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Monday Blues: Fed Moves Bigly and Stocks Slump

Monday Blues: Fed Moves Bigly and Stocks Slump

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4 years ago

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Overview: The Federal Reserve and central banks in the Asia Pacific region acted forcefully, but were unable to ease the consternation of investors. The Reserve Bank of New Zealand cut key rates by 75 bp. The Bank of Japan appears to have doubled its ETF purchase target to JPY12 trillion, and the Reserve Bank of Australia is preparing for new measures that will be announced Thursday. The Fed returned to the zero-bound, resumes long-term asset purchases, and took other measures to boost funding for banks. The price of accessing the dollar-swap lines the Fed keeps with several major central banks was halved to 25 bp over overnight index swaps from 50 bp. All the action and the 9%+ rally the US before failed to stem the tide. Most Asia-Pacific bourses were down 3%-6%, and Australia bled more than 9% after losing almost 11% last week, led by energy, industrials, financials, and real estate. The Dow Jones Stoxx 600 crashed nearly 18.5% last week and is nearly 8% in late morning turnover, led by industrials, consumer discretionary, and financials. The S&P 500 is limited down in electronic trading. Benchmark yields are mixed. Australian, and especially New Zealand yields fell, though the yield on Japan's 10-year yield firmed slightly. In Europe, periphery bonds are under pressure, where the yield is up around 13 bp. France is seeing its premium rise against Germany too. The US 10-year yield is slipping below 77 bp. Last week it fell to almost 55 bp. The dollar is mixed. The dollar-bloc currencies and the Norwegian krone are lower.  The Bank of Canada and Norway's Norges Bank cut rates by 50 bp before the weekend. The yen and Swiss franc are up more than 1.75% and nearly 1%, respectively. Most emerging market currencies are lower, led by more than 2% losses in Russia, Mexico, and South Africa. Gold's early gains have dissipated and is extending last week's near-record decline. It appears poised to possibly break below $1500. May WTI is off by 6% to approach $30 again.  

Asia Pacific

The BOJ's doubling of its ETF target was the largest measure that Governor Kuroda announced, but he also indicated the purchases of corporate bonds will be increased too. A new zero-rate loan facility was also unveiled. As officials consider other steps, it should consider suspending the sales tax increase that went into effect last October. Abe had indicated at the time that only a Lehman-like event would persuade him to delay that tax increase, which had developed a political lift of its own outside of the fiscal goals.   

The Reserve Bank of New Zealand announced a dramatic 75 bp rate cut before the markets opened to bring the cash rate to 0.25%. Once the news wires indicated that an announcement was pending, the Kiwi was marked down to about $0.5945 from last week's settlement of about $0.6135. The other dollar-bloc currencies fell, but not nearly as much, and recall that the Bank of Canada surprised the market with a 50 bp cut before the weekend. The RBNZ also suspended for at least a year new capital requirements on banks, which would have tied up around NZ$47 bln. The central bank was clear that if additional monetary moves are necessary, it envisions asset purchases rather than negative rates. The government will announce new fiscal measures tomorrow. Separately, Australia, which cut rates on March 3, indicated it would make extra liquidity available in its funding markets.

Chinese data was horrific. The economic figures in February were considerably worse than expected and point to a dramatic contraction underway. Bloomberg economists estimate the economy may have contracted by 20% year-over-year in the January-February period. February industrial output fell 13.5%. Retail sales were off 20%, and fixed asset investment plunged by 24.5%. Unemployment, which was at 5.2% at the end of 2019, jumped to 6.2% in February.  

After spiking to almost JPY108.50 ahead of the weekend, the dollar slumped to JPY105.75 in early turnover today. It firmed to about JPY107.55 later in Asia before drifting lower again in Europe. Initial support is seen in the JPY104.50-JPY105.00 area. The Australian dollar is extending its slide into the sixth session today. It recorded new lows for the move, a little below $0.6100. It looks like it is trying to carve out an intra-day bottom, but at around $0.6180, it is off about 0.35% after last week's 6.5% plunge. The New Zealand dollar fell to about $0.5945 on the surprise rate cut. It recovered and is little changed in the European morning near $0.6050. The Chinese yuan was steady in narrow ranges inside last Friday's range, which was inside the previous day's range. The dollar was confined to about 80 pips on both sides of the CNY7.0 level. Lastly, the dollar traded at new four-year highs against the Korean won, after the surprise rate cut (~KRW1226).  

Europe

More of Europe imposed lockdowns, including Ireland, Spain, Austria, and Norway. Italy and France had already done so. The virus continues to ravage the Continent. Cases in Spain jumped 35% yesterday, and the number of fatalities doubled. Switzerland saw more than a 60% jump in the number of infected people. In Italy, fatalities rose by more than 25%. 

