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On the surface the July jobs report was solid, with 209K jobs added, more than the expected, as the recent auto sector slowdown appears to skip the labor market (for now), with Trump quick to take credit for the report.

Excellent Jobs Numbers just released – and I have only just begun. Many job stifling regulations continue to fall. Movement back to USA!

— Donald J. Trump (@realDonaldTrump) August 4, 2017

However, digging through the numbers reveals some troubling features: while the Household survey reported that an impressive 345K jobs were added, more than 50% higher than the Establishment survey, the bulk of these jobs was part-time. According to the BLS, in July 393,000 part time jobs were added, offset by a drop of 54,000 full-time workers.

 

This was the biggest increase in part-time jobs going back to September 2016.

Having monopolized the retail sector (and branching out to others), is Amazon – which recently hired 10 part time jobs for every full time job – starting to dominated the lobs report next?

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It's official, President Trump sees today's payrolls data as "excellent"…

Excellent Jobs Numbers just released – and I have only just begun. Many job stifling regulations continue to fall. Movement back to USA!

— Donald J. Trump (@realDonaldTrump) August 4, 2017

But bond king Bill Gross is not expecting much of a reaction…

"It's a rather strong economic report, but I don't think it moves markets much," Bill Gross says https://t.co/X3f4TPOk45 http://pic.twitter.com/GbuTZnGPbw

— Bloomberg TV (@BloombergTV) August 4, 2017

And he is right in stocks, which popped and dropped on the data…

But bond yields and the dollar are moving notably higher…

 

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Two weeks ago we summarized the stunning impact that ECB Predit Mario Draghi's 'whatever it takes' efforts have had on European capital markets in one simple chart…

The European Central Bank now owns 14.8% of all eligible European corporate bonds.

However, as WolfStreet.com's Wolf Richter points out the ECB’s efforts to buy corporate bonds as part of its stupendous asset buying binge has not only pushed a number of government bond yields below zero, where investors are guaranteed a loss if they hold the bond to maturity, but it has also done a number – perhaps even a bigger one – on the euro junk-bond market.

It has totally gone nuts. Or rather the humans and algorithms that make the buying decisions have gone nuts. The average junk bond yield has dropped to an all-time record low of 2.42%.

Let that sink in for a moment. This average is based on a basket of below investment-grade corporate bonds denominated in euros. Often enough, the issuers are junk-rated American companies with European subsidiaries – in which case these bonds are called “reverse Yankees.”

These bonds include the riskiest bonds out there. Plenty of them will default, and losses will be painful, and investors – these humans and algos – know this too. This is not a secret. That’s why these bonds are rated below investment grade. But these buyers don’t mind. They’re institutional investors managing other people’s money, and they don’t need to mind.

It’s perfectly good to invest in risky instruments as long as you’re being paid to take those risks or have a chance to make serious money. If you buy gold and silver bullion, you know you could make or lose a lot of money. But at a yield of 2.42%, these junk bonds will never make any money if you hold them to maturity, except for covering mild inflation. The risk of losses – including from default – are large. And investors are not getting paid to take those risks. It’s one of the most obviously lopsided deals out there.

The average yield of these junk bonds never dropped below 5% until October 2013. In the summer of 2012, during the dog days of the debt crisis when Draghi pronounced the magic words that he’d do “whatever it takes,” these bonds yielded about 9%, which might have been about right.

Since then, yields have plunged (data by BofA Merrill Lynch Euro High Yield Index Effective Yield via St. Louis Fed). The “on the Way to Zero” in the chart’s title is only partially tongue-in-cheek:

The chart below gives a little more perspective on this miracle of central-bank market manipulation, going back to 2006. It shows the spike in yield to 25% during the US-engineered Financial Crisis and the comparatively mild uptick in yield during the Eurozone-engineered debt crisis:

How does this fit into the overall scheme of things? For example, compared to the US Treasury yield? US Treasury securities are considered the most liquid and the most conservative investments. They’re considered as close to a risk-free financial instrument as you’re going to get on this earth. Turns out, from November 2016 until now, the 10-year US Treasury yield has ranged from 2.14% to 2.62%, comfortably straddling the current average euro junk bond yield of 2.42%

This chart shows the BofA Merrill Lynch Euro High Yield Index (red line) and the 10-year Treasury yield (black line). Note how they used to be worlds apart, and how the spread between them blows out when investors suddenly see risks again, with junk bond prices plunging and yield surging, while Treasuries barely quiver:

If you want to earn a yield of about 2.4%, which instrument would you rather have in your portfolio, given that both produce about the same yield, and given that one has a significant chance of defaulting and getting you stuck with a big loss, while the other is considered the safest most boring financial investment out there?

