NEW YORK (Feb 1, 2019) - The first jobs report of 2019 printed well above forecast, at 304,000 new jobs. The consensus estimate had been just 165,000. But revisions for November (+20,000 jobs) and December (-90,000) netted 70,000 fewer jobs. The revisions resulted in average three months job creation of 241,000 and six months average jobs creation of 234,000. That’s compared to last month’s numbers of 254,000 and 222,000, respectively, that calculated with the December preliminary jobs report (i.e., before revisions.)Job creation was up a sharp 78 percent from the same month last year, which printed at 171,000,
The unemployment rate was 4.0 percent, up 1/10ths of a percentage point from December, but down 1/10ths of a percentage point from January, 2018. The U-6 Unemployment, at 8.1 percent, clicked up huge 500 bps from December, but is down 0.1 percentage points since last year. It is the highest low U-6 number since February, 2018.Nominal average weekly wages increased by 3.48 percent, year on year, up from 3.15 percent last month, at a rate that is higher than inflation. Real wages increased by just 1.51 percent, up from last month’s 1.18, as percent, assuming the November Trimmed Mean PCE annual inflation rate of 1.97 percent.
Analysis: Details and Outlook
As with the December report, this January report should not be taken as a harbinger of a stronger economy, in our view.
We continue to see a flashing red light, requiring investors and businesses to stop and assess conditions before moving forward. Several things concern us: First, the downward 90,000 December jobs adjustment (that likely occurred because of the BLS year-end adjustments that we reference in our December report);
Then, there is the huge number of jobs 94,000 jobs that were created in low-wage sectors, like leisure and hospitality and retail; and,
Finally, there is the 500 bps increase in the U-6 Unemployment rate.
We have not revised our anticipated 2018Q4 to print in the range of 2.7 to 3.2 percent. Unfortunately, the release of th 2018Q4 data point has been delayed as a consequence of the federal government shut-down.
Let's look at our exclusive jobs creation by average weekly wages for the January jobs report:
January Jobs Creation by Average Weekly Wages: The Stuyvesant Square Consultancy, compiled from BLS Establishment Data for January 2019.The number of people employed increased by about 142,000, down from the 221,000 increase in November. Some 419,000 individuals joined the workforce, compared to more joined the workforce compared to 127,000 last month.
The JOLTS survey for November, the latest available data, released January 8th, showed 243,000 fewer openings from October to November. That compares to 119,000 more job openings that were reported from September to October. It’s an increase of 957,000 new jobs, year-on-year, compared to the 1,020,000 jump that was reported in the October JOLTS.
OIL PRICING AND GEOPOLITICAL CONCERNSWe're heartened to see fuel prices continuing below the $3 per gallon threshold. Gasoline prices for December are 10.2 percent lower than last month, 4.8 percent lower than last year, and the lowest for January since 2016. Overall, they are the lowest since November, 2016. But oil prices, as measured by West Texas Intermediate crude, have spiked sharply, from $45.41 January 1st to $55.32 today, an increase of 21.8 percent from last month, but down from $65.45 at this date last year. We remain concerned about Iran’s belligerent rhetoric and sanctions against Iran precipitating some unforeseen flashpoint in the region and their meddling in social media directed at people in the US . The round of sanctions the White House imposed in November are claimed to be the harshest in our 40 year dealing with the Islamic Republic. Iran has said several times that they would cease all flow of oil through the Straits of Hormuz if Iran could not sell oil because of U.S. sanctions.As of January 28th, the Kearsarge ARG has moved into the Persian Gulf, replacing the U.S.S. John Stennis (CVN 74). It is clear the national command authority will continue to deter, if not intimidate, Iran’s leadership from pursuing misadventures in the Strait. Nevertheless, Europe is anxious to strengthen the international role of the euro, and its ministers would like to undermine the US “exorbitant privilege” as the world’s reserve currency. European allies that support the Joint Comprehensive Plan of Action (“JCPOA”) on Iran’s nuclear arms have developed a special purpose vehicle that will allow EU nations to sell what they purport will be “humanitarian aid” and that went “live” yesterday. But one can easily imagine the SPV morphing into an EU/Iran trading arrangement for all goods and services using euro exclusively and helping undermine the USD as the world’s reserve currency. We discussed these in greater detail here.