There is talk that the ECB could reactive its OMT facility (outright market transactions) to help support the peripheral bond markets, where yield spreads have widened sharply. The divergence in rates disrupts the transmission mechanism of monetary policy. Besides a stigma associated with the program, countries balk at the conditionality that is imposed, namely, austerity. However, under current conditions, the conditionality may be minor and surely not budget cuts or tax increases now. ECB President Lagarde misspoke about the diverging spreads last week. Although it was corrected and the spread between Italy and German narrowed ahead of the weekend, the market pressure remains acute as risk assets are shunned, and peripheral European bonds are seen as such.  

The ECB's asset purchases, which now are around 33 bln euros a month, are less than half of the amount being bought at the peak of the sovereign crisis and can be scaled up. The ECB has to self-imposed caps, one is the capital key, which is a function of the size of the member's economy, and the other is a 33% issuer limited. While there is some flexibility around the capital key, it 33% issuer limit, which is not pressing now for Italy, for example, can be waived in an emergency. This would seem to qualify.   

The euro has traded on both sides of its pre-weekend range (~$1.1055-$1.1220). The high was recorded in Europe, but the upside momentum stalled, and a move back toward $1.1100 in North American session is possible. Initial support may be seen near $1.1150. Sterling is struggling to sustain even modest upticks. Recall that before the weekend, it peaked around $1.26 before slumping to $1.2265. It made a low by $1.2250 in Asia before recovering to $1.2425 but is on its back foot in the European morning. A break of $1.22 would encourage a test on $1.20.  

America

The Federal Reserve went all-in before the markets opened earlier today in Asia. It slashed the fed funds rate by 100 bp to bring the target to the zero-bound (0-0.25%) and announced a new asset purchase plan ($500 bln of Treasuries and $200 bln of mortgage-back securities. It removed capital reserve requirements and, in conjunction with other central banks, reduced the cost of the currency swap lines to only 25 bp on top of OIS rather than 50 bp. The interest on reserves chopped to 10 bp, a cut of 100 bp. Banks will be allowed to borrow from the now-25 bp discount window for up to three months. Cleveland Fed's Mester cast the lone dissenting vote, preferring a 75 bp rate cut. The Fed's statement indicated rates would remain near zero until officials were convinced the economy had "weathered the storm," which some say may not be known until next winter. In any event, low for longer. 

The Fed's move preempt and replace this week's FOMC meeting. No updated forecasts (Summary of Economic Projections--"the dot plot) will be provided. Fed Chair Powell was clear that the situation is too much in flux for such forecasts, though he acknowledged that Q2 will be quite weak. The large-scale action announced three days ahead of the scheduled meeting is seen as a signal that the Fed is bracing for some exceptionally negative news and developments. While there will not be an FOMC meeting this week, Powell is expected to hold the scheduled press conference. During the Great Financial Crisis, the Fed often seemed to want to keep separate monetary policy proper from other measures. The press conference may provide a forum to announce re-opening facilities to support commercial paper and maybe asset-back securities issuance.   

The G7 will hold a video conference call today. Given steps announced by a number of countries, it begs the question of what is left to coordinate and why the plethora of measures was not announced together. We suggested three areas that do lend themselves to coordination. A bank holiday that would close the markets, a ban or limits on short-selling (which South Korea introduced for six-months) and foreign exchange intervention. None seem particularly likely. Mnuchin seemed to rule out a coordinated market shutdown, but the cost-benefits are arguable changing. The Fed announced the cut in the swap lines with other central banks (to 25 bp on top of overnight index swaps, rather than 50 bp). This could have been announced after the G7 call instead of by the Fed, which suggests the still shallowness of the cooperation. News that the US was trying to buy a German company that is working on a vaccine has further antagonized the US-Europe relationship. In an unusual step, the EU rebuked the US last week for its unilateral imposition of travel restrictions with Europe, which were not preceded by consultations or notification.  

The US dollar initially continued to pullback against the Canadian dollar after reaching almost CAD1.40 before the weekend and before the Bank of Canada's emergency 50 bp rate cut. The greenback, however, has bounced off CAD1.3735 and is back straddling CAD1.39 in the European morning. Given the drop in oil prices and the broader de-risking, a retest on the CAD1.40 area cannot be ruled out. That is more or less the story of the Mexican peso too. The US dollar pulled back after reaching a record high near MXN22.50 and found support near MXN21.37. It is recording an outside up day and is rechallenging the MXN22.50 area. It is in uncharted waters, but the next target being discussed is around MXN23.50. 





