Month: July 2014

Is this the reason for the blowout, on the surface, payroll number? In June the BLS reports that the number of full-time jobs tumbled by 523K while part-time jobs soared by 799K!

 

Looking at the breakdown of full and part-time jobs so far in 2014, we find that 926K full-time jobs were added to the US economy. The offset: 646K part-time jobs.

 

Something tells us that the fact that the BLS just reported June part-time jobs rose by just shy of 800,000 the biggest monthly jump since 1993, will hardly get much airplay today. Because remember: when it comes to jobs, it is only the quantity that matters, never the quality.

 

… just in case there is any confusion why there is zero real wage growth (for two months in a row now), and why it will take a few more months before experts start tossing the word stagflation a little more casually.

Source: BLS

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Whether it is Draghi’s jawboning – which has slammed EURUSD back to 1.36, juicing the carry trade (in spite of his concerns) – or the better-than-expected payrolls data, US equities are surging and so are bond yields. The initial reaction to the good news was a selloff in stocks but that was quickly recovered as USDJPY lifted all stops through 102 and saved the day and the meme that all is well in the world. Treasury yields are up 3bp (long-end) to 6bps (short-end) as rate-hike expectations shift from July 2015 to June 2015. Gold and silver were slammed into the print and have rallied since.

Stocka re up (after initially dropping)

 

Thanks to USDJPY…

 

As Draghi slams EURUSD…

 

and Bond yields surge…

 

 

Charts: Bloomberg

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Those following the labor force participation rate (which as even the Census Bureau showed is declining not so much due to demographics but due to older people working longer and pushing younger people out of the labor force as we showed yesterday) will hardly be surprised to learn that alongside today’s impressive NFP print, the reason why the unemployment rate took another big step lower from 6.3% to 6.1%, was once again as a result of the number of people not in the labor force, which in June rose to a fresh record high of 92,120K, up 111K from June.

 

The civilian employment to population ratio remained at cycle lows, if rising modestly from 58.9% to 59.0%

As a result, the labor force participation rate remained flat at 62.8%, matching the lowest print since 1978.

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Q2 GDP hope remains as a significant surge in exports of automotive vehicles, parts, and engines stalled the collapsing trade balance for a very modest beat (still a $44.4 billion deficit). This is the 2nd biggest trade deficit since November 2012 as imports dropped $0.7bn and exports rose $2.0 billion. Saudi Arabia, interestingly, was largely responsible for the improvement in the trade balance as the deficit dropped from $4bn to $2.3bn. Hope springs eternal but the deficit is still considerably more of a drag on Q2 GDP than it was on Q1 GDP. Initial jobless claims continue to go nowhere but missed for the 5th week in a row).

Trade deficit improved marginally but remains a big drag on Q2 GDP..

 

Saudi Arabia’s Trade Balance improved by the most since Nov 2011… to its lowest deficit in 17 months…

 

But initial jobless claims limped higher and missed for 5th week in a row…

 

 

Charts: Bloomberg

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For once the ADP was actually spot on: in June the US economy added 288K nonfarm payrolls, far above the 215K expected, and above the upward revised 224K from June. Further, May jobs were revised from 282K to 204K. This was the fifth consecutive month of job gains over 200K. The unemployment rate tumbled to 6.1%, well below the 6.3% expected. The brth/death adjustment added 121K jobs, compared to 205K previously, and a total of 452K so far in 2014.

Private Payrolls rose 262K, above the 215K expected. Average hourly earnings rose as expected 0.2% from June and 2.0% from a year ago, marginally higher than the 1.9% expected. Finally the weekly hours worked for all employees was 34.5%, same as expected and the same as last month.

 

From the report:

Total nonfarm payroll employment rose by 288,000 in June. Over the past 3 months, job growth has averaged 272,000 per month. In June, employment growth was widespread,  led by gains in professional and business services, retail trade, food services and  drinking places, and health care. (See table B-1.)

Employment in professional and business services rose by 67,000 in June and had averaged 53,000 per month over the prior 12 months. In June, employment within the industry increased in management and technical consulting services (+8,000),  architectural and engineering services (+7,000), and computer systems design and related services (+7,000). Employment continued to trend up in temporary help  services.

