Stocks and bonds have been treading water for the last few weeks but they are poised to break out soon, one way or the other, with or without the Fed.
Thanks to Dent Research, provided here is our weekly information roundup ending the week on June 3, 2016. We hope this information will help you separate the noise from the news. We start each subject with what you hear in the news and finish with what that information means to you.
The U.S. Economy Added 38,000 Jobs in May, the Unemployment Rate Fell to
4.7%… The report missed the low expectation of 160,000 jobs. To make matters
worse, April and March jobs figures were revised lower by almost 60,000.
What it means – There’ s one caveat that makes this report a little less bad – the Verizon strike reduced the non-farm payroll report by 37,000. Still, if the report had been 75,000 jobs created in May, it still would have been an ugly number. The only reason the unemployment rate fell is because almost half a million workers left the workforce, reversing a year-long trend of higher participation.
The big question is how will this affect the Fed’s decision-making? It probably won’t have much of an impact. The margin of error on this report is 100,000 in either direction, and it’s just one month. Fed officials watch the trend of a host of measures over several months. They’ve been so vocal in telegraphing their intention to raise rates based on other factors, they’d lose a lot (more) credibility if they pulled back because of just one data point. Expect a rate hike in either June or July.
For those keeping score at home, the birth/death adjustment, where the Bureau of Labor Statistics guesses at the net number of jobs added by companies not included in the survey, added 224,000 to this report. Without this fake sunshine, it would have been negative by almost 200,000.
S&P Case-Shiller Home Price Index Up 0.90% in March, Up 5.4% Year-Over-Year… Home prices rose in 19 of the 20 cities in the survey.
What it means – Forget the low end. Home builders and buyers are focused on more expensive homes, and are driving up prices. Thin supply and tough lending standards are keeping first-time home buyers out of the market, which in part explains why more young people live with their parents than on their own or with a partner for the first time in more than a century. Home prices in these 20 cities are near their record highs of 2006. It looks like current home buyers have short memories. The worry is that if the equity markets take a hit, consumers will shift from investments to real estate, jumping from one bubble to the next.
Personal Income Up 0.4% in April, Personal Spending Up 1.0%… Income and spending both notched solid gains in April, with spending enjoying its best monthly gain since August of 2009. Core personal consumption expenditures (PCE) rose a more modest 0.2%.
What it means – Auto sales (with their subprime loans) were the biggest contributor to higher spending, along with a bump in gas prices. It’s notable that spending outstripped income, showing that consumers dipped into savings in April. These reports reinforce the Fed’s notion that the economy is strengthening, but then their favorite inflationary measure, core PCE, barely budged. I don’t think that matters very much. It’s clear Fed officials want to hike rates, so they’ll pick whatever metrics support that position and go with it.
Eurozone Unemployment Falls to 9.9%... For the first time in almost a decade, the unemployment rate among the countries of the Eurozone fell below double digits. Germany has the lowest rate at 4.2%, while Greece claims the top spot at 24.2%.
What it means – This is a positive development, no doubt, but let’s keep it in perspective. The unemployment rate is still almost 10%, and the rate in Italy moved up by 0.2% last month. There is still a lot of economic pain in the Eurozone, and a small decline in unemployment won’t solve what ails them.
The European Central Bank (ECB) Left Rates Unchanged, Will Start Corporate Bond Buying June 8… The announcements were expected and didn’t move the markets.
What it means – Along with his anticipated remarks, ECB President Mario Draghi gave investors a hint as to what lies ahead – lower interest rates well past the end of QE, and any monetary policy necessary to keep the euro intact. While markets didn’t react, I think they should have. The spread between long interest rates and short interest rates, called the net interest margin, is the main source of income for banks. By keeping rates exceptionally low, and even negative, for so long, the ECB is robbing banks of what they need to survive. Banks across the Eurozone still hold significant balances of bad loans, so taking away profits for years to come is like sentencing the banks to a slow death.
Illinois Lawmakers Overrode the Governor’s Veto, Giving the City of Chicago More Time to Make Up Pension Funding… Current law required Chicago to increase pension payments at a rate that would fully fund the fireman and police pension by 2040. The new law allows the pension to catch up by 2055.
What it means – This particular pension is only 26% funded. Chicago has short-changed the pension fund time and again, and even took pension-funding holidays after the financial crisis. The old plan required the city to make a monstrous $834 million pension contribution this year, more than triple what it was last year. The new law gives Chicago a reprieve, but it doesn’t solve the underlying issue. The city owes money it doesn’t have to the pensions, and the liabilities are growing every day. Something has to give. The unions will have to agree to less generous pensions, the citizens will pay higher taxes, or a combination of the two. In the meantime, the city’s bond rating keeps falling, because the entire world knows that it’s flat broke.
Japanese Prime Minister Shinzo Abe Delays Sales Tax Hike From April 2017 to October 2019… The delay was widely expected, given the country’s weak economy.
What it means – Part of Abe’s economic plan was greater social spending funded by tax hikes, including bumping the sales tax in two moves from 5% to 10%. The first increase occurred in April 2014, and it crushed consumer spending. Not wanting to repeat that ugly experience, Abe is kicking the can past his term. None of this changes the state of the Japanese economy. Their work rules are stifling, their population is over-weighted with retirees who aren’t interested in spending, and they don’t like immigration. Watch for more extreme monetary policy as government officials try to fix the economy with a weaker yen… which also won’t work.
Hong Kong Retail Sales Drop 5.7% in April, the 14th Consecutive Decline… Domestic consumers are spending less and tourism has declined.
What it means – More than 70% of the tourists in Hong Kong come from mainland China. Falling retail sales in Hong Kong are a direct result of the economic troubles in China, and there’s no relief in sight. As money flows out of the yuan, Chinese consumers are more focused on spending in Australia, Canada, and other foreign currency destinations.
Filipino President-elect Duterte Notes that Corrupt Journalists Aren’t Exempt from Assassination if They’re “S.O.B.s”… The former Mayor of Davao is known for being tough on crime and blunt speech.
What it means – I have no idea what this means. Does he condone assassination in general, or just for those people he thinks are bad actors? This doesn’t really have any economic implications, but his quote was too good not to share. If this is how he talks before he takes office, I’d imagine the Philippines are in for several years of volatile politics! It sort of reminds me of a situation much closer to home…
Chinese Service Area Director Creates Parking Spaces Just for Women… The spaces are 50% larger than the other spaces.
What it means – Director Pan Zhuren decided to create the spaces when he saw how much trouble many women had parking their vehicles, and how carelessly many of them parked. He created the spaces in March, but it’s just now causing an uproar on social media across the country. Like the story above, it’s not a financial fact, but it’s too interesting not to report!
Next Week – The week of June 6 is light on economic reports. It includes Japanese GDP and Chinese inflation.
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