2008 record      


New York (June 7th) - The May jobs report printed at an abysmal 75,000 new jobs. The consensus estimate had been 185,000. Revisions for March (-36,000) and April (-39,000) netted 75,000 fewer jobs.

The revisions resulted in average three months job creation of 151,000 jobs and six months average jobs creation of 175,000. That compares to 144,000 average three months and 191,000 six months new jobs for April 2019 and 199,000 and 212,000 jobs for those same periods, respectively, for May of last year. Job creation was down 72.0% from the same month last year, which had printed at 268,000. It was down 66.5% from April, which printed at a revised 224,000.

The unemployment rate was 3.6%, steady from April, but down 2/10ths of a percentage point from from May, 2018. The U-6 Unemployment, at 7.1%, down 2/10ths of a percentage point from April, and 6/10ths of a percentage point since last year. It is the lowest U-6 number since January, 2001. Nominal average weekly wages increased by 2.81%, year on year at a rate higher than inflation. Real wages increased by just 0.78%, assuming the April Trimmed Mean PCE annual inflation rate of 2.03%.

Analysis: Details and Outlook

In March, we urged investors who were in or near retirement to move toward cash. But since then, our confidence has improved in light of a number of events. While today’s jobs report was deeply disappointing, we’re not as troubled by it as we would be had we seen other data supporting additional downturns.

The Fed’s more dovish stance on interest rates, a headline 3.1% 2019Q1(revised) GDP report that still vastly exceeded expectations, and the strongest (revised) labor productivity in 2019Q1, at 3.4%, since 2014Q3 have made us more optimistic.

Nevertheless, we still have considerable concerns about the global economy and its impact on the US. These concerning data points discussed further, below (in “Other Macro Data) and include:

  • Germany’s substantial slowdown, as well as that of France and Italy;
  • China’s reducing its reserve ratio over obvious concerns about its economy and the rollover of dollar, euro, and pound denominated debt it owes American, European, and British banks;

  • Continuing yield curve inversions;

  • Some disconcerting recent data on housing starts and gas prices;

  • the length of the recovery;

  • what now appears to be a No deal Brexit;

  • Overall concerns about demographics.

All things considered, we are neutral for now, but leaning to a flashing “yellow flashing light”, depending on future data.

We still anticipate 2019Q2 to print at just 1.9% to 2.4% after what we viewed as an outlier in 2019Q1 data.

Let's look at our exclusive jobs creation by average weekly wages chart for the May jobs report.

The number of people employed in May was 156,758,000, up 113,000 from April’s 156,645,000 , but up 1,219,000 from the same period last year. Some 162,646 individuals were in the workforce, up 176,000 from the 162,470,000 who were in the workforce last month. The labor participation rate remained constant at 62.8%, unchanged from last month, and the same period last year.

The JOLTS survey for March, the latest available data, released May 7th, showed 346,000 new job openings from January. That’s 884,000 more new job openings than were created in February, when job openings had decreased by 538,000 jobs from January. But it is 594,000 more jobs than had been created in March of 2018. Nevertheless, the year-on-year increase in jobs creation has decreased significantly and consistently from the year-on-year change from the January 2019 JOLTS report, when 1.666 million new jobs had been created.

Oil Pricing and Geopolitical Concerns

Fuel prices continue below the $3 per gallon threshold, but were their highest in May since June of 2018. Gasoline prices for May are 2.25% higher than last month but 1.4% lower than last year.

Oil prices, as measured by West Texas Intermediate crude, have climbed 10.7%from last month as of April 4th, but 1.4% lower than the same day last year.

The enhanced White House sanctions on countries that still imported Iranian oil - China, Turkey, Japan, and India, among others - still remains to be seen, as the waivers officially ended just last month. There is resistance, and several of the countries with expiring waivers have asked for more time, but there seems to be compliance, provided the Trump Administration does not move too aggressively to impose sanctions on the importers.

We remain concerned of some flashpoint occuring in the region, as we have for some time, since the Joint Comprehensive Plan of Action (JCPOA) was abandoned.

Tensions escalated in May when four ships in Fujairah were attacked and damaged and Israel, the UAE and Saudi Arabia accused Iran of attacks. Iran’s Foreign Minister Mohammad Javad Zariff has denied the allegations, and accused Israel’s Mossad of a “false flag” operation as part of a conspiracy among John Bolton, Bibi Netanyahu and Muhammad bin Salman (what Zariff calls the “#B team”) to create a casus belli for war on Iran. As Iran moves further from the JCPOA and becomes further estranged from the West, it further enhances the odds Iran will abandon the USD as the currency for its oil trading, as we discussed in greater detail here.