Retail trade employment increased by 40,000 in June. Over the prior 12 months, employment in this industry had grown by an average of 26,000 per month. In June, job growth in the industry occurred in motor vehicle and parts dealers (+12,000), building material and garden supply stores (+8,000), and electronics and appliance stores (+7,000).

Employment in food services and drinking places rose by 33,000 in June and has increased by 314,000 over the past year.

Health care employment increased by 21,000 in June, about in line with the prior 12-month average gain of 18,000 per month. Within health care, employment continued to trend up in ambulatory health care services (+13,000) and in nursing and residential care facilities (+6,000).
 
Transportation and warehousing employment increased by 17,000 in June. Over the prior 12 months, this industry had added an average of 11,000 jobs per month. In June, couriers and messengers added 6,000 jobs.

Financial activities added 17,000 jobs in June, with a gain of 9,000 in insurance carriers and related activities. Employment in real estate and rental and leasing continued to trend up in June (+9,000). Financial activities had added an average of 5,000 jobs per month over the prior 12 months.

Manufacturing added 16,000 jobs in June, with all of the increase in durable goods manufacturing. Within durable goods, employment increased in motor vehicles and parts (+6,000) and in computer and peripheral equipment (+3,000).

Wholesale trade added 15,000 jobs over the month and has added 140,000 jobs over the year.

Employment changed little over the month in other major industries, including mining and logging, construction, information, and government. 

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No change… no change. Draghi’s back and, just like RBA’s Stevens last night, is ready to talk (but not jawbone) his currency down; explaining that any day now we might – just might – unleash a treaty-busting monetization of more debt that won’t actually reach the real economy but will provide more ammo for carry-traders to leverage longs in peripheral nations sovereign debt. Since the last ECB NIRP unleashing, things have got worse for Europe… but it will take time we are sure… just wait until H2 2014…

 

 

Why Draghi’s snookered… the real costsof borrowing is practically unaffected by Draghi’s actions…the transmission mechanism is broken

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While up until now the virtual war between Saudi Arabia, openly calling for the ouster of Iraq’s Maliki (whose words in retaliation were just as harsh) was primarily of words, things appear to be escalating on that front too following an overnight report that Saudi Arabia has deployed 30,000 soldiers to its border with Iraq after Iraqi soldiers withdrew from the area, Saudi-owned al-Arabiya television reported Thursday. The world’s top oil exporter shares an 500-mile border with Iraq, where Islamic State of Iraq and al-Sham (ISIS) insurgents and other Sunni Muslim militant groups seized towns and cities in a lightning advance last month. King Abdullah has ordered all necessary measures to protect the kingdom against potential “terrorist threats,” state news agency SPA reported on Thursday.

Al-Arabiya said on its website that Saudi troops fanned into the border region after Iraqi government forces abandoned positions, leaving the Saudi and Syrian frontiers unprotected. The satellite channel said it had obtained a video showing some 2,500 Iraqi soldiers in the desert area east of the Iraqi city of Karbala after pulling back from the border. An officer in the video aired by al-Arabiya said that the soldiers had been ordered to quit their posts without justification. The authenticity of the recording could not immediately be verified.

Iraq was quick to object to the stated reason for the troop buildup, claiming its border with Saudi Arabia is well protected: “We haven’t experienced or noticed any abnormal situation” along border area with Iraq, Major General Mansour al-Turki, Interior Ministry’s spokesman, says in text message responding to questions. In any case, there are now tens od thousands of Saudi troops just waiting for the order to cross the border and join what is now a feeding prozy war zoo involving the US, Iran, Russia, Syria, and – likely very soon- Israel. What can possibly go wrong.

Meanwhile, ISIS or IS as it is now known, is further clamping down on controlled territories. As reported earlier by Bloomberg, Sunni insurgents in Iraq have demanded that residents of at least 2 northern towns pledge allegiance or face death, citing Al-Mada Press reports. The website, quoting tribal chiefs, says group now known as     Islamic State has threatened to kill residents of Hawijah, ~20 kms (12 miles) west of Kirkuk, and at least 1 other town if they don’t vow loyalty. Because what is more loyal than sworn allegiance at the barrel of a gun.

