There has been a lot of positioning in stocks and bonds ahead of today’s monthly jobs report. Stocks rallied early in the week and bonds fell, with yields moving higher. The global currency war continues with the European Central Bank set to move rates further into negative territory next week.
On the job front, we hear in the New York Times, on March 4, 2016, according to the Bureau of Labor Statistics that the US economy added 242,000 non-farm payrolls in February, The good news is that this figure exceeded analyst expectations.
The bad news is that the industries hiring the most workers are the same ones that pay the least. Dent Research’s quality analysis found the majority of jobs added last month were below the median wage. Far worse, though, was that over 44% of all hires fell into the very lowest of the 12 wage “buckets.”
Dent Research’s quality analysis found the majority of jobs added last month were below the median wage. Far worse, though, was that over 44% of all hires fell into the very lowest of the 12 wage “buckets.” Thanks to Dent Research, here is our weekly information roundup ending the week on March 4, 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 242,000 Jobs in February… The jobs numbers for December andJanuary was revised slightly higher, and the unemployment rate remained steady at 4.9%.
What it means – The slow growth in the U.S. economy is creating modest job opportunities, and there’s no doubt more Americans are finding work. Help wanted signs are popping up in all sorts of businesses, but job quality, measured by hours and pay remains weak.
The Dent Research Employment Index dives deeper into the number by finding the wages for the jobs added each month, allowing us to report on more than just the mere number of jobs created.
Dent’s analyst Dave Okenquist found that over 44% of the jobs added in January went to the lowest paying wage “bucket” of the 84 major industries we analyze. These jobs don’t pay enough to kickstart consumer spending to the level our economy needs for a full-blown recovery. In other words, things are still weak.
For those keeping score, the guesstimate of the birth/death adjustment added 129,000 jobs last month, just over half of all jobs “created.”
The Institute of Supply Management’s (ISM) Manufacturing Index Less Weak than Expected, Spurs Rally… The estimate was for ISM manufacturing to improve slightly from 48.2 to 48.5, still in contraction territory below 50. Instead, the index improved to 49.5.
What it means – I know the phrase “less weak” could be replaced by “stronger,” but can a report that shows continued contraction correctly be described as “strong”? That seems misleading, and yet this was part of the big rally on Tuesday. Hints of a coalition to limit oil production also fueled the positive move, but the main component was the notion that the U.S. economy might avoid a recession. I’m not convinced. I’ve outlined the case for a recession before, and one report of less weakness doesn’t change anything.
U.S. Factory Orders Up 1.6% in January… Increased orders for capital goods outpaced the drop in mining and manufacturing, which reflects the weakness in the energy field.
What it means – The positive numbers on capital goods for businesses in January went a long way toward offsetting the negative report in December, but there’s little reason to think this short-term pop will turn into anything more positive. The preliminary numbers for February indicate a turn for the worse, with a double whammy of falling capital goods for export as well as continued weakness in oil and gas. It looks like U.S. energy producers are finally crying, “Uncle!” and shutting production, which will drag down factory orders and weigh on economic growth.
China Lowers Reserve Requirement by 0.50%... The People’s Bank of China (PBoC) cut the amount of reserves banks have to hold against deposits, freeing up about $100 billion additional funds for loans.
What it means – At least in theory, the goal of cutting the reserve rate is to stimulate lending activity and more spending, but no one thinks that will happen. Banks are lending to companies to extend the maturity of loans already outstanding, and to provide capital for debt service.
In other words, Chinese companies are drowning, and banks are desperate to keep them alive so they don’t have to recognize massive debt write-offs. The only material effect of cutting the reserve requirement should be a lower Yuan, which is interesting because the move comes two days after Chinese officials at the G-20 meeting proclaimed to the world that they weren’t going to devalue the currency.
If this leaves you confused about what the Chinese will do with their currency, welcome to the club. No one knows, probably not even them. But many people aren’t waiting around to find out. Capital keeps flowing out of the country.
Australian Building Permits Fall 7.5%% in January, Reversing the 8.6% Gains in December… The drop far outpaced the expected 2.0% decline. Permits fell 15.5% over the same period last year.
What it means – The cracks in the Australian housing market are starting to turn into chasms. Single-family permits were off 3.3% over last year, while condos are down 26.7%. The commodity bust and China’s economic stumbles are working their way through the Aussie economy, and it’s not pretty. The damage is far from over. The big question is when will the long reach of the decline hit the shores of Vancouver?
Japan Sold 10-Year Government Bonds at Negative 0.024%... Effectively, investors are paying the government to hold their money for 10 years.
What it means – Negative interest rates mean one of three things. Investors could be exceptionally fearful of other currencies, so they pile into one so fast that they drive rates lower. Investors could be so fearful of the economic situation that they would do anything to avoid risk (like paying the government for the privilege of investing). Or, it could be a combination of the two.
As China hurtles toward an economic implosion, investors are jumping ship, trying to hide capital anywhere that looks safe. Japan is close and resilient. It also has an economy on life support, so using capital to buy assets doesn’t make a lot of sense.
The problem is that the Japanese government desperately wants people to spend money in the country, not save it. They want the yen to fall, not rise. So much for official plans, The Bank of Japan will have to do something even bigger and weirder than negative interest rates to stem the tide of capital flow if it wants to drive the yen lower.
Next Week – The week of March 7 is light on economic reports, but it could still be volatile. The European Central Bank holds a regularly scheduled meeting and could roil markets when it announces future monetary policy moves.
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