DAVID ROSENBERG: I don't want to alarm anyone but ...
Before getting into the details of the jobs report, let me just quickly state the broad conclusions up front.
My forecast is that the long lineup of Fed officials who were so vocal about raising rates this summer are going to be too busy at summer school (as they go back to the drawing board) to tighten monetary policy.
Hopefully they have been silenced for good and learned a valuable lesson that they really should cast their vote at the FOMC meeting rather than in front of the TV cameras.
As for the markets, the data imply a reversal in investor-based odds of a rate hike, which had moved to a better than 50/50 bet for late July, and that in turn is bearish for the U.S. dollar, but bullish for Treasurys, curve-steepening trades, gold, emerging markets and rate-sensitive stocks like utilities and telecom services.
Defense sectors like consumer staples should benefit, but the banks that had been hoping for the Fed to provide some net interest margin expansion are certainly not going to be celebrating today’s data.
We had been saying for some time that if there was something in recession in the U.S. it was productivity and that a huge gap had opened up over the past six months between weak business output growth and the pace of job creation.
Well, now we know how that gap is being resolved — with the latter playing catch-down to the former.
As everyone is left wondering “what happened?” here is what happened.
Productivity declined at a 1.7% annual rate in Q4 of last year and followed that up with a 1.0% drop in Q1. On average, labor input expanded at nearly a 2½% annual rate and nonfarm business output growth barely averaged 1%.
So do the math.
From last October to this past March, we had an unusual situation where aggregate hours worked outpaced production by a ratio of two-and-a-half to one.
Not sustainable.
The mean reversion means that it is pay-the-piper time in terms of what this means for the labor market.
Nonfarm payrolls rose a meager 38,000 in May and even accounting for the striking Verizon workers, the headline still would have been less than half the consensus estimate of +160,000.
This is the biggest “miss” by the economics community since December 2013, and the worst headline since September 2010 when the Fed was more preoccupied with its next round of quantitative easing than with raising the funds rate.
Not just that, but there were downward revisions to the prior two months totaling 59,000 — something we have not seen since June of last year.
Look at the pattern; +233,000 in February, +186,000 in March, +123,000 in April and +38,000 in May. Detect a pattern here (he asks wryly)?
You can see why I was gagging when I heard some of the pundits on “bubblevision” tell the anchors this morning that the Fed will look through one number. Dude — this isn’t one number. It is a pattern of softness that has been in effect for the past four months … and counting.
In terms of sectors, two developments really stood out and neither particularly constructive.
First, goods-producing employment declined 36,000, which was the steepest falloff since February 2010. But this is not just one data-point but a visible weakening trend — this critical cyclically sensitive segment of the economy has contracted now for four months in a row and the cumulative damage is 77,000 jobs or a -1.2% annual rate.
I don’t want to alarm anyone but the facts are the facts, and the fact here is simply that this is precisely the sort of rundown we saw in November 1969, May 1974, December 1979, October 1989, November 2000 and May 2007.
Each one of these periods presaged a recession just a few months later — the average being five months.
There was just one time, in the 1985/86 oil price collapse, that we had such a huge decline in goods-producing employment without a recession lurking around the corner — but the Fed was easing then and fiscal policy was a lot more accommodative than is the case today.
Not even the job slippage in goods-producing sectors during the 1995 soft landing and the 1998 Asian crisis were as severe as what we have had on our hands from February to May.
For such a long time, the service sector was hanging in but services ultimately service the part of the economy that actually makes things.
Private service sector job gains have throttled back big-time — from +222,000 in February to +167,000 in March to 130,000 in April to +25,000 in May (ratified by the non-manufacturing ISM as the jobs index sagged to 49.7 in May from 53 in April — tied for the second weakest reading of the past five years).
Once again, a discernible pattern here, but it is where the slowdown is taking place that is most disturbing.
More than one-third of the weakening we saw in the private services sector came in temp-agency employment where employment shrunk 21,000 in May, down now in four of the past five months and by a cumulative 64,000, which is a losing streak we have not seen since August 2009.
In fact, this type of weakness over such a stretch, again not to sound like an alarmist, occurred just prior to economic recessions in the past, without exception and with no “head fakes”.
Yes, it typically is not good news when the headhunters are the ones to start chopping off heads — this is a leading indicator. So I may not want to sound alarmist, but the answer is yes … I am worried.
