- The US NFP Report was well received by markets last week. The details of the report do not seem to support the enthusiasm.
- US equities continue to forge ahead but this is of little benefit to almost 90% of the population. The US consumer cannot support growth with increased spending.
- France, the second biggest economy in the EU, is slipping away into another recession. Still, they are marching forward with the Teutonic austerity economic plan. Will Europe never learn?
It was a busy week for economic data from both Europe and the US, compressed into a holiday-shortened week. The initial market judgement is that the constructive US NFP report was a far more decisive input than Draghi's promise to take future measures, should last month's monetary changes fail to ignite an EU recovery.
The pundit's average guess was 215K new NFP employees, but the number released by the Bureau of Labor Statistics was 288K. This was a much needed boost for the Washington administration which has difficulties on all fronts. The good headlines were welcomed and spread by the main street media. But, for the cynics who think the numbers are manipulated, only to be adjusted later, the details of these reports were less constructive.
The big NFP number boosted the USD, as the euro tumbled to 1.3586, and sent the Dow Average to the top side of 17,000. The public was delivered the good news but the devil is in the details. There, you will find the increase in part time jobs was 799K, and there was a decrease of 523K of full time jobs. The full-time work force has dropped to 118.2M and part-timers are up to 28M. But it gets worse. There is now a record 92,120,000 working age adults who have dropped from the work force as they have stopped their job search. And we have another record - 10, 982, 920 are now on permanent disability, which usually amounts to accepting a life of poverty.
WSJ editor Phil Izzo summarizes this another way:
The good way for unemployment to fall is for more people to find jobs. But the bad way is for more people to give up looking for work altogether.
Unfortunately, Izzo notes that while 2.15 million people gained employment in June, 2.35 million dropped out of the labor force. "In all but two months since December 2008, more unemployed have dropped out than found jobs," writes Izzo.
So while the unemployment rate is now down to 6.1%, that number is meaningless. Experts claim the U-6 tally is the most accurate measurement of US unemployment. According to CNBC that U-6 was 12.1% unemployed in the most recent report. A vibrant, growing US economy depends upon an economically healthy consumer. With lagging employment numbers, and wages not keeping up with the increasing rate of inflation led by for food and energy - real expenses for Main Street America - it is hard to see how the US consumer can support the recovery.
We still have the buoyant equity market to propel the economy but the trouble here is we must rely on demand from those who already have two or more of just about everything. For most, the stock market rally is one that "bypasses most Americans:"
The wealthiest 10 percent of families earn 11 percent of their annual income from capital gains, interest and dividends, according to the Fed. The poorest three-quarters get less than 0.5 percent of their income from such sources.
"Many moderate- and middle-income households have seen little benefit from recent stock market gains and are still grappling with the implications of home prices that, despite recent progress, remain well below their previous highs," the White House economic team wrote in a March 10 blog post.
The ambiguously-constructive news gave the USD a boost versus the euro to begin trading for the month. Will the euro continue to weaken or is the weakness merely another bear trap?
News in both the US and the EU is light next week. The German factory orders report was released on July 4th, and the numbers fell short of expectations. Last month the number was +3.4, but the number fell to -1.7% less than the expected -1.1%. European equities were also lower Friday partially because the largest Austrian bank announced they were taking $2.2B in bad load write downs. Mention of bad European bank loans can make their markets queasy. The amount on non-performing loans European loans is large and not fully disclosed.
There are a number of reports coming from France next week. Alone, these reports are of minor significance but France, under the leadership of the hapless President Hollande, has their economy flirting with another recession. The recent Market PMI Services gauge was 48.2, down for the third month in a row. An IMF report reduced the French GDP growth to +0.7%, and estimated the public debt will be 95% of GDP by 2015.
The French economy is the fifth largest in the world, and the second largest in the EU. Under the French socialists, 57% of the GDP is created by the government. Cheap money is financing the French economy.
Currently the yield on a French ten-year bond is 1.69%. This compares to 2.64% for the US ten year or 3.58% for the Aussie. In my opinion, the French bonds are priced as the safest, but are really the riskiest. In an attempt to stimulate the EU economy, Draghi is increasing credit availability and promising to keep rates low. With these differentials, the euro seems destined to be the funding currency for investment opportunities outside the EU.
The English analyst Roger Bottle, has some interesting comments on why he thinks the EU must change:
The EU is a malfunctioning construct for today's world - and even more so for tomorrow's. It needs either to undergo fundamental reform or to break up.
It was conceived in a world of large blocs, dominated by the Cold War rivalry between the United States and the Soviet Union and before globalisation and the rise of the emerging markets. Its agenda of harmonisation and integration inevitably leads to excessive regulation and the smothering of competition. This is largely why, in contrast to the prevailing view that the EU has been an economic success, its economic performance has in fact been relatively poor.
If nothing changes, the EU's share of world GDP is set to fall sharply and, with it, Europe's influence in the world. Meanwhile, the EU is becoming more unpopular; most people do not want to press on to a full political union; and increasing numbers of its citizens want to leave the EU altogether. European integration is the great issue of our day.
In retrospect, it appears the reports from last week give us little guidance for the future. The US economy will grow faster than the EU in 2014, but can the US numbers be trusted? While the US will likely muddle through, the longer term of the EU is increasingly murky. The austerity economics of Merkel, Juncker and friends hinders growth and hastens the march to deflation and recession. The wishes of the voters in the recent EU Parliament elections have been ignored by the ruling elites, for the moment. Don't look for them to go away.
Neither the Euro nor the USD are currencies without flaws. Perhaps this is why there has been money recently flowing into the commodity currencies. But, forced to take a longer view, my choice is to use strength to sell the euro. Looking at the daily chart, the EURUSD pierced the 200 day SMA to briefly trade above 1.37. With the advantage of 20/20 hindsight that may be as good as it gets unless there are big changes.
Selling in the 1.3630/50 area with a return to the 1.35 handle seems like a plan.
As always, manage your funds.