover much of its initial losses upon the sacking of the previous central bank chief.  As to KRW, they released CPI data last night, 1.5%, which was the highest print since January 2020, indicating that growth was persistent, and the BOK would be more vigilant going forward.  This also encouraged equity inflows resulting in the won’s modest appreciation.

So, now we wait for the payroll data.  Based on the releases that we have seen during the past couple of weeks, where the economy is clearly pushing ahead, I suspect this number will be somewhere above 800K, although 1000K is clearly not out of the question.  As such, my view is we will see the bonds sell off and the dollar retest its recent highs, if not break through them.

Good luck, good weekend and stay safe
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Cash Will Be Free

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The Chairman was, once again, clear
The theory to which they adhere
Is rates shall not rise
Until they apprise
That joblessness won’t reappear

The market responded with glee
Assured, now, that cash will be free
The dollar got whacked
And traders, bids, smacked
In bonds, sending yields on a spree

It does not seem that Chairman Powell could have been any clearer as to what the future holds in store for the FOMC…QE shall continue, and Fed Funds shall not rise under any circumstance.  And if there was any doubt (there wasn’t) that this was the committee’s view, Governor Brainerd reiterated the story in comments she made yesterday.  The point is that the Fed is all-in on easy money until maximum employment is achieved.

What is maximum employment you may ask?  It is whatever they choose to make it.  From a numerical perspective, it appears that the FOMC is now going to be looking at the Labor Force Participation rate as well as the U-6 Unemployment Rate, which counts not only those actively seeking a job (the familiar U-3 rate), but also those who are unemployed, underemployed or discouraged from looking for a job.  As an example, the current Unemployment Rate, or U-3, is 6.8% while the current U-6 rate is 12.0%.  Given the current estimated labor force of a bit over 160 million people, that difference is more than 8 million additional unemployed.

When combining this goal with the ongoing government lockdowns throughout the country, it would seem that the Fed will not be tightening policy for a very long time to come.  There is, of course, a potential fly in that particular ointment, the inflation rate.  Recall that the Fed’s mandate requires them to achieve both maximum employment and stable prices, something which they have now defined as average inflation, over an indefinite time, of 2.0%.  As I highlighted yesterday, the Fed remains sanguine about the prospects of inflation rising very far for any length of time.  In addition, numerous Fed speakers have explained that they have the tools to address that situation if it should arise.

But what if they are looking for inflation in all the wrong places?  After all, since 1977, when the Fed’s current mandate was enshrined into law, the U-3 Unemployment Rate was the benchmark.  Now, it appears they have determined that no longer tells the proper story, so they have widened their focus.  In the same vein, ought not they ask themselves if Core PCE is the best way to monitor price movement in the economy?  After all, it consistently underreports inflation relative to CPI and has done so 86% of the time since 2000, by an average of almost 0.3%.  Certainly, my personal perspective on prices is that they have been rising smartly for a number of years despite the Fed’s claims.  (I guess I don’t buy enough TV’s or computers to reap the benefits of deflation in those items.)  But the word on the street is that the Fed’s models all “work” better with PCE as the inflation input rather than CPI, and so that is what they use.

Carping by pundits will not change these things, nor will hectoring from Congress, were they so inclined.  In fact, the only thing that will change the current thinking is a new Fed chair with different views, a reborn Paul Volcker type.  Alas, that is not coming anytime soon, so the current Fed stance will be with us for the foreseeable future.  And remember, this story is playing out in a virtually identical manner in every other major central bank.

Which takes us to the market’s response to the latest retelling of, ‘How to Stop Worrying (about prices) and Start Keep Easing.’ (apologies to Dale Carnegie).  It can be no surprise that after the Fed chair reiterated his promise to keep the policy taps wide open that equity markets around the world rallied, that commodity prices continued to rise, and that the dollar has come under pressure.  Oh yeah, bond markets worldwide continue to sell off sharply as yields, from 10 years to 30 years, all rise.

Let’s start this morning’s tour in the government bond market where yields are not merely higher, but mostly a LOT higher in every major country.  The countdown looks like this:

US Treasuries +7.5bps
UK Gilts +7.3bps
German Bunds +5.4bps
French OATs +5.9bps
Italian BTPs +8.0bps
Australian ACGBs +11.8bps
Japanese JGBs +2.5bps

Source: Bloomberg

Folks, those are some pretty big moves and could well be seen as a rejection of the central banks preferred narrative that inflation is not a concern.  After all, even JGB’s, which the BOJ is targeting in the YCC efforts has found enough selling pressure to move the market.  Suffice it to say that current yields are the highest in the post-pandemic markets, although there is no indication that they are topping anytime soon.

On the equity front, Asia looked great (Nikkei +1.7%, Hang Seng +1.2%, Shanghai +0.5%) but Europe, which started off higher, is ceding those early gains and we now see the DAX (-0.4%), CAC (0.0%) and FTSE 100 (+0.2%) with quite pedestrian showings.  Perhaps a bit more ominous is the US futures markets where NASDAQ futures are -1.0%, although the S&P (-0.3%) and DOW (0.0%) are not showing the same concerns.  It seems the rotation from tech stocks to cyclicals is in full swing.

Commodity prices continue to rise generally with oil up, yet again, by a modest 0.25%, but base metals all much firmer as copper leads the way higher there on the reflation inflation trade.  Precious metals, though, are suffering (Gold -1.0%, Silver -0.2%) as it seems investors are beginning to see the value in holding Treasury bonds again now that there is actually some yield to be had.  For the time-being, real yields have been rising as nominal yields rise with no new inflation data.  However, once that inflation data starts to print higher, and it will, look for the precious metals complex to rebound.