We think that undermining the USD, not an Iranian military initiative in the Straits of Hormuz, would retaliate against the USA much more effectively than military action because it would not amount to an act of war by threatening a vital American interest. The effort to “de-dollarize” oil measure, taken by Iran together with our putative “allies” in the EU who still support the JCPOA (“Iran Deal”), notwithstanding reported violations, could greatly diminish the USD status as the world’s reserve currency and wreak economic hardship upon the USA. While it has mostly slipped from US headlines over the last several weeks, we continue to be concerned about the possibly of the US sanctioning Saudi Arabia (“KSA”) over the murder of Washington Post columnist Jamal Khashoggi.As we have stated since the first reports of the murder implicating the kingdom and possible sanctions, retortion might result, particularly by KSA repricing its oil in euro, yuan, or perhaps even some new OPEC backed currency. We think the implications of that upon the USD as the world’s reserve currency, and on US interest rates, would be staggering.A recording of the Khashoggi murder will be played for the UN and will, very likely, get “leaked” media, reigniting the controversy and allowing House Democrats to paint President Trump as accommodating the Saudi regime.
DOLLAR DENOMINATED DEBT
Corollary to our concerns about oil was and is our concern that higher rates and a stronger dollar impinge developing nations ability to repay dollar- and euro-denominated debt they owe to American and European banks.
China, for example, has $750 billion in USD-denominated Offshore Corporate Dollar Bonds (or “OCDB”). Nomura has warned to monitor the situation, and expressed concerns about the bond rollovers could be problematic, given the decline of the yuan. We have had similar concerns for some time with other developing economies, particularly India, where the USD:INR exchange rate is set anticipated to end the year at 1:70. (The INR traded at its lowest point in history in October, 1:74 and remains high, at 1:71 today.)
We were heartened to hear Fed Chairman Powell’s statement Wednesday, saying that the FOMC “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.” We have been urging the Fed to “slow walk” interest rates since the final print of 2018QDP in July.Principally, our concerns were that too rapid an increase would threaten the economic health and well-being of developing economies and puts additional pressure on the already struggling PIGS in the Eurozone as well as China’s seemingly faltering economy.
OTHER MACRO DATA The government shutdown played havoc with the government’s statistical releases, creating hodgepodge of “available” and “delayed” data. We note these other developments since our last jobs report:
The wholesale trade report for November, 2018, reported this morning, showed sales up 4 percent, year-on-year, and inventories up 6.5 percent from last year. Both of those are down considerably from last month. The inventory to sales ratio was 1.29 percent, up from 1.26 percent last year.
Building permits for December has not been released due to the shutdown. November’s report, released December 18th, increased 1.6 percent from October and 0.4 percent from last year. Housing starts increased by 3.2 percent, month-to-month, but fell 3.6 percent, year-on-year.
The ISM Manufacturing report for January, released this morning, showed continuing growth, at 56.6, up from December’s 54.1. The ISM Non-manufacturing report for December, released January 7th, the latest available, printed at 57.6, down from November’s 60.7.
Personal Income & Outlays for December has been delayed by the shutdown. November, released December 21st, showed disposable income increased by 0.2 percent in current dollars, and also up 0.2 percent in chained 2012 dollars. Those are down from 0.5 and 0.3 percent in October, respectively. Personal consumption expenditures (PCE) for November increased 0.4 percent in current dollars and 0.3 percent in chained 2012 dollars. That’s down from 0.8 percent and 0.6 percent from October current and chained dollars, respectively.
The IBD/TIPP Economic Optimism Index,released December 4th dipped to 52.3, by 0.6 percentage points. (Anything above 50 indicates growth; but the robust optimism we saw last Autumn has largely evaporated.)
As stated above, we have been concerned for some time about the Fed tightening rates too much, too quickly. While inflation for personal consumption expenditures, less food and energy, or "Real PCE", had hit the Fed's target of 2 percent, we’re seeing that slip somewhat in the last couple of months. We hope normalization will take place more slowly and only after growth had become decidedly more robust over several more quarters; at least four quarters of consistent 3 to 3.5 percent GDP growth. We are only halfway to that goal as of 2018Q3. As we have illustrated in our GDP reports for 2018Q3 and 2018Q2, the better than expected GDP reports for those quarters included a lot of “shifting” from and to earlier or later quarters. And as we noted in our 2018Q3 report, there were signs of slowing, with 200 bps of the 3.5 percent GDP growth coming from inventory restocking. We would like to see steady, consistent, growth in each of the four categories of GDP growth. The worst performing element of GDP, Gross Domestic Private Investment, has not performed badly in the aggregate; however, the total amounts, which include inventory builds, mask less investment in equipment and productive infrastructure.We have long held the view that trimmed mean PCE, produced by the Dallas Fed, is a better measure of inflation in the day-to-day costs of most Americans, it is currently around 2 percent, but it has been volatile. The 3 percent rate the Fed adopted in December, and the jobs report from today, could still push the Fed to higher rates, particularly given the delayed data from the government shutdown. We continue to be troubled by the volatility of the yield curve, as we have discussed repeatedly. The 3 Month/10 year curve continues to drop from 45 last month to just 30 bps today. Moreover, the 3 and 5 year curve went inverted for much of January.
