Month: June 2018

Two months after the number of US job openings reported by the JOLTS unexpectedly dropped by 150,000 led by food service and construction workers, all it took was two months of revised data to set the seasonally-adjusted, statistically inferred US labor market back on track, and according to the latest JOLTS report, in April the number of job openings soared to a new all time high, rising by 65,000 to a record 6.698 million, the highest number of vacant jobs on record…

… and the biggest cumulative 4-month increase in job openings in history.

The number of job openings increased in durable goods manufacturing (+33,000) and information (+26,000) but decreased in finance and insurance (-84,000). The number of job openings was little changed across all four geographic regions.

Adding to the exuberant picture, while job openings jumped, the number of total hires also increased to just shy of cycle higher, rising to 5.578 million in April from 5.486 million in March. The number of hires was little changed at 5.6 million in April. The hires rate was 3.8 percent. Hires for total private and for government were little changed.

Meanwhile, that other closely watched category, the level of quits – which indicates workers’ confidence they can leverage their existing skills and find a better paying job – posted a modest drop, and in April declined to 3.351 million from 3.387 million. The number of quits was little changed for total private and increased for government (+17,000). Quits increased in state and local government education (+14,000) but decreased in arts, entertainment, and recreation (-25,000). The number of quits was little changed in all four regions.

And with a total 5.4 million separations (a 3.6% rate), this means that there were 1.7 million layoffs and discharges in April, 100,000 higher than in March. he layoffs and discharges rate increased to 1.2 percent over the month. The number of layoffs and discharges edged up for total private and was little changed for government. Layoffs and discharges increased in arts, entertainment, and recreation (+51,000) and in finance and insurance (+27,000). The number of layoffs and discharges was little changed in all four regions.

Putting all this in in context

• Job openings have increased since a low in July 2009. They returned to the prerecession level in March 2014 and surpassed the prerecession peak in August 2014. There were 6.7 million open jobs on the last business day of April 2018, a new series high.
• Hires have increased since a low in June 2009 and have surpassed prerecession levels. In April 2018, there were 5.6 million hires.
• Quits have increased since a low in September 2009 and have surpassed prerecession levels. In April 2018, there were 3.4 million quits.
• For most of the JOLTS history, the number of hires (measured throughout the month) has exceeded the number of job openings (measured only on the last business day of the month). Since January 2015, however, this relationship has reversed with job openings outnumbering hires in most months.
• At the end of the most recent recession in June 2009, there were 1.2 million more hires throughout the month than there were job openings on the last business day of the month. In April 2018, there were 1.1 million fewer hires than job openings.

Finally, and perhaps most notably, the Beveridge Curve (job openings rate vs unemployment rate), continues to gradually normalize after a nearly decade-long “drift” from its conventional pattern. From the start of the most recent recession in December 2007 through the end of 2009, the series trended lower and further to the right as the job openings rate declined and the unemployment rate rose.  In April 2018, the unemployment rate was 3.9 percent and the job openings rate was 4.3 percent.

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Authored by Nick Cunningham via OilPrice.com,

The early signs of discontent and demand destruction could be forcing OPEC’s hand, but increasing production carries its own risks.

OPEC and Russia are considering raising oil production in a few weeks’ time, and while much of the focus has (rightly) been on the supply outages in Venezuela and the potential for disruptions in Iran, the prospect of demand destruction also looms large for the cartel and its partners.

Oil forecasters had been predicting a blistering oil demand growth for 2018. But lately, those bullish forecasts are not looking quite as good, precisely because oil prices had climbed to their highest level in more than three years. For instance, in May the International Energy Agency revised down its forecast for demand growth for 2018 from 1.5 million barrels per day (mb/d) to 1.4 mb/d.

But a growing list of other signs should cause OPEC some concern, and might ultimately push the disparate members of the group into agreeing on higher output.

A nationwide truckers’ strike in Brazil paralyzed the country. Truckers were outraged by the soaring cost of fuel. The expense is made worse by the fact that Brazil’s currency, the real, has declined significantly this year, doubling the pain for motorists in the country. The strike led to enormous damage to the agricultural sector, and led to shortages of a wide array of basic goods. The country’s GDP is expected to take a significant hit.

That strike was followed up by an oil workers’ strike, which forced the temporary shutdown of a series of refineries. The workers, as well as the truckers and a wide swathe of the country, are outraged about the cost of fuel, and they demanded an end to the more market-based pricing for gasoline and diesel that was introduced several years ago. The return to a more government-controlled pricing mechanism, while better for consumers, is costly for the government and for state-owned Petrobras. The oil company has been digging out of a mountain of debt, and if it has to take on the cost of regulated fuel prices, it might have to pile on more obligations.