Finally, the dollar is…mixed, and in quite an unusual fashion.  In the G10, the only laggard is JPY (-0.25%) while every other currency is firmer.  SEK (+0.55%) leads the way, but the euro (+0.5%) is right behind.  Perhaps the catalyst in both cases were firmer than expected Confidence readings, especially in the industrial space.  You cannot help but wonder if the central banks even understand what the markets are implying, but if they do, they are clearly willing to ignore the signs of how things may unfold going forward.

Anyway, in the G10 space, currencies have a classic risk-on stance.  But in the EMG space, things are very different.  The classic risk barometers, ZAR (-1.8%) and MXN (-1.4%) are telling a very different story, that risk is being shunned.  And the thing is, there is no story that I can find attached to either one.  For the rand, there is concern over government fiscal pledges, but I am confused by why fiscal prudence suddenly matters.  The only Mexican news seems to be a concern that the economy there is slower in Q1, something that I thought was already widely known.  At any rate, there are a number of other currencies in the red, BRL (-0.3%), TRY (-0.9%) that would also have been expected to perform well today.  The CE4 is tracking the euro higher, and Asian currencies were generally modestly upbeat.

As to data today, we see Durable Goods (exp 1.1%, 0.7% ex transport), Initial Claims (825K),  Continuing Claims (4.46M) and GDP (Q4 4.2%) all at 8:30.  Beware on the Claims data as the deep freeze and power outages through the center of the country could easily distort the numbers this week.  On the Fed front, now that Powell has told us the future, we get to hear from 5 more FOMC members who will undoubtedly tell us the same thing.

While the ECB may be “closely monitoring” long-term bond yields, for now, the market does not see that as enough of a threat to be concerned about capping those yields.  As such, all FX eyes remain on the short end of the curve, where Powell’s promises of free money forever are translating into dollar weakness.  Look for the euro to test the top of its recent trading range at 1.2350 in the coming sessions, although I am not yet convinced we break through.

Good luck and stay safe
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QE is Our Fate

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The Fed Chair, a banker named Jay
Will meet with his comrades today
Though no one expects
A change, it’s what’s next
That has traders set to make hay

Will guidance be tied to the rate
Of joblessness? Or will they state
Inflation is key
And ‘til there we see
Advances, QE is our fate

Today’s primary feature in the markets is the FOMC meeting where at 2:00 they will release their latest policy statement, and then at 2:30 Chairman Powell will hold a virtual press conference. As is often the case, market activity ahead of the meeting is muted as investors and traders are wary of taking on new positions ahead of a possible change in policy.

However, the punditry is nearly unanimous in its belief that there will be no policy changes today, and that the statement will be nearly identical to the previous version, with just some updates relating to the data that has been released since then. The big question is whether or not Chairman Powell will give an indication of what the next steps by the Fed are likely to be.

A quick review of the current policy shows that the Fed has a half dozen lending programs outstanding, which they extended to run through the end of 2020 in an announcement yesterday, and which are focused on corporate bonds, both IG and junk, municipal securities and small business loans. Of course, they continue to buy both Treasury and mortgage-backed securities as part of their more ordinary QE measures. And the Fed Funds rate remains at the zero bound. Consensus is that none of this will change.

The problem for the Fed is, short of simply writing everyone in the country a check (which is really fiscal policy) they are already buying all the debt securities that exist. While eventually, they may move on to purchasing equities, like the BOJ or SNB, at this point, that remains illegal. So, the thinking now goes that Forward Guidance is the most likely next step, essentially making a set of promises to the market about the future of policy and tying those promises to specific outcomes in the economic data. Given their mandate of full employment and stable prices, it is pretty clear they will tie rate movements to either the Unemployment Rate or the inflation rate. You may recall in the wake of the GFC, then Chairman Bernanke did just this, tying the eventual removal of policy accommodation to the Unemployment Rate. Alas, this did not work as well as the Fed had hoped. The first problem was that as the unemployment rate declined, it did not lead to the expected rise in inflation, so the Fed kept having to move its target lower. This did not inspire credibility in the central bank’s handling of the situation, nor its models. But the bigger problem is that the market became addicted to ZIRP and QE, and when Bernanke mentioned, off hand, in Congressional testimony, that some day the Fed would start to remove accommodation, he inspired what is now called the ‘Taper Tantrum’ where 10-year Treasury yields rose 1.3% in just over three months

You can be certain that Powell does not want to set up this type of situation, but, if anything, I would argue the market is more addicted to QE now than it was back then. At any rate, given the Fed’s need to show they are doing something, you can be sure that tied forward guidance is in our future. The question is, to what statistic will they tie policy? It is here where the pundits differ. There is a range of guesses as follows: policy will be unchanged until, 1) inflation is steadily trending to our 2.0% target, 2) inflation reaches out 2.0% target, or 3) inflation spends time above our 2% target in an effort to ‘catch up’ for previous low readings. This in order of most hawkish to least. Of course, they could focus on the Unemployment rate, and choose a level at which they believe full employment will be reached and thus start to pressure inflation higher.

The problem with the inflation target is that they have been trying to achieve their 2.0% target, based on core PCE, and have failed to do so consistently for the past 10 years. It is not clear why a claim they are going to continue to maintain easy money until they reach it now, let alone surpass that target, would have any credibility. On the Unemployment front, given what are certainly dramatic changes in the nature of the US economy in the wake of Covid-19, it beggars belief that there is any confidence in what the appropriate level of full employment is today. Again, it is hard to believe that their models have any semblance of accuracy in this area either.

And one other thing, most pundits don’t anticipate the announcement of new forward guidance until the September meeting, so this is all anticipation of something unlikely to occur for a while yet. But, as a pundit myself, we do need to have something to discuss on a day when markets remain uninteresting.

