Disappointing Jobs report for the US? Not Really!

   Schwaben Blog

February 05, 2016

 

 

Weekly Statistics:

  Today Week Ago Year Ago
  05-Feb-16 29-Jan-16 05-Feb-15
       
S&P TSX 12,763 12,822 14,384
S&P 500 1,880 1,940 2,044
DJIA 16,205 16,466 17,780
OIL $31.00 $33.20  $68.86
USD vs CAD 0.7202 0.7112 0.8503
Gold $1,174 $1,121  $1,174

 

Another volatile week for US equities ended with S&P 500 losing more than 3% for the week. The disappointing jobs report released on Friday brought further negative momentum to already fragile markets. But a detailed look into that report brings out some positive takeaways. The jobless rate dropped to 4.9%, matching the Fed’s median forecast for the long-run sustainable level of unemployment or “full employment”, and continuing the most impressive trend in U.S. economic data. It is the first time since February 2008 that the unemployment rate has dropped below 5%.  The hourly wages also rose by 0.5% in January, the largest increase since January 2015 and beating market expectations by 0.3%. The gain in hourly wages will certainly help the US economy move closer to their inflation target of 2%.  The US economy is 70% consumption driven and with extra savings from lower oil prices, consumers will eventually put more money into the economy. So far we have not seen a substantial improvement in consumer spending but as Deutsche Bank recently said in its research report “Lower oil has an immediate impact on energy sector and the positive effects on the economy usually appear with a lag”. Another explanation for lower consumer spending could be that consumers are paying down their debts instead of spending. According to a Morgan Stanley report, consumer balance sheets are in great shape, with the lowest debt-to-disposable income ratio since 2003. As far as earnings recession goes, if we strip out the energy companies from the S&P 500, the blended earnings will improve from -3.8% to 2.2%. This shows that except the energy companies, the US corporations are doing well and are financially stable.

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Are we in for a rate hike in December?

   Schwaben Blog

November 06, 2015

Weekly Statistics:

Today Week Ago Year Ago
06-Nov-15 30-Oct-15 07-Nov-14
S&P TSX 13,553 13,525 14,690
S&P 500 2,033 2,079 2,031
DJIA 17,910 17,662 17,573
OIL $44.52 $46.59  $78.61
USD vs CAD 0.7537 0.7650 0.8827
Gold $1,088 $1,141  $1,146

With the release of October Payroll report the fear of an interest rate hike as soon as December is back on the table. After last week’s report that the US economy posted a disappointing growth of just 1.5 percent (annualized) in Q3 2015, investors discounted the probability of a rate hike anytime soon and started getting back into equities. But today’s jobs report left little doubt that the US economy is growing again. The gain of 271,000 in payrolls was the biggest this year and exceeded analysts’ expectations of a gain of 185,000. After almost eight years, the US economy now has more civilians working in full-time jobs than it had before the financial crisis of 2007/08. According to CME FedWatch tool, there is a 70 % probability of a rate hike during FOMC meeting in December. Also, if the interest rates are increased, then there is a 69.8% probability of a 50 basis points hike and 30% probability of a 25 basis points hike. Last week, the probability of just a rate hike was less than 30%. I still think that the likelihood of an increase in interest rates is around 30-40%.  Even though employment numbers have far exceeded the expectations, the average blended earnings growth for S&P 500 is -2.2%. If the index reports an earnings decline in Q3, it will be the first back-to-back quarters of earnings declines since 2009. According to Factset, 76% of companies are reporting EPS above estimates. This is above the 5 year average earning surprise for the index, while only 47% of the companies are reporting sales above estimates. With interest rates at record lows, companies are buying back their shares at a record pace and this raises EPS. The share buyback increases EPS however it may not be a sign of significantly increased earnings. Although employment gains last month were a lot stronger than expected it may not necessarily point to an excessively growing US economy.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

The US Dollar and The Interest Rates

   Schwaben Blog

September 25, 2015

Weekly Statistics:

