Today: Employment surges. Factory orders collapse. Draghi faces mutiny while Eurozone sinks further. Oil prices: eco boost or not?
Hiring Grows at Best Pace Since 1999 U.S. employers ramped up hiring last month, continuing a stretch of robust payroll gains and keeping the economy on track to record its strongest year of job creation in 15 years.
Note: the headline is from the WSJ. What follows has been gleaned from many other sources.
Nonfarm employers added a seasonally adjusted 321,000 jobs in November, the most in one month since January 2012, the Labor Department said Friday. Payroll gains in October and September were revised higher as well. The unemployment rate stood at 5.8%, unchanged from October but down from 7% in November 2013.
The icing on the cake was a 44K upward revision to the prior months to reflect more complete data.
The economy added 2.65 million jobs in the first 11 months of the year, more than every full year since 1999.
The latest jobs report takes the six-month average of jobs growth — a popular measure at the US Federal Reserve — to 258,000. That is a full 100,000-a-month more than the pace in 2011 or 2012.
When we look at 2014 relative to other years of the recovery we’re seeing the strongest gains in jobs during the recovery. And not by a small margin. (PragCap)
The jobs diffusion index, which measures the breadth of growth across industry sectors, was the highest since 1997.
Friday’s survey did show that the number of full-time workers ticked down in November from October, but that survey tends to be volatile from month to month. Over the past three months, there are 866,000 more full-time workers, compared with 27,000 more part-time workers.
November’s robust job gains were led by the professional- and business-services sector, which added a seasonally adjusted 86,000 jobs including 23,000 temporary positions.
Retailers added 50,000 jobs as the holiday season ramped up. US retailers have pushed the start of the holiday season ever earlier; there was also speculation about extra seasonal hiring by delivery companies, to reflect the growth in online shopping. The health-care sector gained 29,000 positions last month. Manufacturers added 28,000 jobs and construction employment rose by 20,000. Government payrolls rose by 7,000.
This year, through November 2014, state and local employment is up 96,000.
Average hourly earnings for private-sector workers rose nine cents in November to $24.66. That was a 0.4% increase from October, double the average monthly gain in the prior 12 months. It marked a 2.1% rise from a year earlier, up a hair from the 2% annual growth of recent years. In addition, weekly earnings were boosted by a slightly longer workweek.
November saw stronger gains in traditionally high-paying fields like manufacturing and finance, on top of continued substantial growth at low-wage retailers and restaurants.
Employment hot, wages not so much
Overall, the November employment results were rock solid, putting the U.S. labour market on track for the best performance since 1999 (even if no net new jobs are created in December), something that should encourage the hawks on the FOMC to become more vocal. That said, the doves could continue to point out that despite the job gains, wages as defined by hourly earnings of non-supervisory employees, remain relatively soft, and hence risks of inflation overshooting the Fed’s target are quite low. (NBF)
Retail hiring suggests holiday shopping won’t accelerate this year
(…) According to the latest figures, this year’s Q4 retail job growth is on pace to be about the same as it was last year. October’s strong numbers were offset by a lacklustre November. For the visual learners:
Our earlier enthusiasm was probably just a reaction to noise. While October is historically the least important month for year-end shopping, there is evidence that Americans are pushing their holiday purchases earlier and earlier. In other words, hiring that would previously have occurred in November happened in October. That would explain both October’s strong growth and November’s under-performance (weakest since 2011). Also, the time between the survey for the October and September numbers was slightly longer than normal, which may have led to a slight exaggeration of the figures. (…)
U.S. Consumers’ Borrowing Slowed in October U.S. consumers racked up debt at the slowest pace in almost a year in October, a sign of cautious spending that could limit the economy’s growth in the year’s final months.
Total outstanding consumer credit, reflecting Americans’ debt outside of real-estate loans, expanded at a 4.9% seasonally adjusted annual rate to $3.279 trillion in October, the Federal Reserve said Friday. That was the smallest monthly increase since November 2013. Overall debt grew 5.7% in September.
The slower rate reflected sluggish growth in both credit-card debt and in nonrevolving credit such as auto and student loans. Revolving credit, mainly credit-card balances, grew at a 1.3% pace. That was down from September’s 1.9% growth.
Nonrevolving credit—largely reflecting borrowing for cars and education–expanded at a 6.2% pace. That was lower than the prior month’s 7.1% growth.