So, let’s take a quick look at today’s market activities. Equity markets remain mixed with both gainers (Shanghai +2.1%) and losers (Nikkei -1.2%) in Asia and in Europe (CAC +0.7%, DAX 0.0%, Italy -0.8%). US futures are edging higher, but not with any enthusiasm. Bond markets are all within a basis point of yesterday’s closing levels, although Treasuries did rally in the mild risk-off session we saw Tuesday with 10-year yields back below 0.60%. Yesterday, gold had a wild day, making new highs early in the overnight session and falling back 4% in NY before rebounding to close at $1960/oz. This morning it is little changed, but the trend remains higher.

Finally, the dollar is softer this morning, although yesterday saw a mixed session. The pound (+0.25%) has been a steady performer lately and is pressing toward 1.30 for the first time since early March, pre-Covid. While there was UK data on lending and money supply, this movement appears to be more technical in nature, with the added benefit that the dollar remains under pressure against all currencies. Elsewhere in the G10, oil’s strength this morning is helping NOK (+0.5%), while the rest of the bloc is just marginally firmer vs. the dollar.

In the emerging markets, the big winner today was THB (+0.8%) where the central bank is trying to make a change in the local gold market. Interestingly, gold traded in baht is a huge market, and one where the recent flows have resulted in excess baht strength. As such, the central bank is trying to change the market into a USD based gold market, which should remove upward pressure from the currency. But away from that, while the bulk of the bloc is firmer, the movement is 0.3% or less, hardly the stuff of dreams, and with no coherent message other than the dollar is soft.

And that’s really it for the day. There is no data of note to be released and so all eyes are on the FOMC. My money is on inflation based forward guidance, likely the most dovish type shooting for above target outcomes, but not to be put in place until September. And that means, the dollar’s recent downtrend is likely to continue to be the situation for the immediate future.

Good luck and stay safe
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Singing Off-Tune

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The Jobless report showed that June
Saw Payroll growth really balloon
But stubbornly, Claims
Are fanning the flames
Of bears, who keep singing off-tune

Markets are quiet this morning as not only is it a summer Friday, but US equity and commodity markets are closed to celebrate the July 4th holiday. In fact, it is curious that it is not a Fed holiday. But with a limited and illiquid session on the horizon, let’s take a quick peak at yesterday’s data and some thoughts about its impact.

The Jobless report was clearly better than expected on virtually every statistic. Payrolls rose more than expected (4.8M vs. exp 3.06M) while the Unemployment Rate fell substantially (11.1% from 13.3%). Happily, the Participation Rate also rose which means that the country is getting back to work. It should be no surprise that this was touted as a great outcome by one and all.

Of course, there was some less positive news, at least for those who were seeking it out. The Initial and Continuing Claims data, both of which are much more current, declined far less than expected. The problem here is that while tremendous progress was made in June from where things were before, it seems that progress may be leveling off at much worse than desired numbers.

It seems there are two things at work here. First, the second wave of Covid is forcing a change in the timeline of the reopening of the economy. Several states, notably Texas and California, are reimposing lockdowns and closing businesses, like bars and restaurants, that had reopened. This is also slowing the reopening of other states’ economies. Second is the pending end of some of the CARES act programs, notably PPP, which has seen the money run out and layoffs occur now, rather than in April. It is entirely realistic that the Initial and Continuing Claims data run at these much higher levels going forward for a while as different businesses wrestle with the right size for their workforce in the new economy.

Odds are we will see a second stimulus bill at some point this summer, but it is not yet a certainty, nor is it clear how large it will be or what it will target. But it would be a mistake to assume that the road ahead will be smooth.

The other potential market impacting news was this morning’s European Services PMI data, which was generally slightly better than expected, but still pointing to slowing growth. For instance, Germany’s Services number was at 47.3, obviously well above the April print of 16.2, but still pointing to a slowing economy. And that was largely the case everywhere.

The point is that nothing we have seen either yesterday or today indicates that the global economy is actually growing relative to 2019. It is simply not shrinking as quickly as before. The implication here is that central banks will continue to add liquidity to their respective economies through additional asset purchases and, for those with positive interest rates still, further rate cuts. Governments will be loath to stop their fiscal stimulus as well, especially those who face elections in the near-term. But in the end, 2020 is going to be a decidedly lost year when it comes to the world’s economy!

On the market side, risk generally remained in demand overnight as Asian equity markets continued to rally (Nikkei +0.7%, Hang Seng +1.0%, Shanghai +2.0%). Will someone please explain to me how Hong Kong’s stock market continues to rally in the face of the draconian new laws imposed by Beijing on the freedom’s formerly available to its citizens? While I certainly don’t have proof, this must be coordinated buying by Chinese government institutions trying to demonstrate that everything there is great.

However, despite the positive cast of APAC markets, Europe has turned red this morning with the DAX (-0.2%), CAC (-0.7%) and FTSE 100 (-0.9%) all under pressure. Each nation has a story today starting with Germany’s Angela Merkel trying to expand fiscal stimulus, not only in Germany, but fighting for the EU program as well. Meanwhile, in France, President Macron has shaken up his entire government and replace most of the top positions including PM and FinMin. Finally, the UK is getting set to reopen tomorrow, and citizens are expected to be ready to head back to a more normal life.

In the bond markets, while US markets are closed, we are seeing a very modest bid for European government bonds, but yields are only about 1 basis point lower on the day. Commodity markets show that oil is once again under pressure, down a bit more than 1% but still hanging onto the $40/bbl level.

Turning to currencies, in the G10, only NOK (+0.4%) is showing any real life today as its Unemployment Rate printed at a lower than expected 4.8% encouraging some to believe it is leading the way back in Europe. Otherwise, this bloc is doing nothing, with some gainers and some losers and no direction.

