Thursday, April 03, 2014 - Tomorrow, Tomorrow, It’s Only a Day Away

Tomorrow, Tomorrow, It’s Only a Day Away

by Sinclair Noe

DOW – 0.45 = 16,572
SPX – 2 = 1888
NAS – 38 = 4237
10 YR YLD - .01 = 2.79%
OIL + .73 = 100.35
GOLD – 3.10 = 1287.80
SILV - .16 = 19.92

Forget about today; at least in terms of Wall Street trading. Tomorrow is more important. The first Friday of each month is always a big day because of the monthly jobs report; tomorrow, maybe more than most. The consensus estimates called for 200,000 net new jobs in March and the unemployment rate is expected to drop to 6.6% from 6.7%. Then there is the whisper number. Many people believe the harsh winter weather has held back hiring, like a balloon trapped under water by a thin sheet of ice, and when the ice melts, as it did in March, the balloon will jump out of the water like a salmon swimming upstream. Weather sensitive industries such as retail, construction and manufacturing might be especially strong performers.

A March jobs report that shows a broad increase in hiring across most or all industries would show the economy is recovering and everything, including the Fed, is on track. A disappointing number, though, would bolster the case of the increasingly famished Wall Street bears that bad weather alone is not the source of weak economic growth so far in 2014.

And if the number comes in right at expectations, we’ll have to go to the tiebreakers. We will look at the number of hours worked, In February, inclement weather kept people from getting to work, at least for a few days. The result: The average workweek slipped by 0.1 hour to 34.2 hours in February, the lowest level since January 2011. Fewer hours mean less take-home pay for many, translating into weaker consumer demand and slower economic growth. The wintry mix continued to hit parts of the country in March but the effect shouldn’t be as bad as earlier in the winter. Even a partial reversal of the weather distortion should generate a rebound in average weekly hours worked, which have slumped from 34.5 last November.

We’ll also look at the U-6 underutilization rate. Federal Reserve Chairwoman Janet Yellen this week highlighted the 7.2 million people who would like a full-time job but instead are working only part time. It’s a sign of slack in the labor market and one reason the Fed is likely to keep rates low for a long time. “This number is much larger than we would expect at 6.7% unemployment, based on past experience, and the existence of such a large pool of ‘partly unemployed’ workers is a sign that labor conditions are worse than indicated by the unemployment rate.”

And we’ll look at the participation rate, the share of working-age adults who have a job or are looking for work, held steady at 63% in February, near a 35-year low. That’s partly because baby boomers are retiring in greater numbers but may also indicate some people are frustrated with their job prospects and have dropped out of the labor force. Greater labor-force participation would be welcome, even if that keeps the unemployment rate from falling further.

Of course, that 200k jobs figure is just a guess, an arbitrary number pulled out of a hat. Total private employment reached 115,848,000 in February, close to the seasonally adjusted record of 115,977,000 from January 2008. If the private sector added more than 129,000 payroll jobs in March, the US will be back to its peak level of private-sector employment. Of course, a lot has changed since the prior peak. State local and federal governments have shed more than half a million jobs, leaving total employment still shy of its all-time high. The population is bigger: The civilian labor force has expanded by 1.6 million since then. And the mix of private-sector jobs has changed. For example, more people work in temp and health care jobs, while fewer are in construction and manufacturing.

With the Federal Reserve in the process of tapering down its bond purchases, big surprises on either side of the forecasts could upend expectations about the pace of the Fed’s stimulus withdrawal and the timing of eventual rate hikes. As important as the jobs figure is, it is also important to remember that, as Fed Chairwoman Janet Yellen has noted, unemployment isn’t the only number policy makers will consider.

It would take a really big number to move the bond market, but something north of 250,000 jobs could push the yield on the 10 year Treasury note above 2.8%. Market expectations appear to be biased toward higher yields.

A strong jobs report would also be bullish for the dollar. Today the dollar moved higher against the Euro as European Central Bank President Mario Draghi said policy makers were discussing the possibility of using quantitative easing and other unconventional stimulus measures to counteract extremely low inflation.