U.S. Hunger for Imports Offers Hope for Global Growth
(…) Imports to the U.S. advanced a seasonally adjusted 0.9% in October to $240.97 billion, the best gain in six months, the Commerce Department said Friday. Imports of capital equipment, including semiconductors and machinery, reached the highest level on record back to 1992. The gains, however, could be a drag on domestic growth because imports subtract from economic-output readings.
The strong import demand comes as businesses abroad are looking to American customers for sales. The 18-nation eurozone is registering barely positive growth this year, but imports to the U.S. from the region were up 8% in the first 10 months of the year, compared with the same period in 2013. In China, economic growth has slowed as well, but imports from there reached a record high in October. (…)
Yet, having received little attention because of the employment report:
U.S. factory orders fall for third straight month
New orders for U.S. factory goods fell for a third straight month in October, pointing to a slowdown in manufacturing activity.
The Commerce Department said on Friday new orders for manufactured goods declined 0.7 percent after a revised 0.5 percent drop in September.
And after a 10.0% collapse in August. That means orders for all manufactured goods is off 11.2% in the last 3 months, that is a 53% annualized rate! Total orders are up 1.8% YoY, a sharp slowdown from +4.0% YTD.
Economists polled by Reuters had forecast new orders received by factories would be unchanged after a previously reported 0.6 percent fall in September.
There are conflicting signals on the manufacturing sector, with the so-called hard data suggesting a cooling in activity, while sentiment surveys point to a building of momentum.
Factory orders excluding the volatile transportation category dropped 1.4 percent in October after being flat for two straight months. (…)
Orders for non-defense capital goods excluding aircraft – seen as a measure of business confidence and spending plans – fell 1.6 percent instead of the 1.3 percent decline reported last month.
May I remind you the loss of momentum apparent in Markit’s latest U.S. Manufacturing PMI report:
(…) Manufacturers mostly commented that slower new business gains, especially from export markets, had weighed on output growth at their plants.
Volumes of new work received by U.S. manufacturers continued to increase at a solid pace during November, but the latest rise was the weakest since the start of the year. Anecdotal evidence suggested a greater degree of caution among clients and weaker sales to export markets. Although only modest, the latest data indicated that new business from abroad decreased at the fastest pace since June 2013. (…)
A Evans-Pritchard: Draghi’s authority under threat as half ECB board joins mutiny
The European Central Bank is facing a full-blown leadership crisis. Mario Draghi’s authority is ebbing, with powerful implications for financial markets and the long-term fate of monetary union.
Both Die Zeit and Die Welt report that three members of the ECB’s six-strong executive board refused to sign off on Mr Draghi’s latest statement, an unprecedented mutiny in the sanctum sanctorum of the ECB’s policy making machinery.
The dissenters are reportedly Germany’s Sabine Lautenschläger, Luxembourg’s Yves Mersch, and more surprisingly France’s Benoît Cœuré, an indication that Paris is still hoping to avoid a breakdown in relations with Berlin over the management of EMU.
The reality is that a full six months after Mr Draghi first talked loosely of a €1 trillion blitz to head off deflation risks, almost nothing has actually happened. The ECB balance sheet has shrunk by over €100bn.
Talk has achieved a weaker euro but that is not monetary stimulus. It does not offset the withdrawal of $85bn of net bond purchases by the US Federal Reserve for the global economy as a whole. It is a zero-sum development.
The clash comes at a delicate moment amid Italian press reports that Mr Draghi may soon go home, drafted to take over the Italian presidency as the 89-year old Giorgio Napolitano prepares to step down. Such an outcome is unlikely. Yet there is no doubt that Mr Draghi has pressing family reasons to return to Rome, and he barely disguises his irritation with Frankfurt any longer.
This incendiary column in the ARD Tagesschau gives a flavour of what is being said in Germany. Fairly or not, Mr Draghi is accused of losing his temper, refusing to listen to objections, cutting off Bundesbank chief Jens Weidmann, and retreating to a “narrow kitchen cabinet”.
(…) the Bundesbank’s Jens Weidmann, who said this morning that monetary policy is too loose for German needs — even as the Bundesbank halves its economic growth forecast for Germany to 1pc next year, and even as the share of goods in Germany’s price basket in deflation reaches 31.2pc. Mr Weidmann says the crash in oil prices is a “mini-stimulus”, seeming to imply that it therefore reduces any need for QE.
The Germans suspect that Mr Draghi is trying to rush through sovereign QE so that there will be a lender of last resort in place for Club Med bonds next year as banks sell their holdings, following the repayment of ECB loans (LTROs).