The answer would normally be totally obvious, but not in the Draghi’s nutty bailiwick. That this sort of relentless and blind chase for yield – however fun it may be today – will lead to hair-raising losses later is a given. And we already know who will take those losses: The clients of these institutional investors, the beneficiaries of pension funds and life insurance retirement programs, the hapless owners of bond funds, and the like.

In terms of the broader economy: When no one can price risk anymore, when there’s in fact no apparent difference anymore between euro junk bonds and US Treasuries, then all kinds of bad economic decisions are going to be made and capital is going to get misallocated, and it’s going to be Draghi’s royal mess.

In the US, “covenant-lite” loans – risky instruments issued by junk-rated borrowers, with few protections for creditors – set an all-time record at the end of the second quarter. Read…  Risk has been Abolished, According to Institutional Investors

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And now the dovish Fed has another problem: the BLS reports that in July the US added 209K jobs, beating consensus expectations of a 180K print, while June was revised higher to 231K from 222K, even as May was revised modestly lower from 152K to 145K, for a net gain of +2,000 in the prior two months.

Nonfarm private payrolls rose 205k vs last month’s 194k, and above the estimate of 180k, as the drop from durable manufacturing failed to materialize. In a familiar refrain, bars and restaurants hired the most workers of any sector in July.

Of course, keep in mind that the July gain was all in the seasonal adjustment factor: unadjusted, jobs declined by 1.308 million.

The average workweek for all employees on private nonfarm payrolls was unchanged at 34.5 hours in July. In manufacturing, the workweek was also unchanged at 40.9 hours, and overtime remained at 3.3 hours.

Adding to the hawkish pressure, wages rebounded from last month’s 0.2%, rising 0.3% M/M, and 2.5% on a Y/Y basis, above the 2.4% expected, while average weekly earnings rose from 2.8% in line with the highest print over the past 7 years, and once again putting wage inflation back on the map.

The unemployment rate dropped from 4.4% to 4.3% as expected, while the participation rate rose from 62.8% to 62.9%, as the number of workers out of the labor force declined by 156K to 94.657 million.

That said, the gap between the unemployment rate and the unemployment to population ratio remains wide.

Some more details from the report:

Total nonfarm payroll employment increased by 209,000 in July. Job gains occurred in food services and drinking places, professional and business services, and health care. Employment growth has averaged 184,000 per month thus far this year, in line with the average monthly gain in 2016 (+187,000).

Employment in food services and drinking places rose by 53,000 in July. The industry has  added 313,000 jobs over the year.

Professional and business services added 49,000 jobs in July, in line with its average  monthly job gain over the prior 12 months.

In July, health care employment increased by 39,000, with job gains occurring in ambulatory health care services (+30,000) and hospitals (+7,000). Health care has added 327,000 jobs  over the past year.

Employment in mining was essentially unchanged in July (+1,000). From a recent low in October 2016 through June, the industry had added an average of 7,000 jobs per month.

Employment in other major industries, including construction, manufacturing, wholesale trade, retail trade, transportation and warehousing, information, financial activities,  and government, showed little change over the month.

The average workweek for all employees on private nonfarm payrolls was unchanged at 34.5 hours in July. In manufacturing, the workweek was also unchanged at 40.9 hours, and overtime remained at 3.3 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls was 33.7 hours for the fourth consecutive month.

In July, average hourly earnings for all employees on private nonfarm payrolls rose by 9 cents to $26.36. Over the year, average hourly earnings have risen by 65 cents, or 2.5 percent. In July, average hourly earnings of private-sector production and nonsupervisory employees increased by 6 cents to $22.10.

The change in total nonfarm payroll employment for May was revised down from +152,000 to +145,000, and the change for June was revised up from +222,000 to +231,000. With these revisions, employment gains in May and June combined were 2,000 more than previously reported. Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors. Over the past 3 months, job gains have averaged 195,000 per month.

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Authored by Mike Shedlock via MishTalk.com,

Yesterday, I commented on “transitory” factors holding down inflation.

Today, the Wall Street Journal reports Global Inflation Hits Lowest Level Since 2009.

