This week stocks hovered just below all-time highs, and long-term Treasury rates sat around 3%. Not even the overnight U.S. missile strike on Syria could do much to move the markets.
The Fed believes that stock valuations are too high, according to the minutes of its March meeting, released this week But you don’t need them to tell you that.
Analysts expected a lighter jobs report this month, with consensus expectations of 175,000 new nonfarm jobs, but the economy fell far short, adding just 98,000 jobs. Wages were expected to climb another 0.3% like the month before, but again disappointed, only up 0.2%. The unemployment rate fell to 4.5% but the labor participation rate was unchanged at 63%. This was a disappointing report since upward wage pressure is absent.
Thanks to Dent Research, provided here is our weekly information roundup ending the week of April 7, 2017. 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 98,000 Jobs in March, and the Unemployment Rate Fell to 4.5%… Jobs growth missed expectations by more than 75,000, and the numbers for January and February were revised lower by 38,000.
What it means – The interesting part of the jobs report wasn’t the number of positions, but the pay. Average hourly income grew a mere 0.2%, and is up 2.7% over the past year.
With unemployment at 4.5%, shouldn’t we be seeing some sign of bidding for workers? It’s just not happening yet. And the participation ratio didn’t perk up last month either. It remained at 63%, near multi-decade lows. The slow hiring numbers might give the Fed a reason to push rate hikes to later in the year, which equity investors will like.
As for our old friend, the birth/death adjustment, it added 32,000 jobs in March, further padding the employment totals beyond actual survey results.
Minutes of March Federal Reserve Meeting Reveal Shift to Shrink Balance Sheet… Members discussed potentially not reinvesting bond proceeds, essentially letting the bank’s balance sheet shrink over time.
What it means – Calling the Trump White House, here comes free money! My April Boom & Bust issue focuses on this exact topic. When the Fed stops reinvesting bond proceeds, the central bank ends up with wads of cash. By law, the Fed must send its excess funds to the U.S. Treasury as a gift, with no strings attached. On the flip side, without this 800 lb. gorilla bidding up bonds, it’s very likely that prices will dip a bit and yields will climb. I don’t think it will be a big move, but it could present a very nice bond-buying opportunity for those wanting to lock in yield in an otherwise slow-moving economy.
No matter what happens to the funds when they eventually reach the U.S. Treasury, it was clear that equity investors didn’t like the Fed’s new approach this week. Stocks sold off on the news. This has been the conundrum since the Fed intervened so heavily in 2008 and 2009. As they withdraw from the markets, they create a vacuum, which could lead to volatility and bring down the bubbles they created in stocks, bonds, and real estate.
U.S. Factory Orders Up 1.0% in February… January orders were revised up from 1.2% to 1.5%.
What it means – Durable goods showed gains, but mostly in aircraft. In fact, looking through to the components, core capital goods (non-defense orders excluding aircraft), a proxy for business spending, dropped 0.1% in February after posting a tepid gain of 0.2% in January. Shipments of core capital goods rose 1%, but unfilled orders remained flat.
The takeaway is that factory orders won’t drive employment in the sector, so don’t expect higher wages in the manufacturing sector anytime soon.
Crude Oil Inventory Rose from 1.6 Million Barrels to 534 Million… That’s 7.4% higher than this time last year, and still in record territory. Distillates and gasoline both dropped.
What it means – There’s more oil sloshing around in Cushing, Oklahoma, where U.S. inventory is measured, but OPEC members talk like they’re willing to extend their production cuts when the current agreement expires next month. Does it really matter? These guys agreed to cuts in November, and yet we have more oil. Word of the extension drove up oil prices, but rumors only last so long. For oil to stay above $50, the cuts must lead to falling inventory. With frackers coming back on line, it’s hard to see how that’ll happen.
U.S. Auto Sales Dip in March, Falling from 17.5 Million annualized to 16.6 Million… That’s well off the pace of 18 million units at the end of 2016.
What it means – Detroit, we have a problem. I recently saw an ad for new Chevy trucks that included 16% off list price. When they have to give you $10k off gas-guzzling vehicles, you know car companies are in trouble. But they aren’t alone. 85% of new cars are financed, with only 9% down. As we buy fewer vehicles, we use less credit, which translates into slower money growth and weaker economic growth. This isn’t a good sign for GDP.
Department of Homeland Security (DHS) Tightens Rules for H-1B Visas… On direction from the new administration, the DHS informed companies that computer programming no longer qualified as a specialized occupation, and that companies with a large proportion of H-1B visa holders will be subjected to heightened scrutiny for visa violations.
What it means – The move fulfills a Trump campaign promise to end abuse of the H-1B visa program, which allows companies to sponsor foreigners with specialized skills that are in short supply in the U.S. But the program is rife with abuse. Each year the U.S. issues 85,000 such visas. When more than 85,000 people apply, which is common, the U.S. awards the visas by a lottery. Outsourcing firms regularly apply for thousands of slots, essentially buying large quantities of lottery tickets so that they have a greater chance of getting awarded visas. The move should eventually lead to higher incomes for those in affected fields.
Illegal Immigration from Mexico in March Estimated at Lowest Level Since 2000… Homeland Security Secretary John Kelly informed Congress there were 17,000 arrests of illegal immigrants in March, the lowest number in 17 years.
What it means – President Trump’s views of and approach to border enforcement are well known, even to people who aren’t here. The idea of risking so much to cross the border only to be aggressively pursued and deported must make it much less appealing.
Trump’s already succeeding in reducing illegal immigration, even without extending the border wall. On that score, Secretary Kelly noted that there probably won’t be a wall along the entire border, which makes sense given that part of it runs through mountains and part through shifting sands and rivers.
Companies Want Employees to Stop Borrowing from Retirement Plans… U.S. corporations like Home Depot are trying to dissuade employees from raiding retirement accounts by educating them on the loss of savings and making it harder to borrow.
What it means – Once again, management and company employees are speaking different languages. Management notes that, by borrowing from their retirement plans, employees are reducing what will be available to them in the future. Employees say, “We need the money.”
They are both right. But at the end of the day, the funds belong to employees. If they want to raid their accounts to pay medical bills, tuition, or just buy motorcycles, they can. There’s a case to be made that higher wages might lower the demand for borrowing, but that’s a story for another time.
India Bans Alcohol Sales Within 500 Meters of Major Highways… Attempting to reduce drunk driving, the ban went into effect on April 1.
What it means – The ban is expected to affect over 100,000 businesses and $10 billion in sales, including major hotels that line busy roads in urban centers. Cities big and small asked for exceptions, but few were granted.
Luckily, state administrators came up with a novel solution – they simply reclassified their highways as roads, rendering the ban moot. It’s likely the national government will work to close the loophole, but I’ll still offer a toast to the state administrators for their cleverness.
Next Week – The week of April 10 is very light on economic reports, and ends with the Good Friday holiday ahead of Easter.
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