We believe all these point to the Fed rate hikes having been premature, outpacing the economy's growth. We continue our belief that the Fed should only consider another rate increase only after a minimum of two quarters of at least a 150 bps spread between the 3 Mo and 10 Yr yield. That higher 150 bps spread from the current 2.25 percent three month rate would show a holistic appetite among investors for increased risk, as signalled by moving away from Treasuries and into “risk-on” assets. (Treasury yields are inversely proportional to risk, so the lower the Treasury rate, the more dollars invested there and not in risk-on assets.) While we dogmatically prefer a strong dollar from a high demand for US goods and services, we're wary of dollar strength that is attributable to the Fed's interest rate hikes more than demand for U.S. goods and services. We think a stable -- or even a lower -- Fed rate would help on a number off fronts, not least of which would be relieving foreign debtors of USD debt obligations they might not be able to meet with a strong dollar.
We remain unperturbed by the trade dispute with China, and by the Trump tariffs, but we’re not willing to ignore the “herd instinct” of ignorant investors who buy into the lie that “tariffs cause (or worsen) depressions”. (Milton Friedman’s estate has a Nobel Prize that says otherwise.) We support the president's more diligent management of trade to defend against cheating and to oppose tariff and non-tariff barriers. We’re hopeful, too, that China’s President Xi will agree in the current talks to ensure China/US bilateral trade agreement that will address US concerns like mandatory joint ventures Chinese and enhanced protections of US intellectual property. Xi has shown little tolerance for corruption among Chinese officials in his efforts to make China a respected member of the family of nations. We only hope that he will extend that attitude to end China’s more egregious trade cheating. That said, we would like to see the president engage America’s Asian and European allies to step up to join a "coalition of the willing" to challenge China's decades-old unfair trade practices and thefts of intellectual property because the one-on-one dispute could simply trigger mutual retaliation. There is more power in American dealings with Xi from a multilateral “we” than a unilateral “us”. Moreover, China can't afford a restless - or even a rebellious - populace being unemployed. Its leaders need exports to the U.S. and Europe more than the West needs access to China’s markets. Losing American sales in Chinese markets might hurt American and European companies bottom line and anger American farmers; losing Chinese jobs to American tariffs might collapse China’s government, particularly given the Chinese firms’ inability to roll-over its USD denominated debt.
While CEOs seem concerned about margins if China manufacturing sites are lost in a trade war, we note that contract producers in most businesses are available in other locations and at lower wages than China and that continuing thefts of intellectual property present a longer-term threat to US businesses. We remain bullish on India, and believe it is a much more promising venue for low-wage manufacturing investment over the long-term; however, again, a return to the Fed’s overly- aggressive rate increases would risk a “sudden stop,” as discussed earlier.OUR VIEWSWe’re circumspect about the rate of GDP growth reflected in the first three quarters of 2018 and are mostly blind to 2018Q4 until that data comes available. We continue to believe the favorable numbers from 2018Q1 and 2018Q2 arose largely from stacking up GDP from prior and later quarters, as discussed here. Then, 2018Q3, at 3.5 percent, had a huge 2 percent bump from an inventory build. Our doubts will continue until we see two consecutive quarters of increases in all four categories of GDP (i.e., Personal Consumption Expenditures, Net Exports, Gross Domestic Investment, and Government Consumption Expenditures.) We predicted a slowing economy in our November and December jobs reports and we are inclined to continue that view with the January report, given that the big jobs increases came at the lower-end of the wage scale and these inverting shorter term yield curve inversions.We estimate 2018Q4 GDP will print at 2.7 to 3.2 percent. We expect 2019 Q1 to print at 2.5 to 3.0 percent.In equities, and given the dearth of new data from the shutdown, we’re inclined to stand pat for a third month with these sectors, as follows:
Outperform: Consumer discretionaries in the mid- to high-end retail sector; trucking on speculation of consolidation and acquisition; companies or REITs that own real estate in sectors identified as "opportunity zones" under the Tax Cut and Jobs Creation Act of 2017.
Perform: Consumer staples, energy, utilities, telecom, and materials and industrials. Lower-end consumer discretionaries, like dollar stores; the asset-light hospitality sector on speculation of stabilizing franchisee property values and room rental costs; certain leisure and hospitality.
Underperform: Healthcare; financials; and technology; currencies of developing nations, such as INR; some of the PIGS currencies, too.
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