(…) it is hard to see how a deeply-split ECB can proceed – as the Bank of Japan did most recently with a narrow 5:4 vote in favour of Abenomics II – on an issue of such huge political and legal import as full QE. (Pin-prick QE is another matter, but it would make no difference) (…)
The stakes are very high. A showdown must surely come within months, one way or another.
Meanwhile, in the real world:
EUROZONE RETAIL SALES FELL AGAIN IN NOVEMBER
Eurozone retail sales fell again in November, according to the latest PMI® data from Markit, marking the fifth straight month in which sales have decreased. That said, the rate of decline was the slowest in this sequence, reflective of downturns having eased in both France and Italy, and Germany seeing growth pick up to a solid pace.
November saw the headline Markit Eurozone Retail PMI – which tracks month-on-month changes in like-for-like retail sales – climb for the second straight month from 47.0 in October to 48.9, its highest reading since June. Year-on-year sales likewise fell at the slowest rate in five months, though the extent of the overall decrease in trade compared with November 2013 was still substantial.
German retailers recorded a rise in sales for the second consecutive month in November, and the rate of growth picked up to a solid pace that was the fastest since June. Retailers in France registered a further decrease in sales, the sixth in successive months, but the rate of contraction eased to the slowest in this sequence and was only moderate. Italy’s retailers on the other hand recorded another sharp drop in trade, albeit one that was slightly less marked than in October.
Eurozone retailers generally missed their sales targets during November, with the degree of underperformance marked and little-changed from that recorded in the previous survey period. French and Italian retailers noted particularly pronounced shortfalls in sales compared to their plans.
That means excess inventories at year-end…
On the inflation front, the GSCI made a new low this week and is down a huge -24.4% y/y. Inflation is really MIA around the world and are likely to slow significantly in Dec from China CPI to the EZ CPI and the US core PCE deflator given the plunge in commodity prices. Lower gasoline prices are likely to decline to $2.50 by Jan. (ISI)
OECD Says Eurozone Slowing Economic growth is set to slow in the eurozone, according to leading indicators released by the Organization for Economic Cooperation and Development, placing the currency area at risk of a slide back into contraction.
“In the euro area the CLI (composite leading indicator) continues to indicate a loss of growth momentum, particularly in Germany and Italy,” the OECD said. “Stable growth momentum, however, is expected for France.”
Crude Oil Prices Hit Five-Year Low
January Brent crude on London’s ICE Futures exchange was 2.2% lower at $67.60 a barrel. On the New York Mercantile Exchange, light, sweet crude futures for delivery in January were down 1.8% at $64.68 a barrel. (…)
Morgan Stanley on Monday lowered its forecasts for crude oil prices for the next five years, reiterating some concerns that the supplies are likely to keep prices down for some time.
For its base case scenario, the U.S. bank sees oil averaging $70 per barrel during 2015, down nearly 30% or $28 from its previous forecast. In a worst-case scenario, prices next year could be down 38% on average. The bank sees prices gradually recovering to an average of $100 per barrel in 2017, just $4 below where it had the price in the previous forecast.
Without intervention from the Organization of the Petroleum Exporting Countries, the global market for crude oil risks “becoming unbalanced, with peak oversupply likely in 2Q15,” said Morgan Stanley’s Adam Longson. But he doesn’t see stress levels matching those of prior oil crises. “Estimates of the oversupply are vastly overstated versus true crude balances,” said Mr. Longson. (…)
Falling Oil Prices Spur Bets on Growth Many of the world’s top policy makers are rewriting their economic forecasts for the U.S., Europe, Japan and elsewhere, betting plummeting oil prices will lead to an overall boost in the global economy.
Officials at the International Monetary Fund, U.S. Federal Reserve and European Central Bank have in recent days shrugged off concerns that the tumbling cost of crude signals a global slowdown. Instead, they project cheaper oil will be a shot in the arm for the world economy overall, especially countries with high energy tabs.
Stanley Fischer , vice chairman of the U.S. Federal Reserve, called it a “supply shock” that will help the U.S. “It’s more likely to increase GDP than reduce it,” he said.
“The effect is unambiguously positive,” European Central Bank President Mario Draghideclared after the bank’s monthly meeting last week. (…)
The IMF is raising its forecast for U.S. growth next year to 3.5% from its last estimate of 3.1%, in part because of expected lower energy costs. (…)
Trevor Houser, a partner at the Rhodium Group consultancy and a fellow at the Peterson Institute for International Economics, estimates major oil-importing countries could see their import bills cut by more than $500 billion if prices remain low for another six to eight months. That includes roughly $90 billion for the U.S. alone.