Brazil is emblematic of the pain that consumers face when oil prices rise by so much in such a short period of time. There are similar signs of disgruntlement around the world. Bloomberg notes that there are plans or calls for changes to fuel prices in India, Thailand, Vietnam and Indonesia. The reactions vary in degree and approach, but across the world there is unrest at the rising cost of energy.

These developments will not be lost on OPEC and its non-OPEC partners as they gather in Vienna on June 22. Keeping the production cuts in place for the rest of 2018, which has long been the plan, could risk overtightening the oil market, potentially sending prices up towards $100 per barrel. That would lead to much wider economic pain and conflict. Ultimately, high prices would destroy oil demand, a development that would likely backfire on OPEC.

However, the flip side of this is that OPEC also faces risks if it decides to increase oil production.

While the specific fuel-related concerns are becoming increasingly visible on the ground, the macroeconomic environment is showing some signs of trouble. The most recent datafrom the global manufacturing PMI by IHS Markit puts global manufacturing growth at a nine-month low, “largely reflecting a waning of global trade flows to the weakest for over one-and-a-half years.”

At the same time, the Wall Street Journal notes that investor confidence in the Eurozone is at a multi-year low, a reflection of the trade war that has erupted between the U.S. and the EU, as well as the political turmoil in Italy, which has put the common currency back in the spotlight.

In short, the global growth story is starting to look a little shaky.

All of this puts OPEC in a tricky position. If it keeps the production cuts in place, oil prices could go too high. Historically, high oil prices help contribute to economic slowdowns, so OPEC runs the risk of sowing the seeds of an economic downturn, which would inevitably drag oil prices back down.

But, OPEC also faces risks by increasing output as well. The danger is that the global economy softens anyway, and OPEC ramps up production at the same time when the economic cycle moves into a slow phase. While higher oil supplies would lower prices and thus blunt the negative fallout of a cyclical downturn, OPEC would also be pumping oil just as the market needs less of it. The result could be a decline in prices far beyond what the cartel wants.

As a result, there are no clear or easy answers for OPEC and Russia when they meet in two weeks.

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US Services surged to a three-year high, according to Markit’s PMI survey, but with business optimism near record highs, concerns over rising costs and the impact of tariffs are rising.

Inflationary pressures intensified in May, as input cost inflation accelerated to the fastest since October 2013. Anecdotal evidence suggested the latest rise in cost burdens was due to higher material inputs, often linked to tariffs, higher interest rates and rising energy and fuel prices. Output charges also increased at a quicker rate, with inflation accelerating to a three-month high.

Anecdotal evidence suggested the latest rise in cost burdens was due to higher material inputs, often linked to tariffs, higher interest rates and rising energy and fuel prices… or put another way – corporate margins are about to get crushed.

• US Services PMI are back above the PMI Manufacturing level at 56.8 (better than expected and up from 54.6 in April)

• ISM Services rebounded from 4-month lows to 58.6, catching up to Manufacturing (better than expected)

Prices Paid also jumped in the ISM data along with New Orders and Employment.

Commenting on the PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

“The US economy kicked up a gear in May. A markedly improved service sector performance takes the final composite PMI reading above the flash estimate and to its highest for over three years.

“With business optimism about the year ahead running at one of the highest levels seen over the past three years, it looks likely that good growth momentum will be sustained in coming months.

“However, the survey also reveals increased concerns regarding rising costs and the impact of tariffs. Across both manufacturing and services, companies’ costs are now rising at one of the strongest rates seen over the past seven years, which will likely feed through to higher consumer prices in coming months.”

Williamson concluded: “The composite PMI is a reliable leading indicator of GDP, and has risen to a level which is consistent with the economy growing at an annualised rate of approximately 3.5%. “

Which is above consensus for now…

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Authored by Lance Roberts via RealInvestmentAdvice.com,

On Monday, stocks opened higher as the bulls pushed the market above overhead resistance. In this past weekend’s missive, I updated our ongoing “pathway” analysis which continues to drive our overall portfolio positioning currently. To wit:

“As shown by the reddish triangle, the ongoing consolidation process continues. Eventually, this will end with either a bullish or bearish conclusion. There is no ‘middle ground’ to be had here.

• Pathway #1 – a breakout to the upside on heavy volume that pushes the market through resistance at 2780 and back to old highs. (Probability 20%)
• Pathway #2a and #2b – a breakout to the upside which fails resistance at 2780. The market then either a) retests the 100-dma and then is able to push to old highs, or, b) fails at 2780 a second time and continues the consolidation process through the summer. (Probability 50%)
• Pathway #3 – the market breaks down next week on continued geopolitical worries, economic data or some unexpected catalyst and retests the 200-dma. (Probability 30%)

I have increased the more “bearish” probability from 20% last week to 30% this week given the triggering of a short-term ‘sell-signal.’ (Lower panel)”

With the higher open on Monday, the market broke above the downtrend resistance and is set up to test resistance at 2780. With the market back to overbought currently, it is likely that 2780 may well be a challenge to the bulls in the near term. Pathway #2a and #2b continue to be the highest probability outcomes currently.

However, a “one-day” move is not necessarily the start of a new trend.

As we discussed previously, from a portfolio management perspective we rely much more heavily on “weekly” data as it smooths out the “volatility” of daily price movements. Given that we are “longer-term” investors, seeking to deploy capital for extended periods of time, using weekly data helps reduce the issues of “head fakes” or “false breaks” which lead to a variety of bad investing outcomes and behaviors. Also, weekly data reduces the emotional “wear and tear” on investors over time by keeping the primary focus on the “trend” of the data.

If we take a look at the weekly chart, a slightly clearer picture emerges.

As shown in the chart above, the consolidation process continues as in the daily chart above. While the market is appearing to bullishly “break out” of the current consolidation pattern, such will not be “confirmed” until the end of the trading week. On Friday, if prices have reversed, then the “break out” will NOT have occurred and portfolio allocations will remain flat.

Furthermore, on a “weekly basis,” the intermediate-term “sell signal” remains which suggests continued pressure on stock prices in the short-term. While the signal is improving, it has not confirmed an increase in equity allocations just yet. The market is also wrestling with a 61.8% Fibonacci retracement from the February lows which is providing some resistance.

We want to give the “benefit of the doubt” to the “bulls” currently. The action on Monday was indeed bullish, and sets us up to add further equity exposure to portfolios, but we will wait for confirmation of the weekly data.

Our worry is the “bulls” seem to charging directly into a potential “trade war.”

A “Trade War” Cometh

As discussed this past weekend, there are a litany of issues which currently concern us particularly has we meander further into the “seasonally weak” period of the year.

• Italian “debt” is a problem. While it was quickly dismissed by the markets, the potential impact to the global financial system is magnitudes larger than Greece was.

• The elected officials in both Spain and Italy are not particularly “EU” friendly with both recent appointments primarily anti-establishment officials. 

• Deutsche Bank is a major issue of concern.

• The Fed is raising interest rates and reducing their balance sheet.

• Short-term interest rates are rising rapidly.

• The yield curve continues to flatten and risks inverting.

• Credit growth continues to slow suggesting weaker consumption and leads recessions

• The ECB has started tapering its QE program.

• Global growth, especially in Europe, is showing signs of stalling.

• Domestic growth has weakened.

• While EPS growth has been strong, year-over-year comparisons will become challenging.

• Rising interest rates are beginning to challenge the equity valuation story. 

However, the biggest immediate concern is the implementation by the current Administration of “tariffs” not only on China but the EU, Mexico, and Canada.

On June 1st, the Administration announced tariffs on steel and aluminum products. On June 15th, the Administration will announce further tariffs on roughly $50 billion of imported products from China.

While “tariffs” sounds like a rather benign issue, it is simply another word for “tax.” In this case, it is a 25% tax increase on the goods and services being penalized. But it is not just those specific goods and services that rise in price, but all related and affected goods and services.

When tariffs are applied, the cost of steel, aluminum, and everything comprised of those commodities, will rise in price. Products, like automobiles, which use imported parts will also rise in price if the imported component increases in cost. As Doug Kass noted previously:

“What I believe they don’t understand is how interconnected the global economy is today compared to the past. As each year progresses, the role of world trade increases and the role of non-US operations in our largest multinationals multiply. Just look at the ever-expanding role of exports (and non-US sales) in the S&P Index – it’s increased as a percentage of total revenues by 2.5x in the last few decades.”

Throw into the mix a stronger dollar, and the risks increase further. As Garfield Reynolds blogged for Bloomberg:

“The law of unintended consequences is striking again. This time it’s the surge in the U.S. dollar that’s being fueled by decisions from President Donald Trump -who seems to prefer a weaker currency – to intensify his attacks on the current ‘unfair’ global trade regime.

