U.S. economy added surprisingly few jobs in May, likely delaying the next Fed funds rate hike

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United States Macroeconomic and Markets Dashboard: Updated June 4, 2016

Dashboard update summary:

The employment summary released on Friday was surprisingly weak, with only 38,000 new jobs added to the U.S. economy during May and previous month figures revised down. The BLS estimate was dramatically below consensus forecasts. Many macroeconomic indicators remain positive and in line with Fed targets; households have been spending and investing more and inflation is above one percent. However, the surprise job growth weakness is sufficient to delay the expected timetable for Fed interest rate hikes.

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Macro: GDP revised upward but business investment still strongly negative

In the second estimate, 2016 Q1 U.S. real gross domestic product (GDP) growth was revised upward to 0.8 percent from 0.5 percent. Private inventory investment did not decrease as much as previously estimated. Gross domestic investment from businesses remains strongly negative, following negative corporate profits in 2015 Q4 and very low profits in 2016 Q1. Slow real GDP growth is a result of the offset of negative business investment on sound household data. Household incomes increased in April, while expenditures decreased slightly in real terms but remain strong.

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Jobs day disappoints

Economists’ consensus view that between 100,000 to 200,000 jobs were added to the U.S. economy in May was met on Friday with a surprisingly paltry 38,000 increase estimate from the BLS. The weak data was surprising enough to cause large immediate jumps in bond and foreign exchange markets.

Meanwhile, the headline unemployment rate fell to 4.7 percent from 5.0 percent, the largest decrease in several months. The fall in the headline rate had more to do with people “leaving the labor force” than with the addition of new jobs, unfortunately. The labor force participation rate fell to 62.6 percent in May. Many of those who left the labor force had been unemployed for 27 weeks or more and where therefore discouraged enough to stop trying to find a job.

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Bond and FX markets react

Treasury bill and bond constant maturity yields fell in response to the expected delay of interest rate hikes. The yield curve (see below a simple visualization) remains relatively low and flat. The real yield on a five year treasury, for example, fell to -0.22 percent on Friday, June 3. Foreign exchange markets saw an almost universally stronger U.S. dollar in response to the jobs report. The dollar closed roughly two percent weaker against the Euro, Yen, Australian Dollar, and Ruble, roughly one and a half percent weaker against the Swiss Franc, Brazilian Real, Turkish Lira, and Malaysian Ringgit, and more than three percent against the South African Rand.

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Rate hike delay

While U.S. macroeconomic data has not been thrilling, labor market strength and wage increases were, in the previous few months, supportive of a June Fed Funds target rate increase of a quarter point, to 0.5-0.75 percent. The new jobs report, therefore, softens the strongest pillar. Markets have basically taken a June hike off the table. The next jobs report will be watched very closely and will likely determine whether a July hike is appropriate. Given the timing of Fed meetings and the expected gradual increase rate, it is more likely that we only see one rate hike during 2016.

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Dashboard update: Inaction has reactions

Dashboard PDF file:

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

Dashboard update summary:

Markets closed down slightly on the week following inaction from both the Fed and Bank of Japan. Oil and Yen both still became five percent more expensive in dollar terms. Advance estimate 2016 Q1 real GDP growth was weak at 0.6 percent, but in line with expectations. Labor markets continue to be a bright spot, with eyes on next Friday’s April jobs report.

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Real GDP ticked up 0.6 percent in log terms in the first quarter of 2016. Personal consumption expenditures and residential fixed investment helped to keep GDP growth positive despite a decrease in nonresidential fixed and inventory investment, and growth in the trade gap. The personal savings rate also increased slightly, in quarterly terms, to 5.2 percent in Q1 from 5.0 percent the previous quarter.

FOMC meeting statement changes are kindly highlighted by the Wall Street Journal and include removal of the language about global risks and, some suggestion in my view, based on labor market growth, household income, and consumer sentiment, of a June rate hike. This would depend on continued labor market strength and price pressure plus an upward revision of Q1 GDP.

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Personal consumption expenditures (PCE) continued to increase in Q1, led by higher spending on services. However, monthly data on PCE as a share of GDP decreased slightly in March over its February level. PCE on durable goods as a percentage of GDP was also down slightly in March, to 7.3 percent from 7.4 percent in February.

Labor market data continues to be spotless. The weekly 257,000 new jobless claims is still near the multi-decade low. Next Friday is jobs day. Both the labor force participation rate and wages should continue to improve.

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Disappointing earnings data from Apple includes the first decline in iPhone sales nearly since its introduction and a slowdown in sales in China. This hit the Nasdaq particularly hard, as the composite index was down 2.7 percent while the S&P 500 and Dow Jones industrial average fell 1.3 percent each during the week.

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Oil prices still managed to climb five percent over the past five days. West Texas Intermediate (WTI) crude oil was trading above $46 a barrel at several points during the week. Two recent stories reminded me how oil price fluctuations cause enormous transfers of wealth between countries. Jamaica was praised in this week’s Alphachat series on sovereign debt, while noting that their recent fiscal fortune is aligned with lower prices on their fuel imports. Likewise, a recent IMF publication noted that oil exporting economies in the middle east and central Asia have enacted powerful fiscal stimulus measures to keep their economies moving while they suffer the oil revenue slowdown. Those who believe in the resource curse might note that government measures to shift the economy away from oil are both important and difficult to achieve.