Today Week Ago Year Ago
25-Sep-15 18-Sep-15 25-Sep-14
S&P TSX 13,380 13,646 15,026
S&P 500 1,931 1,958 1,965
DJIA 16,315 16,385 16,945
OIL $45.58 $44.92  $89.37
USD vs CAD 0.7507 0.7604 0.9051
Gold $1,146 $1,138  $1,226

After deciding to keep interest rates steady during the last meeting, the Federal reserve chairperson, Janet Yellen, commented yesterday that most members on Federal Open Market Committee (FOMC) still expect a rate increase in 2015. She also said that “Prospects for the US economy generally appear solid”. Her comments are supported by this morning’s report from the Commerce department, which states that the US economy grew at an annual rate of 3.9 percent compared to the previous forecast of 3.7 percent. A significant correction in oil prices could also be partially responsible for this stellar growth. This boosted the confidence of investors after the last FOMC meeting gave them some jitters about the growth of the US economy. Most of the major economic indicators are pointing towards a healthy and growing economy, and raising interest rates by 25bps would not prove catastrophic. Although there could  be a short-term correction in equity markets, a hike in interest rates would  signal that the US economy is strong enough to absorb a rate hike after almost a decade, however this does not alleviate the concern of falling inflation especially with a rise in interest rates. A stronger dollar could also  lower inflation as it suppresses import prices. The US dollar index, which measures the performance of US dollar against a basket of six currencies, has significantly appreciated on a year-over-year basis and is almost at the highest level for a decade resulting in disinflation for US consumers.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

US unemployment at record low – where is inflation ?

Schwaben small S    Schwaben Blog

 

May 24, 2015

 

Weekly Statistics:

 

Today

Week Ago

Year Ago

 

24-July-15

17-July-15

24-July-14

       
S&P TSX

15,108

14,385

14,534

S&P 500

2,122

2,076

 1,885

DJIA

18,272

17,752

16,511

OIL

$59.45

$52.13

 $92.78

USD vs CAD

0.8318

0.7888

0.9072

Gold

$1,225

$1,160

 $1,296

 

The number of Americans filing new claims for unemployment benefits fell last week to the lowest level in 41 years, pointing towards a strengthening US job market. Initial claims for unemployment benefits dropped 26,000 to 255,000 (seasonally adjusted) for the week ended July 18. Initial jobless claims have an importance in financial markets because unlike continued claims data which measures the number of persons claiming unemployment benefits, initial jobless claims measures new and emerging unemployment. As it is evident from the chart below, the data could be volatile but the latest numbers are at historic lows. The four-week moving average of claims, considered a better measure of labor market trends as it excludes the week-to-week volatility , fell 4,000 last week to 278,500. A number below 300,000 is usually considered a threshold associated with strengthening labor market and the jobless claims have stayed below 300,000 for 17 straight weeks. Persistently low layoffs and greater employment gains will help wage gains and likely support consumer spending. At this point the Federal Reserve is still assessing the health of the US economy before deciding when to raise the interest rates. Unemployment numbers and jobless claims play a key factors in the Fed’s decision making process. The Federal Reserve may raise the interest rates in September should employment continue to strengthen and there are signs of wage gains.  This could possibly bring a small correction in equity prices over the short term.

united-states-jobless-claims July 24 2015

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

Is the Canadian Housing Market and Household Debt on the road to a train wreck ?

Schwaben small S    Schwaben Blog

 

July 17, 2015

 

Weekly Statistics:

Today

Week Ago Year Ago
17-July-15 10-July-15

17-July-14

S&P TSX

14,385

14,385

15,204

S&P 500

2,076

2,076

 1,958

DJIA

17,752

17,752

16,976

OIL

$52.13

$52.13

 $94.36

USD vs CAD

0.7888

0.7888

0.9315

Gold

$1,160

$1,160

 $1,320

 

In not surprising  that the Bank of Canada recently cut its benchmark interest rates by 25 basis points to 0.5 percent from 0.75 percent. This is the lowest level since 2009 when interest rates were at 0.25 percent. The reduction in interest rates also sent the Canadian dollar down to 77.40 cents (US), its lowest level since March 2009, and continued its drop today to another record low since 2009 to 76.97 cents US. Canada’s major banks also followed the central bank and lowered their prime lending rates but only by 15 basis points to 2.7 percent from 2.85 percent. This is the second time this year that the banks have taken a cautious approach to their lending rates after the central bank has slashed the interest rates. Overall, the banks have lowered their prime rates by a total of 30 basis points as compared to Bank of Canada’s reduction of 50 basis points. The lower interest rates have led to a surge in house prices and according to Bank of Canada’s estimates, housing market could be overvalued by as much as 30 percent. Apart from the housing market, consumers’ debt is rising at a record pace while the income is growing