Global bank UBS AG estimates that every $10 decline in oil prices will add around 0.2 percentage point to global GDP. China, Japan, Germany, India, South Korea, Italy, France and a number of other countries spend a much higher percentage of GDP on crude purchases than the U.S. does.
Japan, which spent around 3.6% of its GDP to pay for its oil imports in June, is one of the biggest beneficiaries. The drop in oil prices cuts the country’s crude bill by nearly 1.2% of GDP.
Don’t Count on Oil Drop Greasing Global Growth
(…) Recent history even may be on the side of contrarians like Fatih Yilmaz from London-based hedge fund SLJ Macro Partners LLP. On top of that, advances in energy efficiency and interest rates already at zero are likely to weaken the potential ripple effects of the 37 percent plunge in Brent crude this year.
“It is hard to make a strong statistical statement about the impact of declining oil prices on the global gross domestic product,” said Yilmaz in a Dec. 4 report.
Between 1970 and 2000, a 20 percent decline in oil typically added 0.25 point to worldwide GDP in the subsequent 20 months, his analysis showed. Since 2000, however, that relationship has broken down with the initial impact of an oil drop on GDP actually negative. It turns positive after a year and then fades. (…)
For one thing, in the 1980s and 1990s, declining oil often led the U.S. Federal Reserve to lower interest rates. With U.S. rates already near zero, there’s no room for reductions, and it would take a lot of economic weakness to get it buying assets again, said King.
“In the absence of rate cuts, falling oil prices might unfortunately serve to increase already-widespread fears of deflation,” he said.
And now that the U.S. economy is a bigger producer thanks to the shale energy boom, lower oil may also no longer be as unambiguously good news as it once was for America.
Japan GDP Revised Down Japan’s economy shrank more than previously estimated in the third quarter, contracting 1.9% as capital spending declined and private consumption remained weak.
(…) Private consumption, the most important pillar of the economy, remains anemic, rising just 0.4% in the third quarter from the second, as consumers continue to stagger following a sales tax increase in April and a decline in the yen of more than 30% that has raised the cost of imports.
The downbeat consumer mood was most evident in weak sales of big-ticket items such as houses and automobiles. Residential investment and consumption of durable goods both fell sharply for two consecutive quarters. (…)
China Trade Data Miss Forecasts
According to the General Administration of Customs, China’s exports rose 4.7% in November from a year earlier, down from an 11.6% rise in October and below the median growth forecast of 8% from 16 economists surveyed by The Wall Street Journal.
Imports fell 6.7% from a year earlier, following a 4.6% rise in October, missing the economists’ median forecast of a 3.9% increase. (…)
Falling commodity prices, which will have weighed on the value of commodity imports, are almost certainly to blame…But the sharp fall also hints at a further cooling of domestic demand (Julian Evans-Pritchard, Capital Economics)
An Ailing Venezuela Trims Oil Diplomacy Caracas cuts back shipments of discounted crude to its partners in the Caribbean and Central America who depend heavily on the subsidies amid an economic crisis and falling energy prices.
(…) For a decade, the 13 beneficiaries of Venezuela’s largess have depended deeply on the oil to finance social spending and infrastructure, and rewarded Caracas with diplomatic support on the international stage, regional diplomats said in interviews. (…)
Several participants in the program, called Petrocaribe, are preparing for further declines, which diplomats said stand to upend spending plans and tip some economies into recession.
Countries such as Cuba, Jamaica, Haiti, Guatemala, Grenada, Dominican Republic, Honduras, Bolivia, Paraguay are impacted.
The IMF calculates that Petrocaribe countries receive about 100,000 barrels a day from Venezuela. The lender says they will on average face a 1.6% hit to economic output if Venezuela turns off the oil tap, with highly dependent countries such as Haiti facing the most difficulty. (…)
BIS sounds alarm over resurgent dollar Indebted emerging market companies vulnerable to rally
The Bank for International Settlements, known as the central bankers’ bank, warned on Sunday in its Quarterly Review that a prolonged rally in the dollar could expose financial vulnerabilities in emerging markets by damaging some companies’ creditworthiness. (…)
A stronger dollar has historically proved to be a harbinger of turmoil for the developing world, leading to crises in Latin America in the 1980s and Asia in the 1990s. Governments have as a result largely severed their currency pegs to the dollar, weaned themselves off foreign borrowing and bolstered central bank reserves.