Lastly, the Yen had a volatile week, closing with a five percent appreciation against the dollar. The Brazilian real appreciated nearly four percent during the week, the Swiss franc and Turkish lira appreciated nearly two percent each, the pound sterling nearly one and a half percent and the Canadian dollar nearly one percent.

The full dashboard is here: Macro and Markets Dashboard: United States (April 30, 2016 — PDF)

Dashboard update: lowered expectations

Dashboard PDF file:

Macro and Markets Dashboard: United States (April 16, 2016 — PDF)

Dashboard update summary:

Much of the past week’s macroeconomic news offered disappointment, yet markets dismissed the weak data as a result of what seems like lowered expectations. Retail sales, business inventories, and industrial production reports showed weakness in March (though labor market continues to look good). Corporate earnings have been quite soft in the first quarter, and GDP figures are likely to reflect the first quarter slowdown in output. Investors, however, seem relatively more risk-on, despite the weak macroeconomic data. Their expectations about earnings have fallen low enough to not only absorb the recent results, but to react positively in some cases. These investors are also faced with fewer high-earning alternatives, given sluggish and slowing growth abroad.

CPI and PPI data show little change, while oil prices continue to rebound. Currency markets are quite active, especially on the emerging markets side, where the dollar is weaker, partially as a result of the commodity price rebound.

Macro and Labor Market Indicators

Industrial production and total capacity utilization both fell in March. The industrial production index was down 0.6 points, largely stemming from decreases in production in mining and utilities market groups. This was magnified in the total percentage of capacity utilized figure, which fell to its lowest level since 2010. Mining capacity grew 1.6 percent year over year, despite a simultaneous 12.9 percent fall in production.

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The inventories to sales ratio ticked up in February, as a result of a fall in sales of 1.4 percent and an increase of inventories by 1.2 percent over their February 2015 levels. The most recent week’s data on new jobless claims showed the fewest new claims since 1973.

Equities and Fixed Income

Despite the weak data from the corporate side, equity markets were up and corporate bond yields down during the week. The Nasdaq and Dow were up 1.8 percent on the week, while the S&P 500 climbed 1.6 percent. Yields on U.S. Treasury bonds at all maturities, and U.S. corporate bonds at all maturities and credit ratings, have fallen over the past month, pushing prices higher.

Prices and Currency Markets

This week brought the release of March PPI and CPI data. Both were largely unchanged, as the PPI for all commodities increased slightly and the CPI fell slightly, over their February year over year percentage change levels. There was a surprise in CPI apparel prices, which fell 0.6 percent over their March 2015 levels, despite an increase in February. The data continue to reflect the very low prices of energy and moderate prices increase in healthcare and housing.

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Currency markets were busy during the past week. The dollar strengthened against the Euro (0.91 percent), Yen (0.81 percent), and Swiss Franc (1.06 percent), while, as pointed out by FT’s hard currency, the dollar weakened further against the four R’s, the ruble, real, ringgit, and rand. These four currencies have seen a dramatic change in direction over the past month, appreciating against the dollar by more than 3.5 percent each and more than 5 percent in the case of the rand.

Note:

I try to gradually improve the dashboard and how I summarize changes. Any feedback would be much appreciated. Please feel free to leave a comment, or send me an email at brianwdew@gmail.com.

Dashboard update: recent economic data

Macro and Markets Dashboard: United States (March 19, 2016 — PDF)

As expected, the Fed left key interest rates unchanged. New economic data covering prices, industrial production, jobless claims, and inventories did not offer any dramatic surprises. Equity markets were up on the week, while treasury bond yields fell. The dollar weakened against nearly all major currencies.

Markets reacted positively to the Fed’s key interest rate decision and reduction of their forecast for 2016 rate hikes to two from four. The Nasdaq composite index increased one percent on the week, while the S&P 500 climbed 1.35 percent. Ten-year treasury bond yields fell to 1.88 percent on Friday.

Monthly CPI figures for February showed a year over year consumer price level increase of one percent, compared with a 1.3 percent increase in January. Energy and transportation costs fell more in February than January. Energy costs dropped 12.7 percent over their February 2015 level, while transportation costs fell 3.6 percent over the one-year period.  Healthcare, food, housing, and apparel prices all increased over the previous year’s level. Healthcare costs were up 3.5 percent.

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The industrial production index and total capacity utilization figures were both down slightly in February, following a modest increase in January.

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New weekly jobless claims, at 265,000, showed no sudden increase, further supporting the so far solid labor market data. January data on manufacturing and trade inventories and sales, from the U.S. Census Bureau, showed that sales were down 1.1 percent over their January 2015 level, while inventories were up 1.8 percent over the same period, pushing the inventories to sales ratio to 1.4.

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Over the past week, the U.S. dollar weakened against all major currencies except for the Egyptian pound, which was devalued by 14 percent against the dollar during the week. The dollar fell roughly two percent or a bit more against the Euro, Yen, and Canadian Dollar, and nearly a percent and a half against Pound Sterling and Swiss Francs. The dollar fell against the Yuan by nearly three quarters of a percent on Friday.

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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.

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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.