In emerging markets, the story is of two weak links, IDR (-1.0%) and RUB (-0.9%). The former, which has been falling for more than a week, is suffering from concerns over debt monetization by the central bank there, something that I’m sure will afflict many currencies going forward. As to the ruble, the only explanation can be the oil price decline as their PMI data was better than expected, although still below 50.0. But there are issues there regarding the spread of the infection as well, and concerns over the potential imposition of new sanctions by the US.

And that is really it for the day. With no data or speakers here, look for markets to close by lunchtime, so if you have something to do, get it done sooner rather than later.

Have a wonderful holiday weekend and stay safe
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Dreams All Come True

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The Minutes explained that the Fed
Was actively looking ahead
Twixt yield curve control
And guidance, their goal
Might not be achieved, so they said

This morning, though, payrolls are due
And traders, expressing a view
Continue to buy
Risk assets on high
Here’s hoping their dreams all come true!

In the end, it can be no surprise that the Fed spent the bulk of their time in June discussing what to do next. After all, they had to be exhausted from implementing the nine programs already in place and it is certainly reasonable for them to see just how effective these programs have been before taking the next step. Arguably, the best news from the Minutes was that there was virtually no discussion about negative interest rates. NIRP continues to be a remarkable drag on the economies of those countries currently caught in its grasp. We can only hope it never appears on our shores.

Instead, the two policies that got all the attention were forward guidance and yield curve control (YCC). Of course, the former is already part of the active toolkit, but the discussion focused on whether to add an outcome-based aspect to their statements, rather than the more vague, ‘as long as is necessary to achieve our goals of stable prices and full employment.’ The discussion centered on adding a contingency, such as; until inflation reaches a certain level, or Unemployment falls to a certain level; or a time-based contingency such as; rates will remain low until 2023. Some would argue they already have that time-based contingency in place, (through 2022), but perhaps they were leading up to the idea it will be longer than that.

The YCC discussion focused on research done by their staff on the three most well-known instances in recent history; the Fed itself from 1942-1951, where they capped all rates, the BOJ, which has maintained 10-year JGB yields at 0.0% +/- 0.20%, and the RBA, which starting this past March has maintained 3-year Australian yields at 0.25%. As I mentioned last week in “A New Paradigm” however, the Fed is essentially already controlling the yield curve, at least the front end, where movement out to the 5-year maturities has been de minimis for months. Arguably, if they are going to do something here, it will need to be in the 10-year or longer space, and the tone of the Minutes demonstrated some discomfort with that idea.

In the end, my read of the Minutes is that when the FOMC meets next, on July 29, we are going to get a more formalized forward guidance with a contingency added. My guess is it will be an Unemployment rate contingency, not a time contingency, but I expect that we will learn more from the next set of Fed speakers.

Turning to today, as the market awaits the latest payroll report, risk assets continue to be on fire. The destruction in so many areas of the economy, both in the US and around the world, is essentially being completely ignored by investors as they continue to add risk to their portfolios amid abundant central bank provided liquidity. Here are the latest median forecasts as compiled by Bloomberg for today’s data:

Nonfarm Payrolls 3.06M
Private Payrolls 3.0M
Manufacturing Payrolls 438K
Unemployment Rate 12.5%
Average Hourly Earnings -0.7% (5.3% Y/Y)
Average Weekly Hours 34.5
Participation Rate 61.2%
Initial Claims 1.25M
Continuing Claims 19.0M
Trade Balance -$53.2B
Factory Orders 8.7%
Durable Goods 15.8%
-ex Transport 6.5%

Because of the Federal (although not bank) holiday tomorrow, the report is being released this morning. It will be interesting to see if the market responds to the more timely Initial Claims data rather than the NFP report if they offer different messages. Remember, too, that last month’s Unemployment rate has been under much scrutiny because of the misclassification of a large subset of workers which ultimately painted a better picture than it might otherwise have done. Will the BLS be able to correct for this, and more importantly, if they do, how will the market interpret any changes. This is one reason why the Initial and Continuing Claims data may be more important anyway.

But leading up to the release, it is full speed ahead to buy equities as yesterday’s mixed US session was followed by strength throughout Asia (Nikkei +0.1%, Hang Seng +2.85%, Shanghai +2.1%) and in Europe (DAX +1.6%, CAC +1.3%, FTSE 100 +0.6%). US futures are also higher, between 0.4%-0.8%, to complete the virtuous circle. Interestingly, once again bond yields are not trading true to form on this risk-on day, as yields in the US are flat while throughout Europe, bond yields are declining.

But bonds are the outlier here as the commodity space is seeing strength in oil and metals markets and the dollar is under almost universal pressure. For example, in the G10, NZD is the leading gainer, up 0.6%, as its status as a high beta currency has fostered buying interest from the speculative crowd betting on the recovery. But we are also seeing NOK and SEK (both +0.5%) performing well while the euro (+0.3%) and the pound (+0.3%) are just behind them. The UK story seems to be about the great reopening that is due to occur starting Saturday, when pubs and restaurants as well as hotels are to be allowed to reopen their doors to customers. The fear, of course, is that this will foster a second wave of infections. But there is no doubt there is a significant amount of pent up demand for a drink at the local pub.

In the EMG bloc, the ruble is today’s winner, rising 1.2% on the back of oil’s continued rebound. It is interesting, though, as there is a story that Saudi Arabia is having a fight with some other OPEC members, and is close to relaunching a full-scale price war again. It has been the Saudis who have done the lion’s share of production cutting, so if they turn on the taps, oil has a long way to fall. Elsewhere in the space, INR (+0.8%) and ZAR (+0.75%) are having solid days on the back of that commodity strength and recovery hopes. While the bulk of the space is higher, IDR has had a rough session, in fact a rough week, as it has fallen another 0.65% overnight which takes its loss in the past week near 2.0%. Infection rates continue to climb in the country and investors are becoming uncomfortable as equity sales are growing as well.

