It’s sounding like a broken record. Stocks remain close to all-time
highs and Treasury bonds are still flashing danger!
Even though there was a lot of important data released this week, nothing really surprised the markets. Manufacturing, personal income, consumer spending and a closely watched inflation index were all within the expected range.
Thanks to Dent Research, provided here is our weekly information roundup ending the week on August 5, 2016. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news.
The U.S. Economy Created 255,000 Jobs in July… Unemployment remains at 4.9%, the third consecutive month it has sat below
the 5% level of technical full employment. Markets reacted positively
to the news.
What it means – This makes two strong payroll prints in a row. And with upward revisions to both the May and June reports, the past three months have averaged a respectable 190,000 jobs per month.
Wage growth has been sticky for years, but today’s release shows slow and steady movement in the right direction. Average hourly earnings rose 2.6% compared to a year ago. While an improvement, it is far lower than the positive 3% growth seen before the financial crisis.
With these strong numbers, expect to hear increased chatter about a rate hike next month. While it’s true that the chances of a rate hike have improved, the Fed’s data-driven approach means the next bad headline can put to rest any thoughts of an increase.
The Bureau of Labor Statistics’ (BLS) birth/death model, which estimates at the number of jobs created by small firms outside its survey, found 112,000 hires in July. That means that the BLS is really only that sure of 143,000 new hires. The rest are just a guess.
U.S. Spending Grew 0.4%, While Incomes Rose 0.2% in June… The personal saving rate slipped 0.2% to 5.2%. The core Personal Consumption Expenditures (PCE) Price Index grew 1.6% for the year.
What it means – Over the past few months, American incomes rose while budget items like gasoline and food got more affordable. Instead of ramping up their spending, consumers put a lot of that savings in the bank or used it to pay off debt.
That trend reversed in June as income gains slipped and consumers dipped into their savings to account for their increased spending. While consumers still have a savings cushion, expect a quick pullback in spending if income growth recedes into stagnancy.
The Fed's preferred measure of inflation, the core PCE price index, which strips out food and energy, reported a rise of 0.1% in June and 1.6% for the year. Fed policy makers target 2% annual growth on core prices, a number not seen since March of 2012.
No matter how hard the Fed pushes on this string, it can't fight the fundamentals of demographic change that depress consumer demand and inflation.
Ford, General Motors and Toyota Report Falling Sales in July… The news sent the share price of the three auto titans into the red on Tuesday.
What it means – Despite a gain for the market overall in July, sales sit below their level from a year ago. And industry executives warned markets to not expect a continued explosion of sales.
Last week, Ford CFO Bob Shanks told Reuters: "The growth is over." That kind of statement is far stronger than the type that blames sluggish sales on things like bad weather. This is a clear warning that the industry could roll over. And that's exactly what Harry Dent's been saying.
Ultra-low interest rates have queered the market, allowing just a small difference between the monthly payments of a brand-new, fully warrantied car and a quality used one. You may as well spring for the shiny new one.
Our research tells us that consumers reach their peak spending for new cars in their mid-50s. The bulk of people at that age recently peaked and have begun to recede, meaning the demand for new cars will fall with it. Thanks to the US Census Bureau, it appears that 54 is the age that Americans peak in car buying. The highest number of 54 year olds peaked in 2015.
This is just one more thing the Fed can't fight. Or fix. Father Time and Mother Nature hold the trump cards.
U.S. Gasoline Inventories Fall 3.3 Million Barrels, Increase of 500,000 Expected… Crude oil fell below $40 per barrel earlier in the week on expectations of a glut. The report from the Energy Information Administration surprised markets Wednesday and sent crude oil higher.
What it means – While the price of crude oil rebounded on the news, expect this bump to level off. A large drawdown of gas during the driving season isn't terribly surprising.
While U.S. production was unchanged, supply is on the way from other nations. Last week I mentioned the Chinese lifted restrictions on oil exports. Nigerian production might come back online after settling a ceasefire and there are rumblings that Libyan oil might make it to market.
These moves, coupled with slack global demand, will keep a lid on prices for a while.
The Bank of England (BoE) Announces Benchmark Rate Cut to 0.25%, New Round of QE… The BoE slashed rates for the first time since 2009, which had held rates steady at 0.50%. The news lifted the London stock market. The British pound and yields on the 10-year gilt sunk.
What it means –The BoE wants to pin this move on the country’s June Brexit vote to leave the European Union. But it’s more likely the central bank has come to terms with much deeper problems in the British economy.
Central planners haven’t figured out how to translate monetary stimulus into real growth. So aside from the $100 billion in sovereign and $13 billion in corporate bond purchases, the new $130 billion Term Funding Scheme (TFS) is the policy to watch.
The BoE will print new money and allow banks to borrow at a 1% discount, near the new 0.25% benchmark rate. Banks can keep borrowing, so long as they pass these discounts on to their customers. The TFS wants to pass low interest rates directly to consumers and businesses to expand borrowing and spur economic growth.
BoE governor Mark Carney says he has no love for either negative interest rates or helicopter money, but it looks like he’s heading for both.
Japan Reveals Details of Its $276 Billion Fiscal Stimulus Package… The announcement disappointed investors, who believe the measures are too small to make any meaningful impact. They sent the Nikkei lower and shot the yen up near 100 per dollar.
What it means – Japan's newest stimulus plan will have the same result of the past 25 stimulus plans. It will create a tiny blip of economic activity that quickly fades away. Japan's policymakers can't overcome the reality of an aging population and an economy caught in a deflationary death spiral. Still, they keep trying.
Some provisions in the package make sense for a country with a stubbornly low birth rate. Programs that provide families with childcare support and extend maternity leave for mothers should help move the needle in the right direction.
But other measures aren't as inspiring. Japan will invest in a magnetic levitation rail line connecting Tokyo and Osaka and spend cash on safety doors at rail platforms. Heck, magnetic levitation sounds pretty cool and safety is a fair concern. But for a country that already boasts top-notch infrastructure, further spending in that sector under the guise of creating economic growth is a total waste. They've simply run out of ideas.
News of the smaller-than-expected stimulus package sent the yen higher, which won't please Japan's central bankers. This move puts more pressure on the Bank of Japan to devalue the yen.
Japan Considering Wage Controls… Kozo Yamamoto, the newest member of Shinzo Abe’s cabinet, wants all government departments to look at a wage targeting policy.
What it means – Nations usually introduce price or wage controls to tamp down on inflation. President Nixon issued them in the early 1970s without great success. Japan has the opposite problem of stubborn deflation. Instead of placing a ceiling on wages, they’d build a wage floor in a desperate attempt to spur inflation and consumer spending.
Wages in Japan have been sinking since the late 1990s. Their two-tier employment sector is part of the problem. Nonregular workers make up over a third of the labor force. They get low pay, no job security, no benefits and face stiff competition. They’re in no position to ask for a raise. Regular workers get all of the perks, but are more worried about keeping what they have than asking for more pay.
If Japan imposes wage controls, then the market will find a new normal and simply hire fewer workers. Japan would do better to focus on reforming its strange labor market than handing down more regulation.
Next Week – The week beginning August 8 will have just a few economic releases. China reports on consumer prices. Friday's U.S. retail sales report will garner the most attention.
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