Dashboard update: Jobs data and new uncertainty

Dashboard PDF file:

Macro and Markets Dashboard: United States (May 7, 2016 — PDF)
Dashboard Update Summary:

Jobs data for April showed payrolls continue to grow, but at a slower rate. Wage data was strong, however, the labor force participation rate gave up much of its recent improvement. Uncertainty surrounding markets and economic policy seems to have increased in the recent week, and fewer economists now predict a Fed rate hike in June. U.S. equity markets were down for the second consecutive week, while corporate bond yields rose and treasury yields fell. Recent data showed improvement in the trade balance from the weaker dollar, however, the recent depreciation trend has also become less certain.

Jobs Report showed slower jobs growth but wage improvement

The U.S. added 160,000 jobs in April, compared with 208,000 in March and 233,000 in February (both previous months were also revised downward). By sector, much of the growth came from the services side, on an annualized basis. Construction jobs, which make up less than five percent of nonfarm payrolls, were up 4.1 percent, while mining and logging jobs continued their decline and are now down more than fifteen percent over the past year (this is the smallest industry sector shown in the figure below, and represents only 0.4 percent of nonfarm payrolls). Weekly data on new jobless claims, as of April 30, showed still very low, but slightly increased, levels.

jobsector_may072016

The latest jobs report shows continued improvement in both nominal and real wages in practically all sectors. Nominal wages increased most rapidly over the past year in financial services, information services, and leisure and hospitality. On average, wages from the goods sector are higher, largely as a result of low-wage service-sector jobs in leisure and hospitality.

wages_may072016

Equity and Bond market conditions deteriorated

Equity markets were down for the second straight week. The S&P 500 was down 0.4 percent, the Nasdaq composite index was down 0.8 percent, and the Dow Jones industrial average was 0.2 percent lower. Volatility was higher during the week, and the VIX closed Friday at 14.7. The Shiller index of price to earnings ratios was up to 26.02 percent in April from 25.54 in March. Corporate bond yields ticked up during the week. The Merrill Lynch index of junk bond yields was up to 7.56 percent. Ten year treasury yields fell to 1.79 percent.

Economic policy uncertainty improved in April but may revert

Economic policy uncertainty, as measured by Baker, Bloom, and Davis, fell sharply in April, as there was little speculation of Fed action at the April meeting. However, I expect this index to bounce back; uncertainty will increase as the Fed June meeting and Brexit grow closer.

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Oil was down on the week, while April food prices increased

Oil prices closed lower on the week. The U.S. measure of crude oil prices, West Texas Intermediate crude front-month contracts, fell 2.7 percent during the week, to $44.66 a barrel. World food prices from the Food and Agriculture Organization (which I half-jokingly also use as a proxy of political instability) ticked up slightly in April, but remain low.

A weaker dollar improved the trade balance in March

The Fed’s trade-weighted dollar broad index against major currencies fell last Friday (April 29–past week data is released on Mondays) to its lowest level since May 2015. The year-to-date rapid depreciation of the dollar has cut import quantities, as further evidenced in the March data on trade. The trade deficit, which remains roughly 2.2 percent of GDP, improved to -40.4B in March. However, more recent foreign exchange data shows uncertainty about recent depreciation trends. The dollar was stronger against nearly all major trading partners during the past week, notably 1.2 percent against the British pound, 2.76 percent against the Canadian dollar, 3.16 percent against the Australian dollar, 4.5 percent against the Turkish lira, 3,86 percent against the Mexican peso, and 4.3 percent against the South African rand.

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Dashboard update: investors shift assets to safe havens

Macro and Markets Dashboard: United States (February 13, 2016 — PDF)

As a result of the tumultuous start to the year, investors have been increasingly retreating to bastions like gold, Yen, and Swiss Francs. Gold prices have risen nearly 17 percent so far this year (see below). The Yen has appreciated more than six percent against the dollar during the past week, while the Swiss franc strengthened two and a third percent against the greenback.

gold_feb132016

Internationally, an increasing share (now 30%) of all government debt offers negative interest rates (the New York Times ran a fantastic piece on negative interest rates). This week, Japanese government bonds were in the news as the yield on the ten-year JGB fell into negative territory. This suggests expectations of prolonged low or negative interest rates. U.S. Federal Reserve Chair Yellen said that U.S. officials are looking into the option of negative interest rates. The yield on a ten-year U.S. treasury bond fell to 1.63 percent on Thursday. The spread between this ten year government bond and a high-yield corporate bond has climbed to its highest level since the financial crisis (see below).

junkspread_feb132016

Market volatility, as measured by the CBOE VIX, closed above 25 all week, ending the week at 25.04. Oil prices fell further during the week, with the benchmark U.S. measure, front month contracts for West Texas Intermediate crude, closing Friday at USD29.44 per barrel. On Thursday, the price per barrel hit a twelve year low of $26.05 (see below).

oil_feb132016

Dashboard update: volatility persists but investor sentiment improved

Macro and Markets Dashboard: United States (January 30, 2016 — PDF)

A busy week for economists, as the Fed met, advance estimate 2015 annual and 2015 Q4 GDP figures were released, and earnings results were announced for hundreds of U.S. companies. Of course, the Fed did not change interest rates, and actually softened their statement language some. The first estimate of 2015 Q4 GDP growth showed a slowdown. Earnings, especially from Facebook, did not disappoint.

Advance estimate GDP data from the BEA showed real GDP growth in 2015 Q4 was lower at 0.7 percent (annualized basis), down from two percent in Q3. Analysts have been expecting a lower rate of growth, so this was not a huge surprise, though it is not great news. The strong dollar has hurt exports, while inventories and savings rates have both increased. The economist offered a nice piece of analysis on the GDP slowdown. As usual, the data will be revised a few times.

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The FOMC meeting during January 26-27 was not stopped by winter storm Jonas, though it seems the policymakers are being slowed by forces much much further away. As noted in the Fed’s statement (PDF):

The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.

The FOMC’s additional consideration of volatility abroad is a real wrinkle for monetary policy makers who have an already limited toolkit. Given the potential consequences of highly divergent monetary policy, this additional consideration has become a reality.

Equity market indices were higher on the week. The S&P 500 was up 33 points or 1.7 percent, and the Dow Jones Industrial Average climbed 372 points on the week, 2.3 percent. Much of these gains came from a surge on Friday.

Corporate high yield bond yields fell during the week, but remain in dangerous territory. The yield spread of Merrill Lynch’s index of high-yield corporate bonds over 10 year treasuries remains above 7 percent.

hybonds

The U.S. dollar softened against most major currencies during the week, including by half a percent each against sterling and the Euro. The dollar weakened by 1.39% against the Australian dollar, 1.75% against the Canadian dollar, 2.5% against the South African rand, more than 3.5% against the Malaysian Ringgit, and more than 6% against the Russian Ruble.

The dollar strengthened by more than 1.6% against the yen during the week, as the Bank of Japan announced that it would take its battle against deflation to the next level by adopting a negative key interest rate.