The U.S.’s insistence on using tariffs as a weapon came as the White House dropped any effort to seek trade rebalancing through a weaker USD and decided against naming any nations as FX manipulators.

As Trump’s trade stance became more truculent, the dollar just kept climbing. That was puzzling because classic havens such as JPY, CHF, and gold were seeing little benefit as market fears heightened.

It’s become clear that the dollar gained because the impact of Trump’s stance was seen benefiting U.S. assets on a relative basis.”

“Yes, a major trade war is likely to cause damage to the U.S. economy, but a lot of that will be in the longer term. It’s going to cause significantly more pain, especially in the short term, to all those exporters Trump is targeting; and the U.S. is far and away the world’s largest net importer.

This issue is helping to leach investment out of EM in particular, with major developing economies among those most at risk from a U.S.-initiated trade war. Developing Asia, for example, sends 18% of its exports to the U.S., almost three times what it sends to Japan, the next- biggest single-country destination.“

With the 10-year treasury rate now extremely overbought on a monthly basis, combined with a stronger dollar, the impact historically has not been kind to stock market investors. While it doesn’t mean the market will “crash” today, or even next week, historically rising interest rates combined with a rising dollar has previously led to unexpected and unintended consequences previously.

As I have stated previously:

“We remain keenly aware of the intermediate-term “risks” and we continue to take actions to hedge risks and protect capital until those signals are reversed.”

We also remain acutely aware of the longer-term capital risks due to elevated valuation levels, the length of the economic cycle, and weakening annualized comparisons going forward. While it is not yet time to be exceedingly “bearish” on equities, it is no longer advantageous to be exceedingly “bullish” either.

Finally, we are reminded of what DataTrekResearch’s Nicholas Colas said – stocks are ignoring the trade war rhetoric because markets believe there is no way he consciously tanks the US equity market/economy ahead of midterm elections.

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A day after the New York Times published a story speculating that outgoing Starbucks executive chairman and former CEO Howard Schultz might make a bid for the White House in 2020, Schultz appeared on CNBC Tuesday morning to discuss his prospects with Andrew Ross Sorkin.

After acknowledging to the Times that he might be considering a career in politics, Schultz declined to talk about specific next steps with CNBC – though the tone of the interview strongly suggested that he’s at least considering a run.

“I intend to think about a range of options, and that could include public service,” he said. “But I’m a long way from making any decisions about the future.” Schultz added that he “can’t be nailed down” on a potential run for higher office.

Pressed by Sorkin about his plans, Schultz coyly stated that “there’s a lot I can do as a private citizen” and “let’s just see what happens.”

He added that his departure from Starbucks has been planned for more than a year, before launching into a litany of issues that sounded like the first stirrings of his policy platform. The US needs to rein in the national debt, improve education while offering a defense of free trade.

Most recently, Schultz was widely praised by the mainstream media for his company’s response to the arrest of two black customers who’d tried to use the bathroom at a Starbucks in Philadelphia. Schultz decided to close all Starbucks stores for a day to allow employees to undergo racial sensitivity training.

Howard Schultz: My departure has been planned for over a year from CNBC.

 

In each point, Schultz appeared to position himself in opposition to President Trump, and like Hillary Clinton before him, appears to be staking out a center-left position.

Schultz blamed “dysfunction” in the government on Trump’s populist “ideology”.

“I think the issues that we are facing in terms of the dysfunction and polarization that exists within the government is really based on a systematic problem of ideology and I think we need a very different view of how the government and how the country should be run,” Schultz said.

He also touted his push to hire veterans and refugees at Starbucks, as well as the company’s generous tuition assistance and health benefits, which he said “demonstrate the humanity…and the guiding promise of America.”

“It’s been a long time, I think, since anyone within the government has really walked in the shoes of the American people and done the things that would demonstrate the humanity of what is the values of the country and the guiding principle of the promise of America,” Schultz said.

“I think the country is longing for truth, longing for an opportunity in which respect and dignity,” he said. “We have to ask ourselves an important question today what kind of country do we want to live in. We can’t live in a country in which we’re divided. We have to create the kind of value and opportunity for everyone. We can’t do that without reforming and transforming the education system in America.”

Of course, Schultz isn’t the only high-profile CEO toying with a presidential bid. As the NYT pointed out yesterday, Mark Cuban and Disney CEO Bob Iger are also rumored to be considering presidential bids of their own.