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February Employment Situation

By Paul Gomme and Peter Rupert The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000…

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2 hours ago

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March 9, 2024

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By Paul Gomme and Peter Rupert

The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.

Temporary help services employment continues a steep decline after a sharp post-pandemic rise.

Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.

The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.

The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.

Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.

As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.

Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.

The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.

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Mortgage rates fall as labor market normalizes

Jobless claims show an expanding economy. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.

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17 hours ago

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March 8, 2024

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Everyone was waiting to see if this week’s jobs report would send mortgage rates higher, which is what happened last month. Instead, the 10-year yield had a muted response after the headline number beat estimates, but we have negative job revisions from previous months. The Federal Reserve’s fear of wage growth spiraling out of control hasn’t materialized for over two years now and the unemployment rate ticked up to 3.9%. For now, we can say the labor market isn’t tight anymore, but it’s also not breaking.

The key labor data line in this expansion is the weekly jobless claims report. Jobless claims show an expanding economy that has not lost jobs yet. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.

From the Fed: In the week ended March 2, initial claims for unemployment insurance benefits were flat, at 217,000. The four-week moving average declined slightly by 750, to 212,250


Below is an explanation of how we got here with the labor market, which all started during COVID-19.

1. I wrote the COVID-19 recovery model on April 7, 2020, and retired it on Dec. 9, 2020. By that time, the upfront recovery phase was done, and I needed to model out when we would get the jobs lost back.

2. Early in the labor market recovery, when we saw weaker job reports, I doubled and tripled down on my assertion that job openings would get to 10 million in this recovery. Job openings rose as high as to 12 million and are currently over 9 million. Even with the massive miss on a job report in May 2021, I didn’t waver.

Currently, the jobs openings, quit percentage and hires data are below pre-COVID-19 levels, which means the labor market isn’t as tight as it once was, and this is why the employment cost index has been slowing data to move along the quits percentage.  

2-US_Job_Quits_Rate-1-2

3. I wrote that we should get back all the jobs lost to COVID-19 by September of 2022. At the time this would be a speedy labor market recovery, and it happened on schedule, too

Total employment data

4. This is the key one for right now: If COVID-19 hadn’t happened, we would have between 157 million and 159 million jobs today, which would have been in line with the job growth rate in February 2020. Today, we are at 157,808,000. This is important because job growth should be cooling down now. We are more in line with where the labor market should be when averaging 140K-165K monthly. So for now, the fact that we aren’t trending between 140K-165K means we still have a bit more recovery kick left before we get down to those levels. 




From BLS: Total nonfarm payroll employment rose by 275,000 in February, and the unemployment rate increased to 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in government, in food services and drinking places, in social assistance, and in transportation and warehousing.

Here are the jobs that were created and lost in the previous month:

IMG_5092

In this jobs report, the unemployment rate for education levels looks like this:

  • Less than a high school diploma: 6.1%
  • High school graduate and no college: 4.2%
  • Some college or associate degree: 3.1%
  • Bachelor’s degree or higher: 2.2%
IMG_5093_320f22

Today’s report has continued the trend of the labor data beating my expectations, only because I am looking for the jobs data to slow down to a level of 140K-165K, which hasn’t happened yet. I wouldn’t categorize the labor market as being tight anymore because of the quits ratio and the hires data in the job openings report. This also shows itself in the employment cost index as well. These are key data lines for the Fed and the reason we are going to see three rate cuts this year.

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Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Last month we though that the January…

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17 hours ago

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March 8, 2024

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Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Last month we though that the January jobs report was the "most ridiculous in recent history" but, boy, were we wrong because this morning the Biden department of goalseeked propaganda (aka BLS) published the February jobs report, and holy crap was that something else. Even Goebbels would blush. 

What happened? Let's take a closer look.

On the surface, it was (almost) another blockbuster jobs report, certainly one which nobody expected, or rather just one bank out of 76 expected. Starting at the top, the BLS reported that in February the US unexpectedly added 275K jobs, with just one research analyst (from Dai-Ichi Research) expecting a higher number.

Some context: after last month's record 4-sigma beat, today's print was "only" 3 sigma higher than estimates. Needless to say, two multiple sigma beats in a row used to only happen in the USSR... and now in the US, apparently.

Before we go any further, a quick note on what last month we said was "the most ridiculous jobs report in recent history": it appears the BLS read our comments and decided to stop beclowing itself. It did that by slashing last month's ridiculous print by over a third, and revising what was originally reported as a massive 353K beat to just 229K,  a 124K revision, which was the biggest one-month negative revision in two years!

