Although this past week was chock-full of important economic data releases, the markets were subdued. Consumer spending and wages came in as expected earlier in the week while inflation sits below the Fed target at 1.7% on the year. Pending home sales were unexpectedly off by 1.3%, on an expected rise. The May jobs report was a major disappointment. We’ll see how that plays out with the Fed in mid-June. Stocks still sit near record highs again while Treasury bonds continue to indicate caution ahead. Yields are on the low end of a six-month range
Thanks to Dent Research, provided here is our weekly information roundup ending the week of June 2, 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 138,000 Jobs in May… The number fell short of the expected 185,000, and revisions to March and April, which lowered their totals by 66,000, compounded the disappointment.
What it means – Rate hike this month? What rate hike? The bad news in this report kept coming, with wages up a modest 0.2% and last month’s 0.3% gain pared back to 0.2% as well. The annual change in wages sits at 2.5%, barely over the rate of inflation. The participation rate dipped back to 62.7%, so there goes the story line of more people lining up for jobs.
And if all that wasn’t bad enough, the fudge factor of the Birth/Death Index, which the Bureau of Labor Statistics uses to guess at the number of jobs created by companies not included in its survey, added 230,000 to the payrolls this month. Without that, the headline number would have been negative. Awesome.
As ugly as this report is, I don’t think it will stop Fed officials from hiking rates this month. Instead, I think it puts the September rate hike, and actually any subsequent rate hike this year, in question. If GDP growth limps along at an average of 2% or less, we will most likely enter 2018 with overnight rates below 1.5%.
S&P CoreLogic Case-Shiller 20-City Home Price Index Up 5.9% in March over Last Year… The index moved up 1% during the month, beating expectations.
What it means – Prices are moving higher, even as we sell fewer new homes, start fewer new homes, and sell fewer existing homes. Go figure. Given the sales data, I didn’t expect home prices to break out to the upside, but here they are. At the moment, the real estate market seems priced for perfection. But it begs the question of “Why not more?”
If prices remain elevated and keep moving higher, then why aren’t more sellers putting their homes on the markets and why aren’t builders breaking more ground? I’ve mentioned several times that builders are more cautious this time around, but that only goes so far. There’s something else at work here.
Maybe builders have a better grasp on the actual number of buyers who can get approved financing, and perhaps sellers are putting their homes on the market, but only in areas where prices are rock solid. Whatever the reasons, real estate appears to be a solid, yet, remarkably smaller, part of the economy. Unless builders start putting up starter homes, don’t expect sales volume to grow.
U.S. Motor Vehicle Sales Dipped to 16.7 Million in May… The annualized rate missed expectations of 16.9 million, and is well below the 18.3 million achieved at the end of 2016.
What it means – Vehicle sales perked up in April after they declined for the first three months of the year, but the turnaround was short-lived. The problems in the new car market will have widespread repercussions. Already GM is stacking inventory on dealer lots, and this is before off-lease vehicles inundate the used car market later in the year.
As car values fall and new car sales stall, automakers will lay off workers and temporarily halt some production. This will show up as falling factory orders, reduced productivity and capacity utilization, and of course lower employment. It could be a mean summer on the economic front… but it’s a great time to buy a car!
Texas Passes Legislation to Shore Up Dallas and Houston Pension Systems… The state of Texas passed legislation that allows those two cities to adjust how their pensions accrue, putting them on better financial footing.
What it means – The two cities changed cost of living adjustments, the years necessary to earn full benefits, and how much employees pay into the systems. They also amended rules for lump-sum payouts. In return for those concessions, employees covered by the pensions secured higher contributions from their respective towns. This is the sort of compromise that should go on around the country, but won’t.
Other states have constitutional guarantees for pension benefits, and government employees and their unions have repeatedly blocked any attempts at compromise. The result is what you’d expect – Illinois, the worst offender, just saw its debt downgraded to one step away from junk status, and is well on its way to bankruptcy. Choose your neighborhood, and your investments, carefully.
Chinese Yuan Moving Higher, Despite Debt Downgrade… The Chinese currency gained ground against the U.S. dollar, trading at less than 6.75 per dollar.
What it means – Hmm. The Chinese economy is slowing down, Moody’s downgraded the country’s debt because of excessive borrowing, and yet the currency strengthened. If it sounds fishy, that’s because it is. The Chinese government determines the exchange rate every day, and ostensibly allows the currency to float in a 2% band around the peg. But sometimes the government gets testy.
Recently officials have been miffed at short sellers who profit when the currency drops. To fight them off, the government essentially buys up yuan inventory, making it difficult for short sellers to borrow. The pain point is the rate of interest charged. Mid-week, the overnight cost to borrow yuan shot above 20%. Such a high rate drives weak-hand short sellers to cover their positions by purchasing yuan, driving the currency higher.
Are the Chinese moves driven by political factors, economic factors, or simply annoyance at those who would profit when the country loses steam? I don’t know, but it doesn’t really matter. It’s manipulation, pure and simple.
Oil Prices Bounced After Inventory Fell… Oil had dropped below $48 per barrel, but climbed back near $50 after U.S. inventory declined by 6.4 million barrels, and Saudi officials floated the idea of more production cuts.
What it means – U.S. inventory dipped, and now stands 1.1% above where it was at the same time last year. It’s still above 500 million barrels. We’ve got plenty of oil. And we, the U.S., are producing more. Production in the lower 48 states is on the rise, and now stands where it was in mid-2015. As OPEC and its non-member confederates try to artificially prop up the price of oil, U.S. producers are happily pumping more out of the ground.
OPEC is following the flawed path of, “If it didn’t work the first time, do more!” While I’ve noted that the first production cuts did succeed in hiking the price, it didn’t push oil near $60, which was apparently the goal. Now that the price is back below $50 with the cuts in place and extended, it’s hard to see how more of the same will work. Eventually the parties to the production limits will get restless, wondering why they effectively are handing American companies more market share and revenue.
Next Week – The first full week of June brings a report on U.S. factory orders and the regularly scheduled policy decision of the European Central Bank.
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