So, this morning will be a tale of the tape. All eyes will be on the data at 8:30 with the odds stacked for a strong risk session regardless of the outcome. If the data shows the recovery is clearly strengthening, then buying stocks makes sense. On the other hand, if the data is disappointing, and points to a reversal of the early recovery, the working assumption is the Fed will come to the rescue quite quickly, so buying stocks makes sense. In this worldview, the dollar is not seen as critical, so further dollar weakness could well be in our future.

Good luck and stay safe
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Frustrations

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The global economy’s state
Continues to see growth abate
As trade between nations
Has met with frustrations
While central banks try to reflate

Markets have been extremely quiet overnight as investors and traders await the release of the US payroll report at 8:30 this morning. Expectations, according to Bloomberg, are as follows:

Nonfarm Payrolls 85K
Private Payrolls 80K
Manufacturing Payrolls -55K
Unemployment Rate 3.6%
Average Hourly Earnings 0.3% (3.0% Y/Y)
Average Weekly Hours 34.4
Participation Rate 63.1%
ISM Manufacturing 48.9
ISM Prices Paid 50.0
Construction Spending 0.2%

While the GM strike has ended, it was in full swing during the survey period and explains the expected significant decline in manufacturing jobs. One other thing having a negative impact is the reduction of census workers. Given these idiosyncratic features, we must look beyond the headline number to ascertain if the employment situation remains robust, or is starting to roll over. Consider that most analysts expect that the GM strike was worth about 50K jobs and the census situation another 20K. If we add those back to the median expectation of 85K, we wind up at essentially the 3-month average of 157K. However, it is important to remember that the 1-year average is higher, 179K, which indicates that there has been an ongoing decline in new hiring for a little while now. Some of this is certainly due to the fact that, as we have heard repeatedly, finding good employees is so difficult, especially in the service industries. But certainly, the trade situation and the fact that the US economy is growing more slowly is weighing on the data as well.

The reason this is important, of course, is that the NFP report is one of the key metrics for the Fed as they try to manage monetary policy in an uncertain world. Unfortunately for them, the Unemployment Rate is backward looking data, a picture of what has been, not what is likely to be. In truth, they should be far more focused on the ISM report at 10:00. At least that has some forecasting ability.

A quick recap of this week’s central bank activity shows us that there were 3 key meetings; the Bank of Canada, who left policy unchanged but turned dovish in their statement; the FOMC, which cut rates and declared they were done cutting rates unless absolutely necessary; and the BOJ, which left policy unchanged but hinted that they, too, could be induced to easing further if things don’t pick up soon. (I can pretty much promise the BOJ that things are not going to pick up soon, certainly not inflation.) Perhaps the most interesting market response to this central bank activity was the quietest bond market rally in history, where 10-year Treasury yields are, this morning, 15bps lower than Monday’s opening. Only Canada’s 10-year outperformed that move with a 20bp decline (bond rally). Given the rate activity, it ought not be surprising that equity markets retain their bid overall. This morning, ahead of the NFP report, US futures are pointing higher and we have seen gains in Europe (FTSE, CAC, and DAX +0.33%) as well as most of Asia (Hang Seng +0.7%, Shanghai +1.0%) although the Nikkei did fall 0.3%.

And what about the dollar? Well, in truth it is doing very little this morning, with most currencies trading within a 0.20% band around yesterday’s closing levels. The one big exception has been the Norwegian krone which has rallied sharply, 0.65%, after a much better than expected Manufacturing PMI release. Interestingly, this movement has dragged the Swedish krona higher despite the fact that Sweden’s PMI disappointed, falling to 46.0. However, beyond that, there is nothing of excitement to discuss.

We hear from five Fed speakers today, starting with Vice-chairman Richard Clarida, who will be interviewed on Bloomberg TV at 9:30 this morning before speaking at 1:00 to the Japan Society. But we also hear from Dallas Fed President Richard Kaplan, Governor Randall Quarles, SF Fed President Mary Daly and NY’s John Williams before the day is out. It seems to me that the market was pretty happy with Chairman Powell’s comments and press conference on Wednesday so I expect we will see a lot of reaffirmation of the Chairman’s thoughts.

So, all in all, it is shaping up to be a pretty dull day…unless Payrolls are a big surprise. I have a funny feeling that we are going to see a much weaker number than expected based on the extremely weak Chicago PMI data and its employment sub index, as well as the fact that the Initial Claims data seems to be edging higher these days. Of course, the equity market will applaud as they will start to price in more rate cuts, but I think the dollar will suffer accordingly.

Good luck and good weekend
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More Concern

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Most data of late have been weak
Thus central banks are set to tweak
Their policy rates
As they have mandates
Designed to keep growth at a peak

Now later this morning we’ll learn
If payrolls are starting to turn
Last month’s poor display
And weakness today
Would certainly cause more concern

It’s payroll day in the US and markets have been extremely quiet overnight. In fact, given yesterday’s July 4th holiday here in the US, they have been quiet for two days. However, don’t let the lack of market activity distract you from the fact that there are still a lot of things ongoing in the global economy.