Of course, that does not mean that this month's jobs print won't be revised lower: it will be, and not just that month but every other month until the November election because that's the only tool left in the Biden admin's box: pretend the economic and jobs are strong, then revise them sharply lower the next month, something we pointed out first last summer and which has not failed to disappoint once.

To be fair, not every aspect of the jobs report was stellar (after all, the BLS had to give it some vague credibility). Take the unemployment rate, after flatlining between 3.4% and 3.8% for two years - and thus denying expectations from Sahm's Rule that a recession may have already started - in February the unemployment rate unexpectedly jumped to 3.9%, the highest since February 2022 (with Black unemployment spiking by 0.3% to 5.6%, an indicator which the Biden admin will quickly slam as widespread economic racism or something).

And then there were average hourly earnings, which after surging 0.6% MoM in January (since revised to 0.5%) and spooking markets that wage growth is so hot, the Fed will have no choice but to delay cuts, in February the number tumbled to just 0.1%, the lowest in two years...

... for one simple reason: last month's average wage surge had nothing to do with actual wages, and everything to do with the BLS estimate of hours worked (which is the denominator in the average wage calculation) which last month tumbled to just 34.1 (we were led to believe) the lowest since the covid pandemic...

... but has since been revised higher while the February print rose even more, to 34.3, hence why the latest average wage data was once again a product not of wages going up, but of how long Americans worked in any weekly period, in this case higher from 34.1 to 34.3, an increase which has a major impact on the average calculation.

While the above data points were examples of some latent weakness in the latest report, perhaps meant to give it a sheen of veracity, it was everything else in the report that was a problem starting with the BLS's latest choice of seasonal adjustments (after last month's wholesale revision), which have gone from merely laughable to full clownshow, as the following comparison between the monthly change in BLS and ADP payrolls shows. The trend is clear: the Biden admin numbers are now clearly rising even as the impartial ADP (which directly logs employment numbers at the company level and is far more accurate), shows an accelerating slowdown.

But it's more than just the Biden admin hanging its "success" on seasonal adjustments: when one digs deeper inside the jobs report, all sorts of ugly things emerge... such as the growing unprecedented divergence between the Establishment (payrolls) survey and much more accurate Household (actual employment) survey. To wit, while in January the BLS claims 275K payrolls were added, the Household survey found that the number of actually employed workers dropped for the third straight month (and 4 in the past 5), this time by 184K (from 161.152K to 160.968K).

This means that while the Payrolls series hits new all time highs every month since December 2020 (when according to the BLS the US had its last month of payrolls losses), the level of Employment has not budged in the past year. Worse, as shown in the chart below, such a gaping divergence has opened between the two series in the past 4 years, that the number of Employed workers would need to soar by 9 million (!) to catch up to what Payrolls claims is the employment situation.

There's more: shifting from a quantitative to a qualitative assessment, reveals just how ugly the composition of "new jobs" has been. Consider this: the BLS reports that in February 2024, the US had 132.9 million full-time jobs and 27.9 million part-time jobs. Well, that's great... until you look back one year and find that in February 2023 the US had 133.2 million full-time jobs, or more than it does one year later! And yes, all the job growth since then has been in part-time jobs, which have increased by 921K since February 2023 (from 27.020 million to 27.941 million).

Here is a summary of the labor composition in the past year: all the new jobs have been part-time jobs!

But wait there's even more, because now that the primary season is over and we enter the heart of election season and political talking points will be thrown around left and right, especially in the context of the immigration crisis created intentionally by the Biden administration which is hoping to import millions of new Democratic voters (maybe the US can hold the presidential election in Honduras or Guatemala, after all it is their citizens that will be illegally casting the key votes in November), what we find is that in February, the number of native-born workers tumbled again, sliding by a massive 560K to just 129.807 million. Add to this the December data, and we get a near-record 2.4 million plunge in native-born workers in just the past 3 months (only the covid crash was worse)!

The offset? A record 1.2 million foreign-born (read immigrants, both legal and illegal but mostly illegal) workers added in February!

Said otherwise, not only has all job creation in the past 6 years has been exclusively for foreign-born workers...

Source: St Louis Fed FRED Native Born and Foreign Born

... but there has been zero job-creation for native born workers since June 2018!

This is a huge issue - especially at a time of an illegal alien flood at the southwest border...

... and is about to become a huge political scandal, because once the inevitable recession finally hits, there will be millions of furious unemployed Americans demanding a more accurate explanation for what happened - i.e., the illegal immigration floodgates that were opened by the Biden admin.

Which is also why Biden's handlers will do everything in their power to insure there is no official recession before November... and why after the election is over, all economic hell will finally break loose. Until then, however, expect the jobs numbers to get even more ridiculous.

Tyler Durden Fri, 03/08/2024 - 13:30

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