Fig. 1

Cdn Consumer Debt Jul 2015

at much slower pace. Due to low interest rates, consumers are taking on other forms of debts as well in the form of personal lines of credit, credit card loans among other types of debt. Fig 1. The surge in house prices combined with an alarming level of household debt for Canadians has prompted the big banks to lower their prime rates by 20 bps less than the central bank’s reduction of 50 points. In fact in 2007 Canadian versus US household debt to income was about the same. Since then Canadian Household debt to income has risen to 150% from 130% whereas US it has declined to 100% from the same level according to Deutsche Bank Fig. 2. The disparity creates an additional risk premium that adds pressure to the Canadian dollar decline.

Fig. 2

Cdn HH Debt Jul 2015

The collapse in oil prices and subsequent reduction in the investments in the oil patch has created one of the highest trade gaps for Canada and the economy likely contracted by 0.6 percent and 0.5 percent in the first two quarters of 2015 – technically a recession. The recent victory by NDP in Alberta has further prevented the investments in oil sands by creating an uncertainty about the corporate tax structure for the province. In order to close or reduce that gap, the country needs to ramp up its non energy exports. It hasn’t happened so far yet and in a desperate measure to increase Canadian exports, Governor Stephen Poloz is trying to push the loonie lower in order to increase the competitiveness of Canadian exports.  At a time when the Federal Reserve in the US is hinting towards a rate hike, this move by Bank of Canada shows that a growing US economy and a cheaper Canadian dollar could be the way to increase the Canadian exports and reduce the trade gap.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

Is North American growth slowing or is it just a temporary dip ?

Schwaben small S    Schwaben Blog

 

July 10, 2015

 

Weekly Statistics:

 

 

Today

Week Ago Year Ago
  10-July-15 03-July-15

10-July-14

       
S&P TSX

14,385

14,593

15,114

S&P 500

2,076

2,069

 1,964

DJIA

17,752

17,683

16,915

OIL

$52.13

$52.78

 $95.77

USD vs CAD

0.7888

0.7905

0.9315

Gold

$1,160

$1,169

 $1,342

 

The International Monetary Fund (IMF) has cut its growth projection for the Canadian Economy. According to the IMF’s forecast, Canada’s real GDP will grow at 1.5 percent this year, down sharply from their previous forecast of 2.2 percent in April. In addition to Canada, it also slashed its forecast for the growth of the US economy for 2015 to 2.5 percent from 3.1 percent.  It is no surprise that the collapse in the oil prices is one of the main reasons for this setback but the IMF also pointed to some one-time factors like harsh winter and US port closures for the poor growth in North America. Due to the slump in oil prices, Canada’s international trade numbers for May showed a near-record trade deficit of $3.3 Billion. Exports of energy products are down 35 percent for the year to date compared with the same period a year ago. Although poor economic indicators have led economists to conclude that Canada’s GDP will likely contract again in second quarter, which means technically the Country is in recession, other economic indicators, specifically unemployment rate and housing starts are showing signs of strength. In the recently released unemployment report, Canada shed 6400 jobs but unemployment rate has been steady at 6.8 percent for the last five months. Although a rising trade deficit, because of energy exports and collapse in oil prices, Canada is still able to maintain its unemployment rate, which means that non-energy related industries are creating  jobs and are growing sufficiently to offset other job losses. A rate cut from Stephen Poloz, Governor of Bank of Canada, during his next announcement on July 15 could bring the interest rates down to 0.5 percent from 0.75 percent. This will be the second rate cut after a surprise rate cut in January. At a time when the housing market is already overpriced, a rate cut could cause house prices climb further out of reach for many Canadians.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

Grexit in Europe versus US growth in North America

 

