The month of June could divide into three acts so far as markets are concerned: Friday's U.S. jobs report, the Greek elections of June 17th, and the EU summit meeting of June 29th-30th.
The jobs report is as difficult to call as ever. There are some positive signs in the tea leaves, beginning with the fact that the moving four-week average of actual (non-adjusted) weekly claims is at its second-lowest level since the pre-Lehman days of May 2008. Partly this is due to the time of year, as claims tend to run low in May before picking up again at the end of the quarter. But it's still encouraging.
Another is that the year-on-year change in monthly claims improved, reversing a trend that seen the difference between 2012 and 2011 narrow for several months in a row. It's a fairly good leading indicator, though as with all the data this year it's difficult to sort out the weather effects. Those are two hard data suggesting an improving labor market.
Survey data tends to lean the other way. The Conference Board's monthly report on consumer confidence showed a noticeable increase in pessimism about the job market, contradicting a more upbeat sentiment report last week from the University of Michigan. The latest Fed regional business surveys have indicated neutral-to-declining conditions.
Then there's the jobs data itself. In real terms, about 2% of the workforce rolls off the count one way or another in January, and then is restored over the next few months. It's instructive to consider the difference in total non-farm payrolls between December and the following April. In a bad year, there is a big deficit, in a good year a plus. This year the difference is +2,000. It's a number still subject to revision, but the difference a year ago was +55,000, so it will take some decent-sized revisions to catch 2012 up to 2011's pace (as an aside, the 2011-2012 numbers are still below the modest six-figure gains in the middle of the decade). It's certainly no sign of acceleration.
The only safe conclusion, ironically, may be that the May report we see Friday may not in fact be conclusive, despite some prominent voices saying the opposite. The headline jobs number is seasonally adjusted, and may get a lift from the claims figures we cited above. If we were to go by that alone, we might lean towards a consensus-beating 200k (something like 150k is expected).
The May retail sales report won't be out for a couple of weeks yet, but the two weekly report series are both predicting a decline from April. That doesn't suggest a jobs market that's catching fire. While we're willing to listen to the idea that headlines have made the consumer cautious, people who get hired go out and spend money. When combined with the surveys, the employment picture clouds over again.
If the number should exceed 200,000, it will almost surely keep the Fed from making any easing suggestions beyond the usual "we can do more if we have to" on June 20th. Besides the good possibility that a big beat might later get cut down, it would have another drawback in that it would set off a big relief rally in the equity markets. We don't want to seem perversely ungrateful, but that would be counterproductive insofar as policy is concerned. It has to be understood that Europe - not to mention our own leaders - will defer making any hard decisions until the proverbial gun is pointed at their heads.
A rally could catch additional momentum from the fact that the Greek election goes into its "quiet period" next week - no more polls until the real thing. Add in the possibility of an ECB rate cut at its June 6th meeting, and you could see equities roar for a couple of weeks. That might be helpful for some traders, but ultimately end up ephemeral and self-defeating. The EU ministers would put their heads back in the sand, and another slice of retail investors will quit the market in exasperation when the rally is given back yet again, probably with interest.
The foundation of such a move would be suspect anyway. If retail sales really did decline as advertised, we could see some disappointing data in June. The latest pending home sales report was a small decline, echoing the steady weekly declines in May mortgage-purchase applications. The two point to coming weakness in monthly housing data. Ironically, a really poor jobs number could actually line up neatly with weak retail sales and housing data and provoke the Fed into more aggressive action at its June 19-20 meeting. That would also cause the market to rally. Not the soundest of foundations either, true, but we would advise against getting in the way of it.
Whatever the May employment estimate is, it's only one month of data. As much as we would like to put forth supporting evidence of economic acceleration, we really can't make the case for anything more than the grind we've all gotten used to.
The sum of recent corporate earnings, employment figures, business and consumer surveys, inventory data and credit conditions make a case for another run rate of 1.5-2.0% in the second quarter, and perhaps a real jobs number in the 125,000-150,000 range, regardless of the first estimate (and in line with this morning's ADP report). Even if the jobs number were to disappoint, it would quite possibly signify not much more than caution in the face of so much political uncertainty.
While we wait for Europe to stagger through yet another lather, rinse-and-repeat cycle in its crisis, markets remain relatively complacent. Any Greek or Spanish exit is by no means priced in, only the worry of one. The VIX has risen off its early spring lows, but is far from fear levels. A solution isn't priced in either, of course, and any hint of one would quickly put another 50 or 100 points back on the S&P.
It's hard to see any change coming soon, even if both the US and European central banks should return to more aggressive steps this month and set off another pop in equity prices. The Spanish crisis, more than the Greek one, might push the EU toward the only solution that can endure, a write-down of debts across the European banking system and a jointly-shared recapitalization. We listened to a call Wednesday that hinted that Germany could be inching towards "burden-sharing," at least so far as restoring the (non-Greek) banking system.
However, while the Greeks overwhelmingly want to stay with the euro (more than 80%), they don't want to pay for it anymore than they have already have. The Germans also want the euro (more than 90%), but aren't willing to pay for it either (or acknowledge the huge exchange rate subsidy they are enjoying). Europe has twice sent delegations abroad to see if someone else (China, the US) wants to write the check that they can't agree on how to write themselves.
It's unlikely that anything but a look into the abyss and seeing the threat of imminent destruction can finally force the Europeans into the tough decisions that have to be made. Trouble is, do-or-die moments don't always result in the best policy decisions. They're not so pleasant for investors, either.
Back in the US, we're not much different. We want a sound defense system/social safety net/federal budget, but don't want to pay for it either - an impasse over who should take the pain amounts to the same thing and is at bottom no different from Europe's dilemma. Unlike them, we can get others to pay for our restructuring via the unlimited (though by no means indestructible) appetite for U.S. Treasuries. Like them, it doesn't look like we're going to make any tough decisions except at the brink of catastrophe - the "fiscal cliff" looms. It's a gruesome way to make policy.
Oddly enough, it could all work out in the end, as real restructuring would be followed by real sustained growth. It's the in-between period that we all have to survive first.