Job Market Looks Ripe for Liftoff The best three-month stretch of hiring since 1997 has positioned the U.S. labor market to start delivering stronger wage growth for a wider swath of Americans after more than five years of sluggish recovery from a deep recession.
U.S. payrolls rose 257,000 last month, above the 237,000 consensus forecast, while revisions boosted the new-jobs count for November and December by a combined 147,000 jobs. That put the average monthly jobs gain over the past three months at 336,000, the fastest pace since 1997.
The economy has added a robust 336,000 jobs to payrolls on average over the last three months. December nonfarm payrolls were revised up by 77,000 to 329,000 and the November gain was revised up by 70,000 to 423,000. The big adjustments partially reflect the impact of benchmark revisions, which recast seasonally adjusted payroll numbers back to January 2010. October’s gain was revised down by 40,000 to 221,000.
The hiring spree prompted many previously sidelined American workers to begin the job search, causing the unemployment rate to tick up a tenth of a percentage point to 5.7%.
The labor force expanded by more than 700,000 last month as the number of job seekers rose. That pushed up the nation’s labor force participation rate by two-tenths of a point to 62.9%, still near a three-decade low.
Average hourly earnings rose 12 cents, to $24.75, more than reversing a five-cent drop in December. That put them 2.6% higher than they were three months earlier, on an annualized basis, which might mean wage growth is finally breaking out of the 2% range it has been stuck in.
As the oil price collapse intensified throughout the fall, worries grew that the benefits to consumers from low oil prices would be offset, at least in part, by the tremendous damage done to U.S. oil producers. The collapse in oil prices has unquestionably hit the bottom line of oil producers and oil-field servicers. But the job losses so far have been small. 
The worst is yet to come. Bricklin Dwyer, a senior U.S. economist at BNP Paribas, estimates the major oil-field servicers have announced job cuts that will total 20,000 in the first quarter of 2015. The oil industry remains a tiny part of the U.S. employment picture, Mr. Dwyer notes, at about 0.7% of total employment.
Outside of the energy sector, job growth appears to be spreading across a wide range of industries. Retailers posted the biggest gain last month, but other sectors with higher-paying jobs also ramped up hiring, including construction, manufacturing and health care.
The construction sector added 39,000 new jobs in January—the third straight month the category added more than 30,000 positions to payrolls, the Labor Department said Friday. That’s a good signal for the economy because construction jobs tend to pay better than retail and many other service jobs, which also increased last month. Jobs in oil and gas extraction slipped in January, falling by 1,900.
Here’s a great chart from the WSJ. I have added the red arrows to highlight the expanding breadth of the jobs market.
Another way to look at jobs diffusion. The share of the private sector in total employment is now 84.5%, the highest since1960, while the diffusion index is at multi-year highs. (NBF)
Other important charts from Doug Short:
When the average work week reaches its max, you need to hire more workers and start paying higher wages. If inflation falls at the same time…
The next chart multiplies Real Average Hourly Earnings times the Average Hours Per Week for a snapshot of the trend in weekly wages. Real weekly earnings are up $7.34.
Your move, Mrs. Yellen. How patient will you be with this patient who no longer looks like a patient. But also consider this:
Importantly:
Young-adult employment rose yet again. Employment among 25- to 34-year-olds, the prime age group for housing demand, was at 76.6% in January—up from 75.8% one year ago, and the highest level since the end of 2008. It’s now halfway back to normal: before the bubble, their employment-population ratio hovered in the 78-80% range. Having a job matters for housing. Just 12% of employed 25- to 34-year-olds live with their parents, versus 21% of 25- to 34-year-olds without jobs, according to 2014 Census data. –Jed Kolko, Trulia
Also:
Last month, the unemployment rate of workers who hold a bachelor’s degree or higher sank to 2.8 percent, its lowest level since September 2008. That compares with a jobless rate of 5.7 percent for the overall population.
That could mean the U.S. isn’t far from a position that would have been crazy-talk not too long ago—running out of those types of people to employ, according to Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia.
“Presumably, these educated workers are the most productive in our information economy, and, at some point in the coming year, we’re going to risk running out of new, productive people to employ,” LeBas wrote in a note to clients. “That comment would have been unthinkable just 12 or 18 months ago.”
That also has good implications for the wages of those workers. As those laborers become scarcer, companies will be forced to bid up their pay to attract the best and brightest.