The ECB's governing council held its key interest rates unchanged for the fifth month in a row, despite an unexpected slowdown in area-wide inflation and worries about deflation.  Of course, Draghi has been trying to jawbone the Eurozone into economic growth for a couple of years, vowing to do whatever it takes but never actually doing whatever it takes, even as the destructive spiral of falling prices pushes consumers to put off purchases, thus destroying salaries, jobs and investment.

Meanwhile, International Monetary Fund Director Christine Lagarde was railing against the deflation ogre again, and warning the ECB about the dangers of “low-flation”, which is apparently a freshly minted economic term, and calling for more monetary easing by the ECB and the Bank of Japan. Draghi said the IMF has been “extremely generous” in suggesting what the ECB should or shouldn’t do. In fact, he urged the IMF to share the generosity “with other monetary policy jurisdictions, like for example issuing statements just the day before a (Fed) meeting.”

Which also means the ECB will not do whatever it takes to stoke the economic engine. And Lagarde was wrong; they don’t face “low-flation”; prices are falling.  The European Central Bank has let it happen. Deflation has been running at an annual rate of -1.5% in the Eurozone over the past five months, when adjusted for austerity taxes. Prices have dropped more than 6% in Greece, more than 5% in Italy, more than 4% in Spain and Portugal, 3% in Slovenia, and 2% in Holland. A little bit of stimulus would push the currency lower and goose exports and economic activity, but Draghi does nothing but jawbone; his constant promises to do whatever ring hollow.

Deflation can create some serious conundrums for debt. When a country’s debt burden rises faster than nominal GDP, it could engulf the private sector as well; tightening the vice on households and companies with fixed-rate debts; it would erode bank assets; risk fresh bank failures and hit life insurers through a mismatch in maturities.

An International Monetary Fund study detailed this week, that there's still a running assumption that governments would again rescue the biggest banks in the event of another panic. The IMF found that at least through 2012 the euro zone's biggest banks still benefited from an implicit taxpayer subsidy of $90 billion to $300 billion. Subsidies for UK and Japanese banks may have been as high as $110 billion and they ranged from $20 billion to $70 billion in the United States. So the risk, you might assume, is still loaded on the government's tab. Yet government borrowing costs across the western world and beyond have rarely, if ever, been lower.

Eurozone loans to businesses are contracting at a rate of 3%. The ECB is missing its 2% inflation target by 150 basis points, and will continue to miss it badly in 2015 and 2016 based on its own forecasts. Despite Draghi’s incessant and unbelievable jawboning, the ECB has consistently refused to offset the contractionary effects of austerity with enough monetary stimulus to keep GDP growing faster than the debt of the southern nations; and the more austerity the more the debt burden to GDP ratio has climbed. In Italy the debt climbed from 119% to 133% since 2010 despite harsh fiscal policy.

Say what you will about the Fed, and I have said plenty; their QE policy has been misdirected and has led to greater inequality, but at least the US maintains its global position as the cleanest shirt in the dirty clothes hamper because we weren’t hit with the double whammy of tight monetary policy and draconian fiscal austerity. (just the fiscal part)

The ECB insists that the latest dip in Euro inflation is due to falling energy costs, and therefore transient. That could all change if Russia decides to ramp up the use of natural gas as an economic weapon, and a precedent was set earlier this week. Rising energy prices in combination with falling prices for almost everything else would make for a really ugly mess in Euroland, and might force Draghi to stop sitting on his hands.

While offering her advice on “low-flation” to the ECB today, IMF chief Lagarde also spoke about other threats to global growth. Another threat is high corporate leverage in emerging economies, which if not adequately addressed will be worsened by the turmoil from eventual monetary tightening in advanced economies, especially the US. Yet another obstacle is the rise of geopolitical tensions, which could cloud the global economic outlook. "The situation in Ukraine is one which, if not well managed, could have broader spillover implications."