In fact, the weakness in employment has broadened out rather dramatically — this is not just a one or two sector phenomenon. This is not just about factories cutting back, shale weakness affecting mining or constraints within the reregulated financial sector.
The private sector job diffusion index collapsed to 51.3% from 53.8% in April and 56.3% in March (the nearby peak of 71.2% set back in November 2014 now seems like a distant memory) and has not been this low since February 2010 when the labor market was still in recession even if the overall economy had already emerged into positive growth terrain.
As an aside, as if to make a mockery of yesterday’s ISM manufacturing index pickup, the factory diffusion index retreated to 43.7% from 45.6%.
The unemployment rate fell to 4.7% from 5.0% in each of the prior two months, the lowest since November 2007, but did so for the wrong reason as household employment barely rose — up 26,000 after a 316,000 plunge in April — and the labor force shrank 458,000 (on top of a 362,000 decline in April so we are back into a phase where people are disengaging from the economy).
Without this impact, which pulled the participation rate down to a six-month low of 62.6% from 62.8% in April and 63.0% in March, the jobless rate actually would have just stayed at 5.0%.
All anyone needs to know in terms of what slack there is left in the jobs market, the broad U-6 unemployment rate was stuck at 9.7%.
There are currently 7.4 million people officially unemployed but when you tack on all the idle resources in the labor market, all the underemployment in other words, that number is much closer to 20 million. And that is why wage growth was so modest, coming in at +0.2% MoM and +2.5% YoY, which is firmly in the range of the past several years and far away from the 3½% to 4% band that Janet Yellen told us two years ago would be consistent with the Fed’s inflation objective.
Meanwhile, the workweek was flat at 34.4 hours for the third month in a row and this means that total wage-based personal incomes edged up 0.2% MoM in nominal terms but that is actually stagnant in real terms.
The bottom line is that no matter how shockingly weak the headline numbers were, the details were even worse.
Full-time employment declined 59,000 on top of a 316,000 plunge in April. Those working part-time for economic reasons — actually preferring full-time employment but no such luck — jumped 468,000 in the sharpest increase for any month since September 2012 (when the Fed embarked on QE3).
Keep in mind that this metric is a Yellen favorite.
I should add that the household survey, when put on a comparable footing to the Establishment (Payroll) Survey — the ‘population and payroll concept adjusted measure’ — slid 105,000 after a 293,000 falloff the month before.
The “quit rate”, another Yellen favorite, dipped to 10.7% from 10.8% as well and confirmed the less bullish job confidence tone that was contained in the just-released Conference Board consumer confidence survey.
Were there any positives? A few.
The median duration of unemployment did dip to 10.7 weeks from 11.4 weeks — the low-water mark of the year.
The share of unemployment that is long-term in nature fell to 25.1% from 25.7%.
Employment in the 25-34 year age cohort rebounded nicely — by 128,000 and so this can be construed as constructive for the homebuilding industry.
That is pretty well about it for any whiff of good news and comes under the label of look hard enough, and you’ll always find something nice to say. The difference with this report is that it took almost two hours to sift through the report to find anything positive.
When we try and recreate the Yellen Dashboard, which is the most holistic approach towards assessing the U.S. labor market, it deteriorated again May and this follows three prior months of negative readings.
We were always skeptical over all this rate-hike chatter of late, which seems to have just come out of nowhere, but for the Fed to tighten policy in the face of this extremely sluggish job market backdrop would be more than just a touch bizarre.
Then again, Fed officials have also told us that they are data-dependent and let’s face it … there is no smoking gun in the employment data, that is for sure, and there are no data points as important as the labor market.
This is a game-changer.
Barrons weekend update: Positive on OAK, WFM; cautious on CAB
Cover story: Private tech companies such as Uber, Dropbox, and Airbnb have legitimate business models that are disrupting mature markets; venture capitalists are funding them, but investors aren't showing much interest, creating a major lull in initial public offerings-but the bad news for IPOs could be a bullish sign for the market.
Features: 1) Female financial advisors face a number of challenges, and "remain a distinct minority in an industry many view as especially well-suited for them"; 2) Positive on WFM: Shares of market chain have strong potential for upside as it cuts costs, offers more competitive pricing, and launches a value chain that could open up new markets; 3) Positive on OAK: Shares have gone down since February, but if new initiatives led by chief executive Jay Wintrob bear fruit, they are likely to head back to the $60 range from today's $45; 4) Cautious on CAB: Shares have climbed to $52 from $33 since October after Elliott Management took a stake, but the retailer still faces many challenges, and investors should consider taking their profits now; 5) Positive on JNJ: Company tops Barron's annual ranking of the world's most respected companies, displacing AAPL, which dropped to No. 3, while Berkshire Hathaway holds the second spot.