Iran can do more damage to the USA by joining the nations which have tried to “de-dollarize” oil because it could greatly diminish the USD status as the world’s reserve currency and create economic hardship for the USA by weakening the dollar. Iran’s other threats seem less troubling. The Republic has said several times it would cease all flow of oil through the Straits of Hormuz if Iran could not sell oil because of U.S. sanctions. The regime has engaged in more missile testing, causing the U.S. to request even stronger sanctions from the UN. In February, it announced it had developed an indigenous surface-to-surface missile, Hoveyzeh. As of June 3rd, both the Kearsage ARG and the USS Abraham Lincoln (CVN 72) CSG are posted at the Straits of Hormuz. Clearly, the national command authority will continue to deter, if not intimidate, Iran’s leadership from pursuing misadventures in the straits, particularly given that the US has now completely shut down Iranian oil exports. Having both a CSG and a a ARG in the same immediate theater increases the odds that any aggressive move by Iran will result in an overwhelming reply and, possibly, war.

A Lessening of Concerns

In earlier months, we had concerns that higher rates and a stronger dollar would impinge developing nations ability to repay dollar- and euro-denominated debt they owe to American and European banks. While the Fed has signalled it will be more dovish, we note, nevertheless, that the DXY:CUR is still relatively strong compared to the last two years.

Moreover, the Central Bank of China’s attempts at easing are yet to prove they will resuscitate the country's slowing economy. And the increasing amount of loans, including to struggling small Chinese businesses, estimated up 7%, year-on-year as of March, raise the risk of higher defaults. So we continue to be concerned about foreign debt held by China as well as the strength of the overall economy. China has $750 billion in USD-denominated Offshore Corporate Dollar Bonds (or “OCDB”). Toward the end of last year, Nomura had warned to monitor the situation, and expressed concerns about the bond rollovers could be problematic, given the decline of the yuan. We have similar concerns, but mostly related to a weakening Chinese economy, exacerbated b the trade conc

With other developing economies, particularly India, where the USD:INR exchange rate had ended 2018 at 1:70, we’re seeing recovery, presumably because the Fed has pulled back. (The INR traded at its lowest point in history in October, 1:74. As of today, it was 1:69.) War tensions with Pakistan also seem to have allayed.

Other Macro Data

Note that we have substituted the Department of Transportation statistic, the Transportation Services Index, in our model because the data is produced more closely to the monthly jobs report and it has a closer correlation to GDP than the North American Transborder Freight numbers we had been using. For March, the TSI printed at 0.3, up from -0.8 in February. We continue to be heartened that people are taking home more cash from the tax cut, so that debt service will account for a lesser percentage of disposable income. Data released early last month for 2018Q4 continued to support our thesis we have expected since the tax bill passed. That will be offset, though, by higher gasoline prices to slightly weaken consumer spending.

We would like to see M-2 velocity continue the improvement it seemed to be on track to in 2018. We are disheartened that it is flat and negative so far in 2019. We note these other developments since our last jobs report:

  • The wholesale trade report for March, reported May 9th, showed sales up 3.9%, year-on-year and 0.3% month-on-month. Inventories were up 6.7% from last year and down 0.1% month-on-month.The inventory to sales ratio was 1.32%, up from the 1.29% of March of last year.

  • Building permits for April, released May 16th, up 0.6% from March but down 5.0 % from April of last year. Housing starts jumped 5.7%, month-to-month, but dropped 2.5% year-on-year.

  • The ISM Manufacturing report for May, released June 3rd, showed continuing growth at 52.1%,but at a slower rate from the 52.8% reported for April.The ISM Non-manufacturing report for May, released June 5th, printed at 56.9%, up from 55.5% in April.

  • Personal Income & Outlays For April, released May 31st, showed disposable personal income up 0.4 % in current dollars and 0.1% in chained 2012 dollars. Personal income in current dollars was up 0.5%.

  • Personal consumption expenditures (PCE) for April were up 0.3% in current dollars. In chained 2012, PCE was unchanged.

The IBD/TIPP Economic Optimism Index,released May 7th, jumped 8.1 percentage points to 58.6 (Anything above 50 indicates growth.)