And in other news, as the map below shows, Iraq is finally putting those obtained Russian jets to good use and has launched airstrikes on militants between Baghdad and Kirkuk. Confirmed by the newswires, militants were killed in air strikes and artillery shelling of Islamic State’s positions in northern Babel, Falah al-Khafaji, head of security committee at Babel province’s council, tells al-Mada Press website.

The latest Iraq scenario map courtesy of the Institute for the Study of War.

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Courtesy of RanSquawk, here is a summary of what the Street expects will happen today. Keep in mind, following yesterday’s ADP blowout number (always wrong, yet still somehow having credibility), the whisper number is about 30-40K higher. The market consensus is for a +215k NFP report and 6.3% unemployment. In terms of renewed optimism, we’ve been here many times before in this cycle. As Deutsche Bank’s Jim Reid observes, “given the weather distortions it was always inevitable that there would be a Q2 data spurt at some point. But will it be sustainable? The market might not put quite as much weight on data now as they will in say August/September when surely the weather impact will have been completely worked through by then.”

Far more important than the headline NFP print will be average hourly earnings (expected to rise just 1.9%, below last month’s 2.1%) for those keeping tabs on wage inflation (as opposed to yet again soaring food and energy inflation): recall that as we reported two weeks ago, not only have real hourly earnings declined for two months in a row, but are now back to Lehman levels. Absent some real pick up in wages, the only possible outcome for the US now that cost-push inflation is rearing its ugly head, is nothing short of stagflation.

From RanSquawk

Preview summary:

• US Change in Nonfarm Payrolls (June) M/M Exp. 215K (Low 145K, High 290K), Prev. 217K, April 288K
• US Unemployment Rate (June) M/M Exp. 6.3% (Low 6.2%, High 6.4%), Prev. 6.3%, April 6.3%; Labor force participation rate prev. 62.8%
• Today’s number is not expected to alter the future course of Fed monetary policy
• Focus will once again fall on any sign of wage growth as an indication of tightening of slack in the labor force

Breakdown by bank:

• Citigroup 190K
• HSBC 200K
• Goldman Sachs 210K
• UBS 215K
• JP Morgan 220K
• Deutsche Bank 225K
• Bank of America 225K
• Barclays 250K

With Fed policy now on a steady path and their QE program due to end in October or December, even if today’s reading shows a significant beat or miss on expectation it is not expected to change the course of future FOMC action, although has the potential to adjust expectation of the rate hike timeline. A significant beat is very possible after yesterday’s ADP employment change came in at 281K, leading some analysts to change their forecast for today’s reading and speculate over a potential +300K reading. However, focus will once again fall on any sign of wage growth as an indication of tightening of slack in the labor force, with analysts suggesting the current 2.1% average hourly earnings remains well below the long-term trend of 3.5%.

The unemployment rate is expected to remain on hold at 6.3% for the third consecutive time, and follows a note from the BLS last month that labor force re-entrants partially recovered the big April loss, although participation continues to remain low (62.8%). Ahead of today’s release it’s worth noting that the 6-month average for the main nonfarm payrolls reading continues to reside above 200k, with last month’s reading taking the jobs recovery total above pre-recession highs.

Market Reaction

With the S&P 500 and DJIA trading just off record highs, 17,000 will be closely eyed in the DJIA which could be breached at the Wall Street open following a better than expected jobs report (DJIA future still well below with FV at -82), and the next significant level in the S&P is at the psychologically important 2,000 (record high currently 1978.58). Although the median expectation for the headline NFP is 215K, markets are expecting an even higher reading following a big ADP beat of 281k yesterday, particularly as a higher NFP headline has been seen vs. ADP over the past five consecutive months. As equities have rallied at the start of the new quarter, USTs have seen selling pressure and the yield curve has steepened, although markets are still pricing in the first Fed Fund Rate (FFR) hike in July 2015 (34% probability). In currency markets the USD-Index trades back below 80 after a breach below at the end of last week, and a break back above could mean at test of the 100DMA at 80.04, and also lead to selling pressure in precious metals.

One key footnote is that the jobs report will be released alongside a slew of economic data including US weekly jobs, trade balance, and the post-rate decision press conference from ECB President Draghi.

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