Tech Trader: Positive on GOOGL, AMZN: Companies are starting to look like INTC and MSFT at the end of the 90s: they're focused less on constant disruption and more on strong products that allow them to thrive and provide investors with healthy returns.
Trader: Jim Bianco of Chicago-based Bianco Research is on high alert for "giant asymmetric risk," and is concerned that after the jobs report, markets put the probability of a rate hike at 4%; +/- KORS: Investors have turned the beaten-down stock into a star performer, but they're clearly looking beyond the gloomy outlook for the current quarter; Positive on ATSG: Company's relationships with AMZN and DHL are giving it a boost, and shares could see 43% gain during the next 12 months.
Advisor Rankings: Kimberlee Orth of Ameriprise Financial, Shannon Eusey of Beacon Pointe Advisors, and Stephanie Stiefel of Neuberger Berman hold the top three spots on Barron's list of the Top 100 Women Financial Advisors.
Interview: Ivy Zelman of Zelman & Associates, one of the few analysts who predicted the housing crash, is bullish on the sector, though she is wary of the real estate markets in New York and Miami.
Profile: Michael Cornelius, manager of the T. Rowe Price Emerging Markets Bond fund, takes a contrarian approach, aiming to minimize risk despite a preference for second-tier and frontier countries (top 10 country exposure: Mexico, Brazil, Argentina, Indonesia, Russia, Venezuela, Turkey, Ukraine, South Africa, Serbia).
Small Caps: Positive on HMHC: Textbook and educational-content firm is a market leader in a sector with high barriers to entry; despite a weakening sector, company stands to benefit from the growth of its digital business; Cautious on MPW: REIT invests only in acute-care hospitals, giving it a competitive advantage, but investors may want to pare holdings after a boost following the sale of an equity stake in Capella Healthcare.
Follow-Up: Cautious on MON: Bayer is unlikely to come up with the capital to entice the company into a deal; shares are up, but its growth prospects have eroded and investors should take their profits.
International Trader: Should the U.K. vote to leave the European Union, "it could take two years of negotiations to untangle the country from the EU apparatus, but the impact could be more immediate," including a steep drop in sterling.
Asian Trader: Overview of the Sohn Conference Hong Kon; speaker Yuet Wei Wan of Wei Capital Management said supply and demand for oil is pretty balanced at recent levels, though disruptions in places like Nigeria could tip the markets into deficit.
Emerging Markets: With the Federal Reserve preparing to raise rates, investors may find opportunities in Pakistan, India, and Romania, as well as central and eastern Europe; caution is warranted in Argentina.
Commodities: Iron-ore prices are down by almost 30% since late April, but investors hoping to pick a bottom in the volatile commodity should proceed carefully.
Streetwise: Companies with the highest ratios of free cash flow to debt have outperformed those with the lowest by about five percentage points, which is why investors shouldn't worry about MCD, HD, HSY, and UPS; Companies with low leverage ratios and low interest coverage include MU, MRO, and ODP.
The 'greatest risk to the global economy' has nothing to do with a China slowdown
One of the oil industry's most trusted advisors says that the "greatest risk to the global economy today" is not Brexit, the slowdown in China, or terrorism, but the potential collapse of the fossil fuels industry.
Speaking at the Financial Times' Energy Transformation Strategies conference in London on Wednesday, Phillip Lambert of boutique advisory firm Lambert Energy, said that he believes that moving towards renewable energy sources while ignoring the fossil fuels sector could be disastrous for the world.
Here's what he told the gathering of oil industry professionals, sustainable energy gurus and a handful of journalists earlier today:
The greatest risk to the global economy today is that the fossil fuel industry — if you want to lump it all together, which in itself is dangerous — becomes so battered that it doesn’t invest enough to keep the system going.
I think the world today, especially the young among the populace thinks that the renewable industry is taking over and that’s fine, it’s all going to be hunky dory. Paris met, two degrees, fossil fuel dies, renewable takes over. What we’ve tried to do at Lambert Energy is just point out the unbelievable risk of that position unless we’re very careful.