However, companies in emerging markets have been borrowing heavily via the issuance of dollar securities in recent years, a phenomenon the BIS has been following closely.
It said emerging market borrowers had issued a total of $2.6tn of international debt securities, of which three-quarters were denominated in dollars. International banks’ cross-border loans to emerging market economies amounted to $3.1tn in mid-2014, mainly in US dollars, the BIS added.
Mr Borio said: “Should the US dollar, the dominant international currency, continue its ascent, this could expose currency and funding mismatches by raising debt burdens. The corresponding tightening of financial conditions could only worsen once interest rates in the US normalise.” (…)
The BIS noted that the sharp, intraday fall in US Treasury yields on October 15 coincided with no negative economic news other than “somewhat weaker than expected” US retail sales data.
While markets quickly adjusted to the shock, the BIS said this stabilisation was down to the actions of policy makers. “Markets did not stabilise fully by themselves,” said Mr Borio, adding that the nature of the rebound “highlighted once more the degree to which markets are relying on central banks”.
He added: “The markets’ buoyancy hinges on central banks’ every word and deed.”
SENTIMENT WATCH
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Hiring Surge Shows Strength of U.S. Expansion as Bears Turn Tail So much for secular stagnation.
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The Running of the Bears: Surge in Hiring Sways Even the Pessimists The skeptics about the U.S. economic recovery are turning optimistic.
Economists including former U.S. Treasury official Brad DeLong, Nobel Prize winner Paul Krugman and Stephen Stanley of Amherst Pierpont Securities say a hiring surge in November shows the outlook has finally improved.
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What Multiples Say About a Market Top The U.S. stock market has tripled from 2009’s lows and more than a few view it as a wee bit expensive at current levels. Bulls, of course, have argued otherwise.
(…) The last time the multiple was at or above 16.2, the S&P was around 1250. Of course, the index had another 2 years and 20% of price gains left in it before 2007′s top, so current multiples don’t mean a top might be close. FactSet notes that for three of the next four quarters, analysts are anticipating S&P 500 companies’ EPS to top what’s set to be a record of $30.09 for the recently concluded quarter.
It makes sense that in a period of record earnings, the index should be making record highs, all else being equal. But Wall Street profit forecasts up to a year out have largely proved wildly optimistic for a while now, getting ratcheted down sharply as the quarter in question nears.
Look at expectation changes through mid-2015. For this quarter, projected S&P 500 earnings growth is now seen been 3.4%, says FactSet, not the 8.3% anticipated on Sept. 30. Forecasts for the next two quarters have also pulled back sharply, dropping to 5.6% from 9.5% for the first quarter and to 6.8% from 10.4% for the second quarter. Much of those declines are also due to sharply cooled expectations for energy earnings.
Since Sept. 30, analysts have slashed their fourth-quarter profit forecasts 21% for S&P 500 energy companies, a group nearly exclusively made up of firms which play in the oil patch.
Also not to be overlooked is how the dollar’s further advance versus many other currencies will impact S&P 500 earnings near-term. Companies in the index are among those with the most international exposure, and thus at risk for earnings pressure from foreign currencies being transferable into fewer dollars.
Mamma Mia! Italian Bond Gains Push Yield Below 2% on Speculation of ECB QE Italy’s 10-year bonds rose for a fourth week, with yields dropping below 2 percent for the first time, amid speculation the European Central Bank will announce plans as soon as next month to buy sovereign debt.
Cracks in the Billion-Dollar Startup Club Two tech startups, Hortonworks and New Relic, have proposed to sell shares to the public at a 25% to 50% discount to the roughly $1 billion valuations that some venture-capital firms and big mutual funds paid earlier this year.
(…) App-analytics firm New Relic Inc. and data-crunching software company Hortonworks Inc. this week proposed to sell shares to the public at a 25% to 50% discount to the roughly $1 billion valuations that some venture-capital firms and big mutual funds paid earlier this year. (…)
There are now at least 48 private U.S. companies valued at $1 billion or more by venture-capital firms, versus 27 at the start of the year, according to Dow Jones VentureSource. That is a record number—during the height of the dot-com boom in 2000, there were 10 such companies.
Until this week, both New Relic and Hortonworks were on that list. But now those companies and their bankers need to reflect lower public-market valuations in their shares.
So far in 2014, at least 30 companies have gone public in the U.S. with lower prices than they were worth in private stock sales or option grants in the prior 90 days, according to Valuation Advisors LLC, which conducts valuations for private companies. That compares with 10 such companies last year. (…)
