US economic strength continues as yields begin to climb

Today’s daily post will feature a number of articles on topics I think should be on your radar screen, with a few thoughts from me on each article. And I want to lead with the Department of Labor’s 8:30am jobless claims release.

1 – Unemployment Insurance Weekly Claims

• “In the week ending September 15, the advance figure for seasonally adjusted initial claims was 201,000, a decrease of 3,000 from the previous week’s unrevised level of 204,000. This is the lowest level for initial claims since November 15, 1969 when it was 197,000. The 4-week moving average was 205,750, a decrease of 2,250 from the previous week’s unrevised average of 208,000. This is the lowest level for this average since December 6, 1969 when it was 204,500.”

My take: Jobless claims continue to paint a picture of an economy that will continue to do well. We are in a cyclical upturn that shows no obvious signs of slowing. The jobless claim data continues to fall, suggesting the labor market continues to tighten. And the important piece here is directionality, not absolute numbers.

2 – GDPNow: Latest forecast: 4.4 percent — September 19, 2018

• “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2018 is 4.4 percent on September 19, unchanged from September 14. After this morning’s new residential construction release from the U.S. Census Bureau, the nowcast of third-quarter real residential investment growth inched up from -0.7 percent to -0.2 percent.“The next GDPNow update is Thursday, September 27.”

My take: Given how far we are into this quarter and the 4.4% figure from the Atlanta Fed, we are now very likely to see a GDP growth number above 3% for Q3. In combination with what the jobless claims tell us about employment, this makes a rate hike in December a virtual lock after this month’s hike. The real question now is 2019. I see a potential acceleration in timetable. Let’s look at the Fed’s forward guidance when the summary of economic projections is released.

3 – DoubleLine’s Gundlach warns U.S. Treasury yields headed higher

• “The yield on the 10-year Treasury note and 30-year Treasury bond both hit four-month highs early Wednesday. The 10-year yield was currently trading around 3.08 percent and the 30-year around 3.22 percent.”Gundlach told Reuters he was still forecasting 6 percent on the 10-year yield by the next presidential election or a year after…“… My 6 percent by 2021 call is perfectly on track. No reason at all to change it. A move soon to higher yields would be signaled by the 30-year closing two days in a row over 3.25 percent.”

  Last week, Gundlach likened debt-financed U.S. budget deficits to Miracle-Gro plant food and remarked that the benefits of the ballooning deficit, stemming from tax cuts, were not permanent. On Wednesday, Gundlach said, “The deficit is insane. A truly strong economy produces a fiscal surplus.”

My take: Gundlach has never been conceptually strong on what drives government bond yields over the longer term. His comment about a fiscal surplus in a strong economy ignores the other two sectoral balances (external and private). So, you have to take that with a grain of salt.

Moreover, higher yields are a threat to this business cycle.  6% is a number that would crush a lot of marginal enterprises using cheap money to fund expansion. I don’t see it without significant inflation. And even then, we would probably hit recession before we get there. His 3.25% call for the 30-year is more interesting because we do seem to finally breaking out of a channel below 3% on the 10-year. I will have more to say about that in a post for Gold subscribers later today.

4 – Lime’s next stop in scooter global expansion: Florida and Austria

• “customers have completed 11.5 million rides on Lime e-scooter, e-bikes and pedal bikes since the company launched just more than a year ago. While the business resembles ride-hailing companies like Uber and Lyft – passengers use a smartphone app to find a vehicle nearby – the business model is more profitable, as there are no drivers to recruit or pay. However, many in the industry expect the crowded nature of the scooter business will force prices down, eating into profits. Lime has raised $467 million from investors, including a $335 million round in July that involved a deal with Uber to include Lime scooters in the Uber app.”

My take: this is related to the last story. Treasury yields set a benchmark for discount rates. So, they affect equity valuations as well as corporate bond yields. Companies like Lime and their ability to raise equity or debt capital will be negatively impacted by rising rates. A shakeout is coming to this industry, not just from competition though.

I saw a Lime bike at the far end of my neighborhood yesterday when I was out for a ride with my son. How well can Lime monetize units like that? How many rides and at what cost per ride does Lime have to achieve per unit to recoup unit acquisition costs, maintenance and overhead? I am sceptical. And I think, while lower prices may force a purge, ultimately this business model requires higher prices to work.

5 – Amazon considering opening up to 3,000 cashierless stores by 2021: Bbg

• “Amazon.com Inc is considering a plan to open as many as 3,000 new Amazon Go cashierless stores in the next few years, Bloomberg reported here on Wednesday, citing people familiar with the matter.”

My take: I was in McDonald’s for the first time in a while with my son last night. And I saw they installed in-store kiosks for customers to take their own orders. There were even cups for customers to get their own drinks (using the honor system, of course). Since drinks are a massive profit center for McDonald’s and there’s a limit to how much each customer can consume, this makes sense.

The moves by Mickey D’s and Amazon underscore the threat to lower-skilled workers. The refrain that these workers will simply upskill to better jobs is refuted by the data. Politically, this will feed populism unless we solve the problem. And for me, the problem is a dearth of jobs for lower- and middle-skilled workers at decent salaries compared to a generation ago.

6 – Volkswagen pulls out of Iran, according to U.S. official: Bloomberg

• “The Trump administration persuaded Volkswagen to comply with U.S. sanctions on Iran, Bloomberg said.”

My take: This goes to the reach of the US because of the size of the American market and the reach of the US dollar. These weapons are not going away any time soon despite European complaints about Trump’s using them unfairly.

7 – Danske Bank Says Billions May Have Been Laundered at Single Branch

• “Danske Bank said on Wednesday that its headquarters and its Estonian branch failed for years to prevent suspected money laundering involving thousands of customers. The lender said it was unable to estimate the total amount of the suspicious transactions, but its nonresident operation in the Baltic nation improbably had total flows of 200 billion euros, or $234 billion — nearly equivalent to the size of the Danish economy. The chief executive, who had previously headed the bank’s international operations, quickly said he would resign.”

My take: So, if the US can bring Volkswagen to heal, it can certainly play the same role with companies like Den Danske Bank. The fact that it hasn’t or won’t shows you that it chooses not to do so. Watch this story to see which regulators act and how. It will tell you a lot about the tolerance for white collar crime.

8 – Amazon Dominates as a Merchant and Platform. Europe Sees Reason to Worry.

• “Margrethe Vestager, the bloc’s competition commissioner, announced the start of an investigation into whether Amazon is unfairly using data collected about third-party sellers to make its own decisions about products to sell — information that would give it a potentially anticompetitive edge.”

My take: This has been a problem for a long time. The issue is whether Amazon is an indispensable marketplace that third parties feel forced to use only to find out that Amazon then competes against them using the data it gleans from their transactions on Amazon’s platform. As I’ve said many times, the EU is leading the way in regulation on US tech giants and will continue to do so. The EU’s regulatory approach here is in direct contrast with its hands off approach on money laundering.

9 – OECD Sees Trade Tensions Hindering Global Growth

• “The Paris-based research body slightly lowered its targets for global growth Thursday, saying it now expects output to rise by 3.7% in each of 2018 and 2019. In May, it had expected output to grow by 3.8% this year and 3.9% next.”

My take: Trade is consistently overblown as a growth worry. And as you can see here, the hit to growth is minuscule. Yet, the headlines make it seem like Trump’s protectionism will end in recession. The reality is that protectionist policies slow growth at the margin; they don’t crater growth. And they don’t cause recessions except as the straw that broke the camel’s back in a slowing economy.

10 – China Plans Broad Import Tax Cut as Soon as October

• “China is planning to cut the average tariff rates on imports from the majority of its trading partners as soon as next month, two people familiar with the matter said, in a move that will lower costs for consumers as a trade war with the U.S. deepens.”

My take: This is a good strategy for China to pursue. Not only does it lessen the impact on Chinese consumers, it creates a wedge between the US and its potential allies in a trade war with China. In effect, the Chinese are telling other nations that it will make trade with them easier as long as they don’t gang up on China with the US. That’s the hidden message I’m seeing here. Given China’s limited retaliation options, this is a good ploy