Schwaben small S    Schwaben Blog

 

June 26, 2015

 

Weekly Statistics:

 

Today Week Ago Year Ago
  26-June-15 19-June-15

26-June-14

       
S&P TSX

14,808

14,653

15,146

S&P 500

2,101

2,110

 1,960

DJIA

17,947

18,014

16,851

OIL

$59.65

$59.51

 $96.43

USD vs CAD

0.8116

0.8140

0.9370

Gold

$1,174

$1,200

 $1,323

An upbeat New Homes sales report for the United States showed further strength of the US economy. Sales of newly built homes rose in May to 546,000 from 534,000 in April. It is the highest level since February 2008 and a solid indicator of a strengthening US housing market. Although this number is still far from the July 2005 peak of 1.4 million (annualized), but the increase in demand shows that builders will ramp up construction this year which would likely strengthen the broader economy.. Americans also boosted their consumer spending at the fastest rate in almost six years. This increase came amid lowest jobless claims in 15 years. All these indicators will help the Federal Reserve decide when to raise the interest rates. These indicators also clearly show that the US economy is set to grow at a decent pace after a dismal performance in the first quarter, which many analysts believe was due to the harsh winter and the strike at the western ports. Although the positive indicators were supposed to help equity markets, the uncertainty of a Greek debt default still kept the investors anxious. After the meeting of the Eurozone’s finance ministers on Saturday, the ministers rejected a Greek request for a one month extension to its bailout. Subsequent to receiving continuous bailouts for the last five years from the European Central Bank (ECB) and the International Monetary Fund (IMF), Greece is finally set to default on its payment of EUR 1.5 Billion to the IMF on Tuesday. The decision not to extend Greece’s bailout came after Athens rejected the policy overhauls and budget cuts demanded by its creditors. At this time, when the US is preparing for an interest rate increase after almost 9 years, the Greek debt default could severely impact the growth prospects of the Eurozone and also plunge other countries like Portugal, Cyprus and other fragile European countries into a recession. The default may also spread fear among North American investors, which could hurt North American equity markets.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

Is the Fed finally raising rates ?

Schwaben small S    Schwaben Blog

 

June 19, 2015

 

Weekly Statistics:

 

  Today

Week Ago

Year Ago
  19-June-15 12-June-15

19-June-14

       
S&P TSX

14,653

14,957

14,604

S&P 500

2,110

2,092

 1,951

DJIA

18014

17,849

16,943

OIL

$59.51

$58.42

 $93.92

USD vs CAD

0.8140

0.8017

0.9051

Gold

$1,200

$1,172

 $1,256

 

In a meeting on Wednesday, the United States Federal Reserve decided to keep its benchmark interest rates near zero but central bankers believe improving US economic growth is likely to warrant one or two interest rate increases before the end of the year. The Fed will take many economic indicators into account before raising the interest rates, first time since 2006. The significant correction in oil prices has led to downward pressure on the US inflation rate. The Fed has been insisting that the tumbling inflation rate is largely a temporary result of weak energy prices. The inflation rate was recorded at 0 percent for the month of May after falling to -0.2 percent in the month of April, first time into negative territory since 2009. The core inflation rate (which excludes some volatile price items) came out at 1.7 percent . The US housing market is also showing signs of strength and annual pace of permits for new construction, a sign of future demand, rose 11.8 percent to  1.28 million, the fastest pace since August 2007. Improving labor market, housing starts and slightly increasing inflation will further help the Fed to make its decision sooner rather than later. The Eurozone is already facing muted or negative growth and now with the Greek debt default crisis on the loom, it would be very difficult for them to handle an interest rate increase from the US. In case the Fed decides to raise interest rates during their next meeting in July or September, investors would obviously prefer to invest in “safer” US dollar denominated investments (with a higher yield) than investing in the troubled Euro area. This could further strengthen the USD against many currencies and also virtually push some countries in Eurozone into the recession. The Fed has four meetings left for the year and according to a survey released by the central bank, only 2 out of 17 Fed officials believe that the bank should wait until 2016 to raise the rates. This clearly shows the increased confidence of the Fed officials in the US economy and now the question remains if they are going to raise interest rates once or twice this year?