For example, a key question on analysts’ minds has been whether or not a recession is in the offing. Data continues to generally disappoint, with this morning’s sharply lower German Factory Orders (-2.2%) and UK Labor Productivity (-0.5%) as the latest in a long line of crummy results. And given last month’s disappointment on the US payroll front (recall the outcome was 75K vs. the 185K expected) today’s numbers are being closely watched. Here are the current median expectations based on economist surveys:

Nonfarm Payrolls 160K
Private Payrolls 153K
Manufacturing Payrolls 0K
Unemployment Rate 3.6%
Average Hourly Earnings 0.3% (3.2% Y/Y)
Average Weekly Hours 34.4

A couple of things to note are the fact that the NFP number, even if it comes in at the median expectation, still represents a declining rate of job growth compared to what the US experienced in 2018. This is likely based on two factors; first that this historically long expansion is starting to slow down, and second, that there are less available workers to fill jobs as population growth remains restrained. The other thing to remember is that the Unemployment Report has always been a lagging indicator, looking backwards at how things were, rather than giving direction about the future. The point is that worsening of this data implies that things are already slowing. As I wrote Wednesday, don’t be surprised if when the inevitable recession finally gets determined, that it started in June 2019. I failed to mention the ADP report on Wednesday as a data release, but it, too, disappointed, printing at 102K, some 40K below expectations.

With that as our cheerful backdrop, let’s consider what to expect ahead of the release:

Weaker than expected results – If the NFP number prints at 90K or less, look for equity markets to rejoice as they perceive the Fed will become even more aggressive in their attempts to head off a recession, and the idea of a 50bp rate cut at the end of the month takes hold. Bond markets, too, will soar on the same expectations, while the dollar is likely to give up its overnight gains (granted they were only about 0.2%) as a more aggressive Fed will be seen as a signal to sell the buck. The key conundrum in this scenario remains equities, which continue to rally into weaker economic conditions. At some point, if the economy continues to weaken, the negative impact on earnings is going to outweigh the kneejerk reaction of buying when the Fed cuts, but as John Maynard Keynes reminded us all, ‘markets can stay irrational far longer than you can stay solvent.’

Results on or near expectations – If we see a print in the 120K-180K range, I would expect traders to be mildly disappointed as the call for a more aggressive Fed policy would diminish. Thus equities might suffer slightly, especially given they are sitting at record highs, while bonds are likely to see yields head back toward 2.0%. The dollar, meanwhile, is likely to maintain its overnight gains, and could well see a modest uptick as the idea of more aggressive Fed easing starts to ebb, at least for now.

Stronger than expected results – Any print above 180K will almost certainly, perversely, see a stock market selloff. It is abundantly clear that equity buyers are simply counting on Fed largesse to keep the party going. The market has nothing to do with the fundamentals of the economy or individual company situations. With this in mind, strong data means that the Fed will have no call to cut rates. The result is that the futures market will likely reprice the odds of a rate cut in July lower, perhaps to a 50% probability, while equity traders will take the news as a profit-taking opportunity given the lack of reason for a follow through higher in stocks. Bonds will get tossed overboard as well, as concerns about slowing growth will quickly abate, and a sharp move higher in 10-year yields is entirely realistic. As a point of information, the last time the payroll report was released on July 5th, in 2013, 10-year yields rallied 25bps on a surprising payroll outcome. And remember, technical indicators show that the bond market is massively overbought, so there is ample opportunity for a sharp move. And finally, because of the holiday yesterday, trading desks will have skeleton staffs, further reducing liquidity. Oh yeah, and the dollar will probably see significant gains as well.

The point is that there are two possible outcomes that could see some real fireworks (pun intended) today, so stay on your toes. While one number is just that, a single data point, given the recent trend in place, today’s data seem to have a lot of importance. If pressed, my sense is that the trend of weaker data that has been evident worldwide is going to manifest itself with something like a 50K print, and an uptick in the Unemployment Rate to 3.7% or 3.8%.

We will know shortly.

Good luck and good weekend
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The Chaff from the Wheat

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As markets await the report
On Payrolls they’re having to sort
The chaff from the wheat
From Threadneedle Street
As Carney, does rate hikes exhort

The gloom that had been permeating the analyst community (although certainly not the equity markets) earlier this year, seems to be lifting slightly. Recent data has shown a stabilization, at the very least, if not the beginnings of outright growth, from key regions around the world. The latest news was this morning’s surprising Eurozone inflation numbers, where CPI rose a more than expected 1.7% in April, while the core rate rose 1.2%, matching the highest level it has seen in the past two years. If this is truly a trend, then perhaps that long delayed normalization of monetary policy in the Eurozone may finally start to occur. Personally, I’m not holding my breath. Interestingly, the FX market has responded by selling the euro with the single currency down 0.2% this morning and 1.0% since Wednesday’s close. I guess that market doesn’t see the case for higher Eurozone rates yet.

In the meantime, the market continues to consider BOE Governor Carney’s comments in the wake of yesterday’s meeting, where he tried to convince one and all that the tendency for UK rates will be higher once Brexit is finalized (and assuming a smooth transition). And perhaps, if there truly is a global recovery trend and policy normalization becomes a reality elsewhere, that will be the case. But here, too, the market does not seem to believe him as evidenced by the pound’s ongoing weakness (-0.3% and back below 1.30) and the fact that interest rate futures continue to price in virtually no chance of rate hikes in the UK before 2021.

While we are discussing the pound, there is one other thing that continues to confuse me, the very fact that it is still trading either side of 1.30. If you believe the narrative, the UK cannot leave the EU without a deal, so there is no chance of a hard Brexit. After all, isn’t that what Parliament voted for? In addition, according to the OECD, the pound at 1.30 is undervalued by 12% or so. Combining these two themes, no chance of a hard Brexit and a massively undervalued pound, with the fact that the Fed has seemingly turned dovish would lead one to believe that the pound should be trading closer to 1.40 than 1.30. And yet, here we are. My take is that the market is not yet convinced that a hard Brexit is off the table or else the pound would be much higher. And frankly, in this case, I agree. It is still not clear to me that a hard Brexit is off the table which means that any true resolution to the situation should result in a sharp rally in the pound.