The Organization for Economic Cooperation and Development said Thursday that consumer prices across the G-20—the countries that account for most of the world’s economic activity—were 2% higher than a year earlier. The last time inflation was lower was in October 2009, when it stood at 1.7%, as the world started to emerge from the sharp economic downturn that followed the global financial crisis.

 

The contrast between then and now highlights the mystery facing central bankers in developed economies as they attempt to raise inflation to their targets, which they have persistently undershot in recent years.

 

According to central bankers, inflation is generated by the gap between the demand for goods and services and the economy’s ability to supply them. As the economy grows and demand strengthens, that output gap should narrow and prices should rise.

 

Right now, the reverse appears to be happening. Across the G-20, economic growth firmed in the final three months of 2016 and stayed at that faster pace in the first three months of 2017.

 

Growth figures for the second quarter are incomplete, but those available for the U.S., the eurozone and China don’t point to a slowdown. Indeed, Capital Economics estimates that on an annualized basis, global economic growth picked up to 3.7% in the three months to June from 3.2% in the first quarter.

 

Central bankers in developed economies are puzzled by the sluggish pace of pay rises, given continuing declines in jobless rates. However, they believe that economic growth will ultimately eliminate the gap between what their economies can produce and what they are now producing, supporting wages and prices.

No Puzzle

Central banks are puzzled because they do not know what inflation is, or how to measure it.

For example, instead of using home prices in the CPI, they now use Owners’ Equivalent Rent.

In general, asset prices do not count. Bubbles in stocks and bonds do not count.

The massive global QE liquidity went someone, as money always does. The liquidity did not go where the central bankers wanted. It went into asset bubbles.

Mystery Solved

It’s no mystery why central bankers are mystified: Collectively, they are economically illiterate fools engaged in Keynesian and Monetarist group think.

Yes Virginia, there is inflation. Central banks don’t see it because they are clueless about how to measure it.https://t.co/ek7Y4jB9R6

— Mike Mish Shedlock (@MishGEA) August 3, 2017

On deck is another round of destructive asset price deflation, brought about by Central banks who cannot see the obvious.

 

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From Steven Englander of Rafiki Capital

Even when non-farm payrolls (NFP) are as neglected and downplayed as this time around, you have to ask yourself what it would take to make them meaningful. The reason for the markets disinterest is that no one thinks the Fed is going to raise rates earlier than December and we have four more payrolls releases beyond tomorrow’s release before they have to decide. And even though Janet Yellen has been certified as a ‘low interest-rates person’ she is unlikely to cut rates any time soon.

We have only one additional release before the expected balance sheet reduction announcement. But it would take a lot to put some uncertainty into the balance sheet shrinkage . Especially because claims have been extremely stable at extremely low levels, no one will trust an isolated softish NFP number. The consensus on NFP is 180k.

That said, below 130k and with some soft survey indicators softening, I think investors get nervous. It’s a bit awkward for the Fed, having told us that balance sheet reduction won’t do any damage. But say we get  two 130k prints on NFP this month and next, they may very well decide that a brief delay is prudent and that ‘relatively soon’ extends well beyond September. So 130k or lower on Friday means you have to worry a bit that the labor market is coming off the rails. Anything above 150k seems plenty good enough to go ahead with balance sheet reduction. Bond yields may come off a bit more if we print below 160k even though that is good enough to get balance sheet reduction going.

What about a good result? Problem is we have strong NFP recently and the 180k consensus suggests that a firm labor market is priced in. So 250k on its own is not enough to put a September hike on the calendar but it could firm December odds slightly.

I am skeptical that hourly earnings are enough to turn things around on their own. Most forecasters are aware of the calendar issues so the consensus reflects this. The question is whether an 0.4% is enough to change perceptions. Aberrations happen — 0.3% m/m is pretty common, especially in months when the 12th and 15th are in different weeks. Over the last couple of years we have gotten one or two 0.4% m/m prints annually without it being a signal of a real rise in wages. Wage acceleration is a slow moving process, so it is more likely to be signaled by a small shift up ward than a big inflation runup. However, 0.5% would be hard to ignore since it was last seen in 2008. There have been more sighting of carrier pigeons, and many more of Elvis, recently.

With some trepidation, I would argue that 180k on NFP and 0.4% m/m on wages are a fade. There are too many investors wanting to buy EUR and sell USD so any price move would be seen as a USD selling opportunity.