Today, June 1, we will consume the equivalent of 270 million of oil, and most people imagine that you can replace that pretty quickly and seamlessly with wind, solar, electric cars whatever. But of that 270 million, 75 million is coal, 65 million is gas, and 95 million is oil. Nine million of that is wind and solar, and biofuels. So before we delude the world that it is going to be easy to replace it we’ve got to have a realistic debate about the cost.
Lambert's basic point is that simply turning off the taps on fossil fuels and moving all production of energy to renewables would be completely unaffordable, especially in developing nations, that in turn would stunt economic growth, and cause serious financial issues worldwide. Instead, he believes that slowly transitioning to renewables while using technology to make fossil fuels cleaner is the best way to proceed.
“Clearly there is nothing wrong with a renewable future. We passionately believe in the UK in a gas and offshore wind future,” Lambert said.
As its stands, the large majority of debate around the oil industry in particularly is where prices are going to settle. The cost of oil slumped from more than $100 per barrel in mid-2014, to less than $30 in January, as a huge supply and demand imbalance prices to crash downwards. It has since recovered to around $50 as markets begin to rebalance, thanks in part to a series of massive outages in key production areas.
However, Lambert argues that the price crash isn't the biggest issue surrounding oil, and the wider fossil fuels industry, but is simply "another punch to an already battered body" adding that the industry has to be "very, very careful" or it could face collapse.
"There’s an underlying, much greater drumbeat [than the oil price crash], which is the talk of the end of our industry as a whole. In a way, I’ve never seen so little confidence in our industry as today. I think the confidence, both in investment terms and support has been draining away."
Energy industry defaults are already at their highest levels of all-time, and in the past year, several huge coal companies have gone bankrupt as a result of crashing commodity prices thanks to international efforts to ditch coal — traditionally the most polluting fossil fuel.
While he may not be a household name — Lambert Energy Advisory runs from an office on a single floor in Mayfair and the firm doesn't have a website — Lambert is hugely well respected in the energy industry, and is probably best known for his instrumental role in driving the early stages of a collapsed $10 billion deal between Rosneft and BP in 2011, which fell through after BP missed a last minute deadline.
Softbank plans to sell 248M shares back to Gungho Online at ¥294/shr - press - Softbank said to be selling most of its stake in Gungho to help raise money to shore up its balance sheet, and comes on the heels of its announced sale of $10B of its Alibaba stake.
SNB Vice President Zurbruegg: SNB could cut rates further and could intervene in FX market at any time it deems necessary
- models show the Swiss Franc remains significantly overvalued
- SNB does not have a new currency exchange rate target
Chinese target Kuka would assess any European bid: report
BERLIN (Reuters) - German industrial robot maker Kuka (KU2G.DE) would assess a possible European takeover bid but it is wrong to assume such an offer would take priority over the bid by China's Midea Group Co Ltd's (000333.SZ), Chief Executive Till Reuter told Frankfurter Allgemeine Sonntagszeitung.
Kuka is the latest and biggest German industrial technology group to be targeted by a Chinese buyer as the world's second-largest economy makes the transition from a low-cost manufacturer into a high-tech industrial hub.
Chancellor Angela Merkel's government is trying to coordinate an alternative offer for Kuka, with government sources expressing concerns about losing German technology to China.
"Should new options arise because of politicians' efforts, then we will assess those the same way without prejudice as we are assessing the offer by Midea," Reuter said in an interview published on Sunday.
He said Kuka has been in contact with federal and regional governments since before home appliance maker Midea's 4.5 billion-euro ($5.12 billion) bid became public last month.
Asked whether a European counter offer would take priority should it come together, Reuter said: "This cannot be said in such a hard and fast way."
The CEO said Midea has already made "several concessions" to Kuka's management by pledging to keep jobs and R&D capacities in Germany, adding it may take several weeks for the Chinese bidder's final offer to arrive.
Fed's Mester (hawk, FOMC voter): pace and timing of rate hikes are data dependent; do not think the Fed is behind the curve - speech in Sweden
- still looking over the May jobs report, but don't think it will alter outlook; believe we are at full employment
- remain confident that growth is picking up
- there is a risk of waiting too long on rates, which would mean raising rates more aggressively later on; a gradual tightening cycle is best
- current environment has many uncertainties
- UK Brexit vote remains a source of uncertainty
- interest rate policy should only be used to fight financial instability if other tools fail; monetary policy should be the last resort for dealing with bubbles