Total outstanding consumer credit, reflecting Americans’ debt outside of real-estate loans, expanded at a 5.37% seasonally adjusted annual rate to $3.31 trillion in December. That was a slight acceleration from November’s 4.92% gain.
Revolving credit, mainly credit cards, contributed to last month’s increase. Revolving credit grew at a 7.85% pace in December, a turnaround from November’s 1.28% decline. December’s expansion in revolving credit was the largest since March.
Nonrevolving credit, such as auto and student loans, grew at a 4.46% pace during the month, the smallest monthly increase since October 2011. November’s nonrevolving balances grew 7.21%. (Chart from Zerohedge)
What did Visa and Mastercard say last week? A refresher:
“We haven’t seen the extra savings from lower gas prices translate into additional discretionary consumer spending,” said Ajay Banga , chief executive of MasterCard Inc., on a conference call Friday to discuss quarterly earnings.
Evidence is that Americans are spending at a faster pace.
I cannot recall a moment when the gap between what markets expect the US Federal Reserve to do and what the Fed itself has forecast it will do has been as large. Markets predict that the Fed will raise rates only to 1.6 per cent by the end of 2017; the Federal Open Market Committee’s average forecast is 3.5 per cent.
Such a divergence raises the risk of volatility and poses a communications challenge for the Fed. More important, it raises the question of what should guide future policy.
(…) there can be no doubt that cyclical conditions are normalising. (…)
On the other hand, the available inflation data suggests little cause for concern. The core consumer price index has averaged 1.1 per cent over the past six months; if housing costs were stripped out it would be zero. Wages actually fell in December and over the past year employment costs have risen 2.25 per cent which, in conjunction with productivity growth of only 1 per cent, suggests inflation of below 2 per cent. Perhaps most troubling: market indications suggest inflation is more likely to fall than rise.
(…) [the Fed] should not raise rates until there is clear evidence that inflation, and inflation expectations, are in danger of exceeding its 2 per cent target. (…)
There is already a danger given all the problems in Europe, Japan and emerging markets that safe haven flows will drive the dollar up to the point where the US economy could be significantly slowed. Raising rates without evidence of rising inflation could dramatically increase real rates and exacerbate these risks.
None of this is to say that rates should never be raised or that inflation indicators might not justify a rate increase before long. It is to say that the Fed could inject much needed confidence in the economy today and minimise future risks by announcing and following a strategy of not raising rates until it sees the whites of inflation’s eyes.
OIL
In its monthly oil-market report, the Organization of the Petroleum Exporting Countries reversed its prediction that demand for its barrels would decrease by about 300,000 a day. Now, the group says demand will be 29.2 million barrels a day, an increase of about 100,000 barrels a day compared with last year. (…)
OPEC forecast that the U.S. oil supply will increase more slowly, by 130,000 barrels a day less than previously expected in 2015. That is because oil prices have forced a large number of drilling rigs to shut down, OPEC said. Already, the growth in American production, mostly from costly rock formations called shale oil, slowed down from 96,000 barrels a day in October to 14,000 barrels a day in November, though it has yet to translate into an actual production decline. (…)
In addition, lower oil prices have also forced international oil companies to cut their expenditure while aging Russian fields will produce less than previously foreseen, the group said.
Lower oil prices have also helped revive an appetite for oil among U.S. motorists. An upward revision of North American oil consumption by 150,000 barrels a day for this year will translate into an oil demand-growth forecast improved by 20,000 barrels a day world-wide.
“Gasoline, in particular, remains a key driver behind the growth in U.S. oil demand, largely a result of lower oil prices,” OPEC said. Overall, oil consumption is expected to increase by 1.17 million barrels a day to 92.32 million barrels a day. (…)
n January, OPEC production stood at 30.15 million barrels a day, down 53,000 barrels a day, mostly due to Libyan disruptions.
(…) The real time activity growth rates are derived from the latest Fulcrum “nowcasts”, based on dynamic factor models. These nowcasts, estimated by Juan Antolin Diaz and colleagues, combine a very large number of different statistical releases to identify a single growth “factor” that is assumed to be driving the economies in question.
A pick-up in activity in both the Eurozone and Japan is countering, and perhaps more than offsetting, a slowdown in the US. Global retail sales volume is rising strongly as oil price effects feed into consumer confidence, and manufacturing sectors seem to have eliminated the excess inventories that accumulated late last year. In the advanced economies, growth is now running at a significantly above the trend rates derived from the models. But in China, the progressive and gradual slowdown continues.
Composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend, point to tentative signs of a positive change in growth momentum in the euro area, particularly in Germany and Spain. In Italy, the CLI also points to improvements, with this month’s CLI pointing to stable growth momentum compared to weakening momentum last month. The outlook for France is unchanged from last month’s assessment, with stable growth momentum anticipated.
The CLIs indicate stable growth momentum also in the OECD area as whole and in some of the major economies, including the United States, Canada, Japan, China and Brazil. In the United Kingdom, the CLI points to an easing in growth momentum, though from relatively high levels.
The CLI for India indicates firming growth while in Russia the CLI continues to point to a loss in growth momentum.
(…) Finally, a word about China. (…) According to the model, the growth rate in activity has slowed markedly during 2014, and now stands at about 7 per cent. This is in line with independent estimates of the annualised growth rate in real GDP in 2014, but is higher than the very volatile official estimate of quarterly annualised GDP growth, now standing at 6.1 per cent. The nowcast growth rate has not yet broken below the range established in the past 3 years, but it is still dropping as the manufacturing sector continues to slow.
As John Authers points out, China definitely represents the most significant downside risk to global growth at present.
The Bank of Italy has raised its growth forecast for the Italy to more than 0.5 per cent in 2015 and above 1.5 per cent in 2016 thanks to the effect of quantitative easing by the European Central Bank.
The new forecast is a U-turn for the central bank which only last month — before the launch of QE — cut its growth forecast for this year to 0.4 per cent and saw 1.2 per cent growth next year.
“Lower interest rates and the depreciation of the exchange rate could bring euro area inflation to levels more consistent with the definition of price stability towards the end of 2016,” Mr Visco added. (…)
Greece warned it was on course to run out of money within weeks if it doesn’t gain access to additional funds, effectively daring Germany and its other European creditors to let it fail and stumble out of the euro.
Greek Economy Minister George Stathakis said in an interview with The Wall Street Journal that a recent drop in tax revenue and other government income had pushed the country’s finances to the brink of collapse.
“We will have liquidity problems in March if taxes don’t improve,” Mr. Stathakis said. “Then we’ll see how harsh Europe is.” (…)
The country needs €4 billion to €5 billion to tide it over until June, by which time it hopes to negotiate a broader deal with creditors, Mr. Stathakis said, adding that he believes “logic will prevail.” (…)
Those pressures are being felt across Greece’s economy. Its banks lost €8 billion to €10 billion in deposits in January alone, government officials say. The banking system’s woes were exacerbated by the ECB’s decision earlier in the week to no longer accept Greek government bonds as collateral from banks seeking funds.
Greek lenders will instead have to rely on emergency central-bank funding, which is more expensive and requires renewal every couple of weeks. (…)
In private, German officials say there may be some leeway in extending the repayment schedule for Greece’s debt to the eurozone’s bailout funds and individual member states, but Berlin is less willing to lower the interest payments due on this debt.
Yet nothing short of a substantial reduction in those interest payments would give Greece’s government the fiscal flexibility it needs to meet its promises to end austerity.
On another crucial issue, supervision, Berlin appears ready to accept some changes. Greece’s bailout is overseen by the European Commission, the European Central Bank and the International Monetary Fund—the so-called troika. (…)
China’s Exports in Surprise Drop China’s exports posted a surprising drop in January, providing more evidence that factories in the world’s second-largest economy are still struggling.
Exports fell 3.3% in January from a year earlier, data from the General Administration of Customs showed Sunday. This was a sharp deterioration from December’s 9.7% rise and short of a 4% increase expected by economists polled by The Wall Street Journal. (…)
In January, exports to Southeast Asia and the U.S. were stronger, while shipments to the European Union, Japan and Hong Kong, a key trans-shipment market, were all weaker in dollar terms.
Export growth from China to the U.S. dropped to 4.8% in January on year from 9.9% in December, according to data from Bank of America Merrill Lynch. That compares to a contraction of 4.6% to Europe last month and growth of 4.9% in December. And while exports from Taiwan to the U.S. rose 8.1% on year in January, that follows a 14.6% rise a month earlier.