However, if we get a 250k and an 0.4% (or higher) the effect could be longer lasting. If it looks like boom time in labor markets, it makes sense that there be spillover into wages. Whether this would be good enough to reverse the USD trend is doubtful – we would need other confirmatory data. But it would make it a two-way market in FX and fixed income.

The UR matters much less than usual, given the shifting around of NAIRU views among policymakers. Deep down, investors understand that it is convenient for the Fed to now have NAIRU estimated 0.25-0.5% above the current unemployment rate but no one really believes these estimates, given their fluidity.

For the record, I am looking for 160k on NFP and 0.3 or 0.4% on hourly earnings and 4.3% on the unemployment rate. This would generate a bit of a chopfest, with markets trading erratically, but I think USD would end up lower.

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• July’s U.S. Labor-Market Numbers Will Probably Look Familiar (BBG)
• Paul Singer Says Passive Investing Is ‘Devouring Capitalism’ (BBG)
• Beyond Bankruptcy: How Failed Stores Come Back Online (WSJ)
• Tesla short sellers lose almost $800 million as stock rallies after earnings (MW)
• Toyota, Mazda to Invest in Each Other (WSJ)
• EU to impose more Russia sanctions over Siemens case on Friday (Reuters)
• Trouble Comes in Threes for Germany’s DAX Losing European Crown (BBG)
• Credit Card Rewards Are Playing Harder to Get (BBG)
• China regulators plan to crack down further on overseas deals (Reuters)
• BOE Finds Error Behind Spike in U.K. Mortgage Arrears (BBG)
• China’s Fear of Japan-Style Economic Bust Drives Crackdown on Deals, Says Source (BBG)
• RBS Investment Bank Income Jumps, Amsterdam Picked as EU Hub (BBG)
• Watch Out China, India Has a Deadly new Submarine (BBG)
• Islamic State behind Australians’ foiled Etihad meat-mincer bomb plot: police (Reuters)
• That Drone Hovering Over Your Home? It’s the Insurance Inspector (WSJ)
• Duterte Approves Free State College Fees Opposed by Budget Chief (BBG)
• Insurers Think They’ve Found the Perfect Patients for Profits (BBG)
• U.S. Heroin Trade Rooted in Mexico’s ‘Corridor of Death’ (WSJ)
• Keystone XL Foes Don’t Mention Climate in Red State Pipeline Battle (BBG)
• Uber Knowingly Leased Unsafe Cars to Singapore Drivers (WSJ)
• How America Dug a $375 Billion Pension Hole (BBG)

 

Overnight Media Digest

WSJ

– Uber Technologies Inc managers in Singapore were aware of the Honda Motor Co recall when they bought more than 1,000 defective Vezels and rented them to drivers without the needed repairs, according to internal Uber emails and documents reviewed by The Wall Street Journal. on.wsj.com/2vnvpnN

– Special Counsel Robert Mueller has impaneled a grand jury in Washington to investigate Russia’s interference in the 2016 elections, a sign that his inquiry is growing in intensity and entering a new phase, according to people familiar with the matter. on.wsj.com/2vn76X8

– Andrew Hall, a legendary trader who made billions betting on oil’s rise, confirmed that he is closing the main fund at the firm he founded, Astenbeck Capital Management LLC, after he misjudged the impact of a boom in U.S. production that upended the market. on.wsj.com/2vobwwO

– Avon Products Inc pushed out Chief Executive Sheri McCoy after a disappointing five-year tenure during which she oversaw an overhaul of the storied cosmetics seller but ultimately failed to stop its years-long downward spiral. on.wsj.com/2vnoviw

– Toyota Motor Corp and Mazda Motor Corp are expected to announce plans to build a $1.6 billion assembly plant in the United States, which would create 4,000 new jobs and be up and running by 2021, according to a person briefed on the plans. on.wsj.com/2vnkydu

– West Virginia’s Democratic Governor Jim Justice announced at a rally with U.S. President Donald Trump that he was switching parties to join the Republicans. on.wsj.com/2vns0Wb

 

FT

Bank of England Governor Mark Carney warned that persistent uncertainty over the UK’s future relationship with the EU is holding back business investment and household spending, as the central bank cut its growth forecasts and left interest rates unchanged.

Britain’s environment secretary, Michael Gove, faced accusations of giving mixed messages about the future of UK fisheries after he spoke positively about the future potential for foreign vessels to fish in British waters.

British Gas said that the cost of the British government’s energy policies is now a bigger share of household electricity bills than wholesale prices.