Pivoting to the rest of the FX market, the dollar is stronger pretty much across the board this morning, and this is after a solid performance yesterday. US data yesterday showed a significant jump in Nonfarm Productivity (+3.6%) along with a decline in Unit Labor Costs (-0.9%), thus implying that corporate activity was quite robust and the growth picture in the US enhanced. We also continue to see US earnings data that is generally beating (quite low) expectations and helping to underpin the equity market’s recent gains. Granted the past two days have seen modest declines, but overall, stocks remain much higher on the year. In the end, it continues to appear that despite all the angst over trade, and current US policies regarding energy, climate and everything else, the US remains a very attractive place to invest and dollars continue to be in demand.

Regarding this morning’s data, not only do we see the payroll report, but also the ISM Non-manufacturing number comes at 10:00.

Nonfarm Payrolls 185K
Private Payrolls 180K
Manufacturing Payrolls 10K
Unemployment Rate 3.8%
Participation Rate 62.9%
Average Hourly Earnings 0.3% (3.3% Y/Y)
Average Weekly Hours 34.5
ISM Non-Manufacturing 57.0

One cannot help but be impressed with the labor market in the US, where for the last 102 months, the average NFP number has been 200K. It certainly doesn’t appear that this trend is going to change today. In fact, after Wednesday’s blowout ADP number, the whisper is for something north of 200K. However, Wednesday’s ISM Manufacturing number was disappointingly weak, so there will be a great deal of scrutiny on today’s non-manufacturing view.

Adding to the mix, starting at 10:15 we will hear from a total of five Fed speakers (Evans, Clarida, Williams, Bowman, Bullard) before we go to bed. While Bullard’s speech is after the markets close, the other four will get to recount their personal views on the economy and future policy path with markets still open. However, given that we just heard from Chairman Powell at his press conference, and that the vote to leave rates was unanimous, it seems unlikely we will learn too much new information from these talks.

Summing up, heading into the payroll report the dollar is firm and shows no signs of retreating. My take is a good number will support the buck, while a weak one will get people thinking about that insurance rate cut again, and likely undermine its recent strength. My money is on a better number today, something like 230K, and a continuation of the last two days of dollar strength.

Good luck and good weekend
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Fleeing the Scene

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The latest news from the UK
Is that they have sought a delay
Til midsummer’s eve
When, they now believe,
They’ll duly have something to say

But Europe seems not quite so keen
To grant that stay when they convene
It should be a year
Unless it’s quite clear
The UK is fleeing the scene

Despite the fact it is payroll day here in the US, there are still two stories that continue to garner the bulk of the attention, Brexit and trade with China. In the former, this morning PM May sent a letter to the EU requesting a delay until June 30, which seems to ignore all the points that have been made about a delay up until now. With European elections due May 23, the EU wants the UK out by then, or in for a much longer time, as the idea that the UK will vote in EU elections then leave a month later is anathema. But May seems to believe that now that she is in discussions with opposition leader Jeremy Corbyn, a solution will soon be found and the Parliament will pass her much reviled deal with tweaks to the political codicil about the future. The other idea is a one-year delay that will give the UK time to hold another referendum and get it right this time determine if it is still the people’s will to follow through with Brexit given what is now generally believed about the economic consequences. The PM is due to present a plan of some sort on Wednesday to an emergency meeting of the EU, after which time the EU will vote on whether to grant a delay, and how long it will be. More uncertainty has left markets in the same place they have been for the past several months, stuck between the terror of a hard Brexit and the euphoria of no Brexit. It should be no surprise the pound is little changed today at 1.3065. Until it becomes clear as to the outcome, it is hard to see a reason for the pound to move more than 1% in either direction.

Regarding the trade story, what I read as mixed messages from the White House and Beijing has naturally been construed positively by the market. Both sides claim that progress is being made, but the key sticking points remain IP integrity, timing on the removal of tariffs by the US, and the ability of unilateral retaliation by the US in the event that China doesn’t live up to the terms of the deal. The latest thought is it will take another four to six weeks to come to terms on a deal. We shall see. The one thing we have learned is that the equity markets continue to see this as crucial to future economic growth, and rally on every piece of ‘good’ news. It seems to me that at some point, a successful deal will be fully priced in, which means that we are clearly setting up a ‘buy the rumor, sell the news’ type of dynamic going forward. In other words, look for a positive announcement to result in a short pop higher in equity prices, and then a lot of profit taking and a pretty good decline. The thing is, since we have no real idea on the timing, nor where the market will be when things are announced, it doesn’t help much right now in asset allocation.

As a side note, I did read a commentary that made an interesting point about these negotiations. If you consider communism’s tenets, a key one is that there is no such thing as private property. So, the idea that China will agree to the protection of private property when it contradicts the Chinese fundamental ruling dicta may be a bit of a stretch. Maybe they will, but that could be quite a hurdle to overcome there. Food for thought.

Now, on to payrolls. Here are the latest consensus forecasts:

Nonfarm Payrolls 180K
Private Payrolls 170K
Manufacturing Payrolls 10K
Unemployment Rate 3.8%
Average Hourly Earnings 0.3% (3.4% Y/Y)
Average Weekly Hours 34.5

A little worryingly, the ADP number on Wednesday was weaker than expected, but the month-by-month relationship between the two is not as close as you might think. Based on what we have heard from Fed speakers just yesterday (Harker, Mester and Williams), the FOMC believes that their current stance of waiting and watching continues to be appropriate. They are looking for a data trend that either informs coming weakness or coming strength and will respond accordingly. To a wo(man), however, these three all believe that the economy will have a solid performance this year, with GDP at or slightly above 2.0%, and that it is very premature to consider rate cuts, despite what the market is pricing.

Meanwhile, the data story from elsewhere continues to drift in a negative direction with Industrial Production falling throughout Europe, UK House Prices declining and UK productivity turning negative. In fact, the Italian government is revising its forecast for GDP growth in 2019 to be 0.1% all year and all eyes are on the IMF’s updated projections due next week, which are touted to fall even further.

In the end, the big picture remains largely unchanged. Uncertainty over Brexit and trade continue to weigh on business decisions and growth data continues to suffer. The one truism is that central bankers are watching this and the only difference in views is regarding how quickly they may need to ease policy further, except for the Fed, which remains convinced that the status quo is proper policy. As I continuously point out, this dichotomy remains in the dollar’s favor, and until it changes, my views will remain that the dollar should benefit going forward.

Good luck
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Lost Traction

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The tea leaves that everyone’s reading
‘bout trade talks claim risk is receding
Since Donald and Xi
Are desperate anxious to see
A deal that shows both sides succeeding

The equity market reaction
Has been one of great satisfaction
But bonds and the buck
Have had much less luck
As growth on both sides has lost traction

This morning is all about trade. Headlines blaring everywhere indicate that the US and China are close to ironing out their differences and that Chinese President Xi, after a trip through parts of Europe later this month, will visit the US at the end of March to sign a deal. It should be no surprise that global equity markets have jumped on the news. The Nikkei rose 1.0%, Shanghai was up 1.1% while the Hang Seng in Hong Kong rallied 0.5%. We have seen strength in Europe as well, (FTSE +0.5%, CAC +0.5%) although the German DAX is little changed on the day. And finally, US futures are pointing to a continuation of the rally here with both S&P and Dow futures currently trading higher by 0.25%.

However, beyond the equity markets, there has been much less movement in prices. Treasuries have barely edged higher and the dollar, overall, is little changed. It is pretty common for equity market reactions to be outsized compared to other markets, and this appears to be one of those cases. In fact, I would caution everyone about one of the oldest trading aphorisms there is, “buy the rumor, sell the news.” A dispassionate analysis of the trade situation, one which has evolved over the course of two decades, would indicate that a few months hardly seems enough time to solve some extremely difficult issues. The issue of IP (whether stolen or forced to be shared in order to do business) and state subsidies for state-owned firms remains up in the air and given that both these issues are intrinsic to the Chinese economic model, will be extremely difficult to alter. It is much easier for China to say they will purchase more stuff (the latest offer being $23 billion of LNG) or that they will prevent the currency from weakening, than for them to change the fundamentals of their business model. While positive trade sentiment has clearly been today’s driver, I would recommend caution over the long-term impacts of any deal. Remember, the political imperatives on both sides remain quite clear and strong, with both Presidents needing a deal to quiet criticism. But political expediency has rarely, if ever, been a harbinger of good policy, especially when it comes to economics.

Of course, one of the reasons that a deal is so important to both sides is the slowing economic picture around the world and the belief that a trade deal can reverse that process. Certainly, Friday’s US data was unimpressive with Personal Spending falling -0.5% in December (corroborating the weak Retail Sales data), while after a series of one-off events in December pumped up the Personal Income data, that too declined in January by -0.1%. The ISM numbers were softer than expected (54.2 vs. the 55.5 expected) and Consumer Confidence slumped (Michigan Sentiment falling to 93.7). All in all, not a stellar set of data.

This has set up a week where we hear from three key central banks (RBA tonight, Bank of Canada on Wednesday and ECB on Thursday) with previous thoughts of policy normalization continuing to slip away. Economic data in all three economic spheres has been retreating for the past several months, to the point where it is difficult to blame it all on the US-China trade situation. While there is no doubt that has had a global impact (look at Germany’s poor performance of late), it seems abundantly clear that there are problems beyond that.

History shows that most things have cyclical tendencies. This is especially true of economics, where the boom-bust cycle has been a fact of life since civilization began. However, these days, cycles are no longer politically convenient for those in power, as they tend to lose their jobs (as opposed to their heads a few hundred years ago) when things turn down. This explains the extraordinary effort that even dictators like President Xi put into making sure the economy never has a soft patch. Alas, the ongoing efforts to mitigate that cycle are likely to have much greater negative consequences over time. The law of diminishing returns virtually insures that every extra dollar or euro or yuan spent today to prevent a downturn will have a smaller and smaller impact until at some point, it will have none at all. It is this process which drives my concern that the next recession will be significantly more painful than the last.

So, while a trade deal with China would be a great outcome, especially if it was robust and enforceable, US trade with China is not the only global concern. Remember that as the trade saga plays out.

Aside from the three central bank meetings, we also get a bunch of important data this week, culminating in Friday’s payroll report:

Today Construction Spending 0.1%
Tuesday New Home Sales 590K
  ISM Non-Manufacturing 57.2
Wednesday Trade Balance -$49.3B
  ADP Employment 190K
  Fed’s Beige Book  
Thursday Initial Claims 225K
  Nonfarm Productivity 1.7%
  Unit Labor Costs 1.6%
Friday Nonfarm Payrolls 180K
  Private Payrolls 170K
  Manufacturing Payrolls 10K
  Unemployment Rate 3.9%
  Average Hourly Earnings 0.3% (3.3% Y/Y)

In addition to all this, we hear from four more Fed speakers, including Chairman Powell on Friday. It seems increasingly clear that Q1 growth has ebbed worldwide compared to the end of last year, and at this point, questions are being raised as to how the rest of the year will play out. Reading those tea leaves is always difficult, but equity markets would have you believe, based on their recent performance, that this is a temporary slowdown. So too, would every central banker in the world. While that would be a wonderful outcome, I am not so sanguine. In the end, slowing global growth, which I continue to anticipate, will result in all those central bankers following the Fed’s lead and changing their tune from policy normalization to continued monetary support. And that will continue to leave the dollar, despite President Trump’s latest concerns over its strength, the best place to be.

Good luck
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