US Inflation June 19, 2015

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

The Canadian economy in flux – employment and economic activity moving to manufacturing again

Schwaben small S              Schwaben Blog

 

June 05, 2015

 

Weekly Statistics:

 

Today

Week Ago Year Ago
05June-15 29-May-15

05-June-14

S&P TSX

14,957

15,036

14,604

S&P 500

2,092

2,114

 1,951

DJIA

17,849

18,052

16,943

OIL

$58.42

$59.93

 $93.92

USD vs CAD

0.8017

0.7995

0.9051

Gold

$1,172

$1,189

 $1,256

 

Ontario and British Columbia were the largest contributors in job creations in Canada last month, creating 43,900 and 30,600 jobs respectively. The entire Canadian economy added 59,000 jobs in the month of May compared with a loss of 19,700 jobs in April.  In the wake of the oil-price collapse, Alberta saw the biggest decline in employment, losing 6,400 positions, making it the first month of negative job creation since then.. Other oil producing provinces like New Brunswick, Newfoundland and Labrador lost about 9,000 jobs in total. As we have mentioned in our previous Blogs we expected a reversal of fortunes and as such also employment levels of oil producing versus manufacturing provinces with the collapse of oil prices and the concurrent decline in the Canadian dollar. Jeremy Lawson, chief economist at Edinburgh-based Standard Life Investments said “I think it’s pretty clear that the Canadian economy is going to rebalance over the next two to three years.” The unemployment rate has remained unchanged at 6.8 percent from the last four months. The unemployment rate in Canada averaged 7.73 percent from 1966 until 2015. Last month’s gain in employment numbers is the largest since October 2014 when 62,200 jobs were created. A poor first quarter and a drop in interest rates by Bank of Canada led investors to believe that the Canadian economy is headed for more troubles and economists were expecting another interest rate cut from Stephen Poloz, Governor of Bank of Canada. Friday’s data however  will likely cause the Bank of Canada to reevaluate and  declines in interest rates likely have come to an end. This jobs report is a positive signal for Canadian economy and offers a positive outlook for the remainder of 2015.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

Deception in economic data – we need to consider more

Schwaben small S                       Schwaben Blog

 

May 29, 2015

 

Weekly Statistics:

 

Today Week Ago Year Ago
29-May-15 22-May-15 29-May-14
(Midday)
S&P TSX 15,036 15,200 14,604
S&P 500 2,114 2,126  1,920
DJIA 18,052 18,232 16,698
OIL $59.93 $59.93  $93.23
USD vs CAD 0.7995 0.8165 0.9051
Gold $1,189 $1,205  $1,260

 

The Gross Domestic Product (GDP) of the United States contracted at a seasonally adjusted annual rate of 0.7 percent in the first quarter of 2015 instead of 0.2 percent growth, which the government estimated last month. Harsh weather, a stronger dollar and a strike at the western ports of the US could be the possible reasons for this contraction. A rising dollar has curbed US exports by making American goods more expensive for importers and which in-turn has created a trade deficit.  We believe that this contraction is a temporary setback in the growth story of the US and the economy will rebound and grow at a decent pace as it did in 2014, after the US GDP contracted by 2.1 percent in the first quarter of 2014. One of the major economic indicators that we believe is imperative for US growth is the unemployment rate. More than 3 million jobs were created last year, the most since the late 1990s. Also, the real median incomes are up 3% in the past year to about $54,578 in current dollars, the fastest growth since 2007. According to MarketWatch, consumer spending accounts for up to 70% of the US economic activity. With a significant correction in oil prices, and rising incomes, consumers are expected to spend more than they did last year and which can give a boost to the US economic growth. Though the economy is not growing at a significant pace but it is certainly not shrinking over the longer term. The Federal Reserve is debating about raising interest rates (no specified timeline yet) and major economic indicators like housing starts, median income, unemployment numbers etc are all pointing towards a growing and a solid US economy. This will definitely increase the Fed’s confidence in the US economy before they decide to finally raise the interest rates, after 9 years. Considering the current market conditions we believe that a rate hike can be expected in late Q3 or early Q4.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics