Today, we got the latest jobs report from the US. And the data were mostly good, with non-farm payrolls expanding by 295,000 and the unemployment rate falling to 5.5%. The big takeaway from the jobs report was not that job growth is so good. Rather, it is that it is so good that it makes it almost impossible for the Fed not to raise rates this summer. Rate hikes could come as early as June. Some brief thoughts below
Before I go into the numbers, I want to let you know a long overdue site revamp is coming. And this is mostly because I haven’t had enough time to expend on writing content. What this will probably mean is that I am going to bring the subscription price way down to compensate for the fact that I am going to write a bit less going forward. Personally, I am excited about the changes coming to the site and hope you will be as well – especially on the new price and the new payments vendor.
Now, on to the numbers. I am not really going to break them down for you since plenty of outlets do that. Let me give you a few of the big data points and move to what these numbers will mean for the Fed, for the US dollar and for markets. Here are the data points I would stress:
- Headline numbers of 295,000 and 5.5% unemployment are really strong and make it possible we could see 5.2 to 5.3% unemployment by June when hikes are first on the table. Supposedly, the Fed considers 5.5% full employment.
- Looking at my analysis on the last few jobs reports, my commentary since December has been very bullish and supports my July contention that we are into a 250-350,000 trend now, up from the prior 200-300,000 range. The three-month average job growth is 288,000, six-month average job growth is 293,000, the best since March 2000. And we have now seen 12 months straight, with numbers over 200,000.
That’s about all I am going to say about the actual numbers. u-6 unemployment was down but some of the other elements like hourly earnings and hours worked were less impressive. And the household survey wasn’t as good since people were leaving the labor force. Overall though I think this was a good report.
What does it mean then?
First, unemployment at 5.5% and Average job gains near 300,000 for 3- and 6-month periods mean rate hikes. Now I have been saying all along that the critical months are going to be March through May because those are the months which will determine how quickly hikes will occur and how many there will be. A big drop in job growth to, say, a 3-month rolling average of 195,000 would delay hikes, yes. But I don’t care if wage growth is weak. There is no chance the Fed doesn’t hike rates in June if we have 5.2% unemployment and average monthly job growth of 300,000.
The market didn’t seem to get this until today. But even after the market moved forward its projections of hikes, it still lags the Fed’s famous dots by a considerable margin. I believe US equity markets are fully priced and that the low projected forward earnings growth and rate hikes are a bad combination given where US markets are right now. To my mind, that means moving elsewhere for incremental gains. If you look at accounting gains for US financials pulling up profit margins overall, for example, then I would say rotating into Irish or Spanish financials makes more sense at this point in both the European and US cycle. The Spanish banks are making huge accounting gains and the Irish ones are returning to profit for the first time as well. All else equal, I see Europe’s macro economy bolstering the outlook.
Jobless claims are the fly in the ointment here. The uptick in jobless claims belie the positive data on unemployment. And I look to jobless claims as more ‘real-time sensitive’. What the claims data are saying is that the downtrend in jobless claims has stopped and that initial jobless claims have bottomed. It isn’t clear they are going up appreciably yet. However, if we remain at yesterday’s 320,000 level, year-over-year average claims data will break positive for the first time since late 2009, which is a bearish macro indicator to take very seriously.
I should also point out that nowcasts for Q1 GD are pointing to annualized growth with a 1% handle, well below current estimates. Andy Lees of the Macro Strategy Partnership says that the numbers are even worse according to the Atlanta Fed’s nowcasting. They have 1.2% versus estimates for 2.7% annualized growth for Q1. The differential comes via lower consumer spending, residential investment, and business investment via the oil patch. All of this makes sense given the bad weather we had in the Northeast in Q1 and the weak retail sales numbers we have had. But cutting out Q1 2014 from the rolling 12-month GDP numbers and we are still running at 3%+ for the last 12-months, giving the Fed plenty of room to hilke.
Overall then, I think the data support rate hikes. But I also believe the Fed is reactive and that the forward looking data on both markets and the real economy are less robust. US equities are fully priced. And given this combination, I don’t see the US equities market as particularly attractive.