Stocks crept higher earlier this week as the Dow slowly approached 20,000 and the S&P neared 2,300, but both backed off. Interest rates, however, turned lower and are flashing big red warning lights.
Like it or not, President-Elect Trump is setting a new precedent in public shaming that has not been seen before. The ‘Master of the Deal’ is breaking new ground rewriting the playbook for negotiations, as he uses every tool he can put his hands on. As Ben Benoy, Editor, MarketVOX Trader put it on January 5, 2017, “The tweet may be mightier than the sword.”
This morning’s jobs report was a slight disappointment, with 20,000 less jobs added than expected. We’ll see how the markets react later but, so far, futures aren’t reacting all that much.
Thanks to Dent Research, provided here is our weekly information roundup ending the week on January 6, 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 156,000 Jobs in December, Unemployment Remained Steady at 4.7%… The job creation total missed expectations by 20,000. Average hourly earnings increased 2.9% throughout the year, and the labor force participation rate was flat at 62.7%.
What it means – I guess the market enthusiasm after the election didn’t extend to the jobs market, although it is nice to see wages make at least a little bit of headway. It’s interesting that labor force participation didn’t change over the year. I’ve written about the retiring boomers skewing this number, since everyone 16 and older counts as part of the potential labor force. But there are five to eight million people from 35 to 44 years old who checked out of the jobs market during the recession and never came back.
These are the people we need to get back to work.
For all of 2016, job growth totaled 2.2 million. But don’t get too excited. Not only is that less than the 2.7 million jobs created in 2015, but it also includes 1.074 million jobs that came from the Bureau of Labor Statistics’ birth/death adjustment (where the agency guesses at jobs created from businesses outside of their survey). So even if we can’t generate a lot of new jobs in the real economy, we can count on the government to make some up!
Federal Reserve Officials See Trump Policies Creating Modest Growth… Minutes of the latest Fed Meeting in December revealed discussions about policies from the new administration and Congress most likely aiding economic growth. However, the governors were skeptical that such policies would create an economic boom.
What it means – The committee members noted that growth could be above or below their expectations, and they would need more data before determining if they raise rates at the expected pace or change course. Wow. What a lot of words to say, “We don’t know what’s going to happen, but we’ll be sure to respond when it does.”
This is the same sad song we’ve heard from these tuneless singers for years. They are stuck in response mode, waiting for… something, anything, to happen. Taylor Rule, where are you? It would be nice to have the most important financial body in the world take the lead.
Bitcoin Breaks Through $1,000, Then $1,100, and Then Crashes… The digital currency shot past these milestones only to drop when China announced potential virtual currency controls.
What it means – Well, that didn’t take long. Obviously, the Chinese authorities recognize the same thing that everyone else does – Chinese citizens use bitcoin to circumvent restrictions on capital flows. When the news of potential limits on converting yuan to bitcoin broke, the digital currency dropped more than 20% at one point, falling back below $1,000. I still expect governments around the world to take a tough stance on bitcoin, which should drive it down even more.
China Supports the Yuan, Drives Overnight Hong Kong Rate to 38%... In another attempt to keep the yuan from freefalling, the Chinese government aggressively bought overnight deposit contracts in Hong Kong.
What it means – An easy way to make money in currency over the last 18 months was to short the yuan. This worked beautifully, except for the times when the Chinese regulators wanted to make a point.
To do this, they would buy all the available yuan in the Hong Kong exchange market and instruct their banks to withhold funds, and then demand exorbitant rates of interest to lend it out overnight. Anyone short yuan would be forced to either close their position by buying it back (which strengthens the yuan), or pay the high interest rate.
On Tuesday, the interest rate shot to 17%. On Wednesday, it jumped to 38%. Eventually the short sellers will get the message: Chinese officials don’t want the yuan to drop any further. The currency strengthened dramatically during the week before reversing course on Friday.
They might be able to hold the line for a few days or a week, but I don’t think this is a long-term solution. I still think the yuan will be cheaper than 7 per U.S. dollar in the near future.
Russian Oil Production Jumped from 10.7 million Barrels Per Day in 2015 to 11.2 million in December 2016… Russia is part of the recent agreement among oil producers to cut production this year.
What it means – A funny thing is happening on the way to oil production cuts. Producers are boosting production. And why shouldn’t they? Per the agreement, each country is expected to cut production by a certain number of barrels. If the goal is to limit your own economic pain, then the smart path is to boost production right before the cuts, so when you dial back a bit, you end up about where you started. Brilliant!
This sort of thing – along with the general knowledge that all oil-producing nations lie about what they’re doing – is why I have no faith in producers limiting their output. It makes for good headlines, but at the end of the day I think we’ll still have higher supply than demand, and oil prices will drop.
Eurozone Inflation Ticked Higher to 1.1%, the Highest Level in More Than Three Years… Excluding energy and unprocessed food, inflation rose to 0.9%.
What it means – The bulk of the inflation came in the form of higher energy prices, which is a bad thing. Energy use tends to be inelastic. We don’t buy a ton more when it’s cheap, but we don’t cut back much when it’s expensive, except at the extreme. So, when gas and heating oil cost more, it just eats into our budgets. As noted above, I expect oil to roll back over, so I don’t think this will last.
Kohl’s and Macy’s Reported Holiday Comp Sales Down 2.1%... The stock of both retailers, along with Nordstrom, fell dramatically on the news.
What it means – Department stores are falling behind. Online retailers are exploding. Shippers, who deal with online deliveries and returns, reported record numbers. Notice a pattern? It’s as if the internet kinda, sorta changed the way we do things.
I agree with the Macy’s CEO, it’s not like the company is at risk of shutting down. We’ll always want a place where we can pick stuff up. But it doesn’t have to look like what’s at the mall today. We’re still in the adjustment phase as we shift from brick-and-mortar to online shopping, and we’ve got a long way to go. Retailers like Macy’s and Kohl’s are still playing catch up.
Next Week – The second week of 2017 brings only one economic report of note, retail sales, which the Census Bureau will release on Friday.
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