In a statement accompanying the trade data, China’s customs authorities said that a survey showed weaker confidence among exporters for the fourth consecutive month. (…)
Meanwhile, imports in January slumped 19.9% from a year earlier, worsening from the 2.4% fall in December and falling far short of expectations of only a 3.3% decrease. (…)
EARNINGS WATCH
We now have 75% of the S&P 500 market cap results in:
Factset:
With 323 companies in the S&P 500 reporting actual results for Q4 to date, the percentage of companies reporting actual EPS above estimates (78%) is above the 5-year average, while the percentage of companies reporting actual sales above estimates (59%) is equal to the 5-year average. In aggregate, companies are surpassing earnings estimates by 4.0%.
As a result of these upside earing surprises, the blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings growth rate for Q4 2014 is now 3.0%. This growth rate is above the estimate of 1.7% at the end of the fourth quarter (December 31).
If the Energy sector is excluded, the blended earnings growth rate for the S&P 500 would jump to 6.0% from 3.0%.
As a result of upside revenue surprises, the blended revenue growth rate for Q4 2014 is 1.6%, which is above the estimate of 1.1% at the end of the fourth quarter (December 31).
If the Energy sector is excluded, the blended revenue growth rate for the S&P 500 would jump to 4.3% from 1.6%.
For Q1 2015, 52 S&P 500 companies have issued negative EPS guidance and 10 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance for Q1 2015 is 84%, which is above the 5-year average of 68%.
However, the ratio remains within the more recent 2-year range. At the same date last year, 80% of the 71 companies that had pre-announced were negative. That was 57 companies compared with 52 this year, whatever that means…
Looking at the first half of 2015, analysts are now projecting year-over-year declines in both earnings and revenues for both Q1 2015 and Q2 2015, compared to expectations for earnings and revenue growth back on December 31. Most of these downward estimate revisions have occurred in the Energy sector.
The “official” S&P rightly treats pension and OPEB (other post-employment benefits) charges as operating costs unlike some of the other aggregators.
S&P’s aggregate beat ratio is 72% with only 3 sectors above that mark and averaging an 82% beat ratio. The remaining 7 sectors have a beat ratio of 67%.
Q4’14 EPS are now expected at $27.77, up from $27.64 and $29.51 one week and two weeks before. Q1’15 EPS are estimated at $26.99, down from $27.33 one week ago while Q2’15 EPS are forecast at $29.26 ($29.53). Trailing 12-month EPS are expected to total $114.03 after Q4, dropping to $113.70 after Q1 and to $113.62 after Q2 but potentially reaching $118.87 for the whole of 2015.
Ex-Energy, Q4’14 EPS are seen up only 0.5% YoY after pension and OPEB charges (mainly taken by Telecoms subtracting $0.46 from total S&P 500 EPS). Ex-Energy and ex-Telecom, I calculate that EPS are up 8.8% YoY in Q4.
In all, there is something for every specie in Q4 earnings. Bears will feed on the fact that trailing EPS are down and will decline some more until mid-year. Bulls will salivate as ex-Energy, Q4’14 EPS are flat but really because of large pension charges taken by but a few companies. “Cleaner” EPS are up 8.8% YoY in Q4 and are forecast +7.2% in Q1’15 and +7.7% in Q2.
Experience suggests that Energy equities will move in sync with oil prices and that investors will disregard pension charges, even more so if interest rates rise (see on this Pension Funding Levels Plunge as Interest Rates Fall).
We should thus attempt to “normalize” S&P 500 EPS in order to better evaluate equity markets, a dangerous but sometimes necessary exercise. “Clean” EPS were up 10.0% YoY in Q3’14, +8.8% in Q4 and are forecast +7.5% on average during the first half of 2015. It is thus not unreasonable to normalize trailing EPS growth to, say +7% ($116.50), after Q1’15 which is only 5 weeks away.
On that basis, the S&P 500 trailing P/E is 17.6x (18.0x actual) and the Rule of 20 P/E is 19.1x (19.5 actual).
It has now been nearly 18 months that the S&P 500 Index has been exceptionally hovering narrowly between 19 and 20 on the Rule of 20 P/E, the only exception being the 18.0x briefly touched in mid-October 2014. Meanwhile, trailing EPS have grown 14% and the S&P 500 Index has appreciated 25%.
Amid the earnings confusion, investors will eventually realize that there continues to be underlying strength in U.S. earnings.
The Strong Dollar’s Squeeze on Wall Street The biggest U.S. banks are facing an unexpected challenge from the strong dollar: the need for more capital.