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One month ago, in a surprising reversal, we reported that Bridgewater was outperforming peers this year even after losing money in April, largely as a result of a a massive derisking, i.e. turning bearish. As Bloomberg further added, the fund had reduced its net long bets on U.S. equities to about 10 percent of assets from 120 percent earlier this year, and added that the entire fund – all $160 billion of it – was reportedly net short equities.

And now we know why.

in one of Bridgewater’s latest Daily Observations authored by co-CIO Greg Jensen, the firm writes that “2019 is setting up to be a dangerous year, as the fiscal stimulus rolls off while the impact of the Fed’s tightening will be peaking” a point echoed yesterday by the head of the Indian central bank, Urjit Patel, who warned that unless the Fed ends its balance sheet reduction, the tightening in financial conditions could lead to a global conflagration started by emerging markets.

And since asset markets lead the economy, Bridgewater continues, “for investors the danger is already here” and explains:

Markets are already vulnerable, as the Fed is pulling back liquidity and raising rates, making cash scarcer and more attractive – reversing the easy liquidity and 0% cash rate that helped push money out of the risk curve over the course of the expansion. The danger to assets from the shift in liquidity and the building late-cycle dynamics is compounded by the fact that financial assets are pricing in a Goldilocks scenario of sustained strength, with little chance of either a slump or an overheating as the Fed continues its tightening cycle over the next year and a half.

To justify his point, Jensen notes that markets are pricing in that the world is pricing in a “goldilocks” world at the start of 2020, with 2.4% growth, 3.0% 10Y yields and 2.8% Fed Funds rates, essentially “an extrapolation of current conditions, with expected growth and inflation near perfect levels. The yield curve is priced to be flat, oil to be at $62, and the dollar to be down 3.5% against developed world currencies.”

Looking at pricing dynamics, the world’s largest hedge fund also notes that “expectations are for inflation to remain at fairly benign levels just above the Fed’s 2% target, and options pricing reflects little investor demand for protection against the potential for the economy to bubble over. On the other hand, it also shows virtually no chance of deflation, which is a high likelihood in the next downturn.“

Needless to say, Bridgewater is skeptical: “we doubt this picture of calm priced into markets will actually play out.“

But what is most ominous, is Bridgewater’s forecast beyond the end of 2019, when mysteriously all other permabulls’ projections appear to be cut off. As Jansen writes, “while such strong conditions would call for further Fed tightening, there’s almost no further tightening priced in beyond the end of 2019. Bond yields are not priced in to rise much, implying that the yield curve will continue to flatten. This seems to imply an unsustainable set of conditions, given that government deficits will continue growing even after the peak of fiscal stimulation and the Fed is scheduled to continue unwinding is balance sheet, it is difficult to imagine attracting sufficient bond buyers with the yield curve continuing to flatten.”

With all of the above in mind, Bridgewater has one simple message: sold to you.

“We are bearish on financial assets as the US economy progresses toward the late cycle, liquidity has been removed, and the markets are pricing in a continuation of recent conditions despite the changing backdrop.”

Don’t worry though: Dennis Gartman remains bullish.

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Submitted by Intellihub

There is arguably one main reason a law would be put into place to stifle so-called “fake news” and that is so the real purveyors of fake news, like CNN, can continue to push theirs according to critics of what is happening right now in France.

The people at the top of the pyramid who are actually running the entire show appear to have it all figured out: in a world where down is up and up is down fake news appears almost everywhere but the real fact of the matter is that most of it comes from mainstream sources, like CNN. So I have to ask: Will the new laws be used to crackdown on sources like CNN that publish garbage or will the powers-that-be let agencies like CNN roll with whatever smut they like while other smaller outlets get targeted over “fake news”? Will the powers-that-be use the law as a weapon to remove controversial reports?

French AFP reports:

France is the latest country attempting to fight the scourge of fake news with legislation — but opponents say the law won’t work and could even be used to silence critics.

The draft law, designed to stop what the government calls “manipulation of information” in the run-up to elections, will be debated in parliament Thursday with a view to it being put into action during next year’s European parliamentary polls.

The idea for the bill came straight from President Emmanuel Macron, who was himself targeted during his 2017 campaign by online rumors that he was gay and had a secret bank account in the Bahamas.

Under the law, French authorities would be able to immediately halt the publication of information deemed to be false ahead of elections.

Absent some dramatic last minute reversal, it looks like French information will soon be fully controlled. The question is how long until this Orwellian trend is adopted in America as the “establishment” tightens its restraints on the general populace.

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