Fed Normalizing

For now, we continue to be heartened by the Fed moving away from tightening rates too much, too quickly. Inflation for personal consumption expenditures, less food and energy, or "Real PCE",is at the Fed's target of 2%, it had slipped somewhat in the last couple of prior months. The April reading is quite troubling because it is nearly twice the 2% target and could deter the Fed from reversing its December, 2018, hike that we believe was erroneous.

We continue to believe that moves toward normalization should take place more slowly and only after growth had become decidedly more robust over several more quarters; at least four quarters of a consistent 3 %GDP growth. We would also like to see more stable growth in Gross Domestic Investment, aside from inventory growth, with growth in that component of GDP of at least 1% to 1.5%, excluding the aforementioned inventory. The yield curve, with which we have been gravely concerned for the last year, has now inverted. The Fed rate hikes, which have their greatest effect on short-term rates (and why we use the 3Mo/10Yr curve) in 2018 were premature and outpaced the economy's growth. We started 2018 with a spread of the 3 Month/10 year yield curve two of nearly 102 bps, just half the 200 or so bps that started 2017. As of yesterday, June 6th, the 3 Month/10 year yield curve was inverted by 21 bps.

While we agree with the Fed’s John Williams that the yield curve that “the yield curve is not a magic oracle” of predicting recession, we believe that Fed’s tightening is far more likely to cause recession than President Trump’s tariff policy. (Milton Friedman’s Nobel Prize would seem to hold with that view, as he blamed the Great Depression on Fed policy far more than the Smoot-Hawley tariffs that have become legend in conventional wisdom and four decades of propaganda promulgated in Paul Samuelson’s text in Econ 101 classes at America’s leading universities.) That said,we’re not willing to ignore the “herd instinct” of ignorant investors who buy into the grand lie that “tariffs cause (or worsen) depressions”Nevertheless, we would like to see the president engage America’s Asian and European allies to step up to join a "coalition of the willing" to challenge China's decades-old unfair trade practices and thefts of intellectual property because the one-on-one dispute could simply trigger mutual retaliation. There is more power in American dealings with Xi from a multilateral “we” than a unilateral “us”. We are simply not seeing any holistic appetite among investors for increased risk, as signaled by moving away from Treasuries and into “risk-on” assets, which would tend to drive rates higher. (Treasury yields are directly proportional to risk appetite, so the higher the rate, the more the market’s appetite for risk. As investors avoid market risk, they invest more in Treasuries, thereby lowering interest rates.) With Asia, Europe and North America all showing evidence of a slow down, we think it is vitally important for the finance ministers and central bankers of all three major economies agree a strategy to address what we foresee as a very challenging time for the global economy.

We’re circumspect about the rate of GDP growth reflected in the last three reported quarters. We think the 2018Q4 GDP of 2.6 %will likely presage continued lower growth for 2019. 2019Q1 was an outlier, skewed by a strong 1.03% increase in Net Exports, as we explained here. Our doubts will continue until we see two consecutive quarters of increases in all four categories of GDP (i.e., Personal Consumption Expenditures, Net Exports, Gross Domestic Investment, and Government Consumption Expenditures.)

Investment Summary

We expect 2019 Q2 to print at 1.9 to 2.4 percent. The narrowing yield curve, concerns about China and Europe, the increasing likelihood of a “No Deal” Brexit, the situation with Iran, and North Korea’s return to testing IRBMs, capable of hitting Japan, all give us pause. We would not be surprised if 2019 yielded growth for the full year at 2 %or less, all things being equal.We don’t think there is sufficient capital growth prospect for equities to justify equity risk given the risks of a sharper market downturn or a grey or black swan event.In equities, we’re inclined to mostly stand pat with these sectors from our 2018Q4 summary, but in less proportion, and with some changes, as follows and to include stop loss orders or hedging:

  • Outperform: Consumer discretionaries in the mid- to high-end retail sector; trucking on speculation of consolidation and acquisition; companies or REITs that own real estate in sectors identified as "opportunity zones" under the Tax Cut and Jobs Creation Act of 2017; CHF.

  • Perform: Consumer staples, energy, utilities, telecom, and materials and industrials. Lower-end consumer discretionaries, like dollar stores; the asset-light hospitality sector on speculation of stabilizing franchisee property values and room rental costs; healthcare; currencies of developing nations, such as INR; and the GBP and EUR.

  • Underperform: Financials; and technology; lower-end, low-quality QSRs (e.g., MCD, DPZ,Yum, etc.)on greater US delivery competition and a slowing economy; certain leisure and hospitality in the low and lower middle sectors

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