Georgia Gould, leader of Camden council in north London, has cast doubt on the usefulness of a new batch of fire safety tests ordered by the government, saying they have revealed nothing new.

 

NYT

– Federal prosecutors are investigating Kushner Companies, the real estate firm owned by the family of Jared Kushner over its use of a program that grants visas to wealthy overseas investors. The authorities are also looking into the role of Kushner’s sister, Nicole Meyer. nyti.ms/2vnlIpm

– Avon Products Inc said its chief executive, Sherilyn McCoy, would step down at the end of March as the door-to-door seller of beauty products has faced pressure from activist investors to reshape its management and speed up its turnaround. nyti.ms/2vnYUGa

-The Trump administration said it would not delay an Obama-era regulation on smog-forming pollutants from smokestacks and tailpipes, reversing a decision that the EPA administrator, Scott Pruitt made in June, to put off an Oct. 1 deadline for designating which areas of the country met new ozone standards. nyti.ms/2vnQj6g

-Alibaba Group Holding Ltd and Kering SA, the owner of brands Gucci and Saint Laurent, said they had resolved their differences. Kering would withdraw a 2015 lawsuit charging that counterfeit goods had been sold from the Chinese e-commerce giant’s website. nyti.ms/2vnogDW

 

Canada

THE GLOBE AND MAIL

** The number of asylum claims in Quebec tripled in recent weeks from an average of 50 a day to 150, according to the province’s Immigration Minister Kathleen Weil. The recent spike in claims has clogged short-term housing for new arrivals in Montreal, leading the province to open up to 600 beds in the Olympic Stadium. tgam.ca/2v5dDDr

** A Canadian deal to finance a Bombardier Inc jet for the controversial Gupta family of South Africa has cast a fresh spotlight on secrecy policies at the federal government’s export credit agency. tgam.ca/2v4LNHk

** Toronto is considering fast-tracking the opening of three supervised drug-use sites and will ask some police officers to carry a life-saving antidote to fentanyl after a spate of deaths linked to tainted street drugs over the past week. tgam.ca/2v4SXLt
NATIONAL POST

** BCE Inc’s wireless division once more outshone its traditional wired business in financial results released on Thursday, but CEO George Cope said the company’s most critical play this quarter was launching a new television product targeted at cord cutters and ‘cord nevers.’ bit.ly/2v5bUxF

 

Britain

The Times

The Financial Conduct Authority has been warned that it is failing to give financial firms a clear idea of how to prepare for Brexit with fewer than a fifth of respondents to a survey saying it was doing a good job. bit.ly/2fcLcPK

Bob Mackenzie, the former chairman of the AA Plc who was sacked for “gross misconduct”, is funding the cost of his own hospital stay after the roadside assistance group cancelled his private medical coverage. bit.ly/2fcX5oU

The Guardian

Bank of England Governor Mark Carney has predicted that the financial sector could double in size to be 20 times as big as GDP within the next 25 years, but warned that the government must hold its nerve and resist pressure to water down regulation after Brexit. bit.ly/2uoqJJD

Julius Baer Gruppe AG, a Swiss bank that accepts only customers with at least 2 million pounds ($2.63 million) of assets, is defying Brexit with plans to expand in the United Kingdom through new offices in Manchester, Leeds, and Glasgow. bit.ly/2v1BoOl

The Telegraph

The government must set out a detailed vision for a Brexit “transitional” period or risk losing the confidence of business that it can successfully manage to move to a new relationship with the European Union, the Institute of Directors warns Friday. bit.ly/2u92ZxX

Aviva Plz’s boss has batted off the suggestion that he might relinquish the chief executive job anytime soon as the insurer he once compared to a “couch potato” continues to spring back to life. bit.ly/2vxlPiH

Sky News

OnTheMarket, the online property portal fighting a fierce battle with rivals Zoopla and Rightmove Plc, is to lift the veil on secret plans to demutualise and list its shares in a bumper stock market flotation. bit.ly/2wbi3IS

Investor Forum, a shareholder body whose members manage assets worth 14 trillion pounds, has waded into the multi-billion pound takeover of Worldpay Group Plc, the FTSE-100 payments group.

The Independent

The Unite union has announced a further two-week strike by British Airways staff working for the Mixed Fleet operation at Heathrow. It will begin on Aug. 16, immediately after the current stoppage ends, and continue to Aug. 30. ind.pn/2u7ekyy

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