John Gerspach, Citigroup ’s finance chief, surprised investors on a recent conference call by disclosing that the dollar’s appreciation will mean that the bank’s required capital levels will be higher than many expected. That likely holds true for the other seven U.S. banks designated as “globally systemically important banks,” too.
(…) the risk lies in an obscure quirk in a rule proposed by the Federal Reserve in December. That rule would impose a capital surcharge on systemic banks that ranges from 1% to 5.5% of risk-weighted assets depending on each bank’s so-called systemic indicator score and its reliance on short-term funding. Those scores are based on scores for various individual indicators, calculated by dividing the amount of each bank’s holdings by the aggregate amount summed across 75 global banks.
It is this proportionality that links the surcharge to currency moves. As the dollar strengthens against other currencies, banks with lots of dollar-denominated assets and liabilities see their shares of those global pools rise. This raises their systemic indicator scores, which can push up their capital surcharge.
That is what seems to have happened to Citi. It was widely assumed that Citi’s score would put it in the category of banks that require an additional capital buffer of 3.5% of risk-weighted assets. Mr. Gerspach says the dollar’s appreciation has moved his bank into the 4% group. It is very likely that other big U.S. banks have also been pushed into higher categories.
This is bad news for investors. Nomura’s Steven Chubak estimates that moving up into the higher categories would reduce the return on equity for Citi, J.P. Morgan Chase , andBank of America by a half a percentage point and push down bank valuations by roughly 3% each.
Perhaps more important, having capital requirements subject to currency fluctuations makes it very hard to predict a bank’s ability to return capital to shareholders in the future. (…)
The only way a bank can cut its indicator score is to shrink its share of the relevant aggregate pool. But if other banks try to do the same, the aggregate itself shrinks, leaving proportions unchanged. 
(…) The German chancellor defended passionately her decision to stick to economic sanctions and eschew a military solution. She urged patience, referring to her own experience of the decades taken for the Cold War to end. She said: “I am surprised at how faint-hearted we are, and how quickly we lose courage.”
Ms Merkel spoke shortly before she was due for trilateral talks in Munich with Mr Poroshenko, and US vice-president Joe Biden, who earlier raised fears that Ms Merkel’s initiative might lead nowhere and only allow Russia to gain more ground. (…)
A growing division between the EU and US on how to deal with the Russian-backed rebels in eastern Ukraine was laid bare by Mr Biden on Friday. He poured scorn on efforts to reach out to Mr Putin, saying he had repeatedly violated all previous agreements to end the conflict.
“President Putin continues to call for new peace plans as his troops roll through the Ukrainian countryside and he absolutely ignores every agreement that his country has signed in the past and he has signed recently,” the US vice-president said in Brussels.
European diplomats and people familiar with Kremlin thinking said Mr Putin made a proposal to draw a new line of separation ceding more Ukrainian territory to the Russian-backed separatist rebels than agreed in Minsk. (…)
From Bloomberg:
“There’s been no breakthrough; Ukraine can’t meet Putin’s demands,” Joerg Forbrig, a senior program director at the German Marshall Fund in Berlin, said by phone. “Military aid for Ukraine is becoming more likely after the failure of these talks and the likelihood that the rebels will now go on the offensive.” (…)
In Washington, U.S. officials said that in addition to possible steps that have surfaced previously — more economic aid to Ukraine, non-lethal military aid and defensive weapons — there is a discussion of adding air, missile defense, ground combat and intelligence deployments in eastern Europe and possibly Scandinavia.
The officials, who spoke on the condition of anonymity to discuss deliberations inside the North Atlantic Treaty Organization, said the debate parallels the one about weapons to Ukraine: would such moves help deter Russia or prompt Putin to escalate threats and military maneuvers? (…)
The Russian Foreign Ministry warned Feb. 5 that U.S. lethal military assistance to Ukraine would do “colossal damage” to relations between Russia and the U.S.
Wal-Mart Lifts Pay as Market Gets Tighter Wal-Mart plans to boost pay for its U.S. employees to at least $10 an hour by next year, well above the minimum wage, signaling a tightening labor market and rising competition for lower-paid workers.
Revenge of the nerds?
BTW, Citigroup’s Economic Surprise Index has plunged recently (BI). 
Mr Sheets’ careful wording obscures the fact that China is now apparently intervening in the opposite direction — selling foreign exchange to buffer the renminbi against an excessive drop. (…)
Lawrence Summers
