Category: Market Action

Holy smokes! Jobs, jobs, jobs!

U.S. employers added 528,000 jobs in July, the Labor Department said on Friday, an unexpectedly strong gain that shows the labor market is withstanding the economic impact of higher interest rates, at least so far.

The impressive performance — which brings total employment back to its level of February 2020, just before the pandemic lockdowns — provides new evidence that the United States has not entered a recession.
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The unemployment rate was 3.5 percent, down from 3.6 percent in June, matching its 50-year low on the eve of the pandemic.
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Wage growth climbed more quickly than economists had expected in July, concerning news for the Federal Reserve at a time when officials are watching for signs of a sustained moderation in pay gains that could help to pave the way to lower inflation.

Average hourly earnings climbed by 5.2 percent in the year through July, more than the 4.9 percent forecast in a Bloomberg survey of economists, and its growth was revised higher in June. Pay gains are still moderating slightly compared to very high readings earlier this year — they were up by 5.6 percent in March compared to a year earlier — but the pace of increase remains unusually rapid.

Meanwhile, in the frozen North:

Canadian employment fell for a second consecutive month in July, but the unemployment rate held steady at a historic low, a sign that labour market conditions remain tight.

Employers shed 31,000 positions last month, following a decline of 43,000 in June, Statistics Canada said in a report on Friday. Financial analysts on Bay Street were expecting a stronger return of 15,000 jobs added. Despite the decline, the unemployment rate remained at 4.9 per cent – the lowest in nearly five decades of comparable data – as fewer people sought work.
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Friday’s report showed job losses that were highly concentrated. The number of public-sector employees fell by 51,000. Ontario shed about 27,000 workers. And the losses were entirely in service industries, such as wholesale and retail trade, health care and education.
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Employers were recruiting for about one million positions in May, near all-time highs, according to the most recent Statscan figures. More recently, the volume of job listings on Indeed has faded, though is still substantially higher than before COVID-19.

The New York Fed released its Weekly Economic Index today, estimating annual Real GDP growth as of June 30, 2022, bumping along at +1.62%, but still positive!

Here are some cheerful words from the Bank of England:

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 3 August 2022, the MPC voted by a majority of 8-1 to increase Bank Rate by 0.5 percentage points, to 1.75%. One member preferred to increase Bank Rate by 0.25 percentage points, to 1.5%.

Inflationary pressures in the United Kingdom and the rest of Europe have intensified significantly since the May Monetary Policy Report and the MPC’s previous meeting. That largely reflects a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs. As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase UK CPI inflation in the near term. CPI inflation is expected to rise more than forecast in the May Report, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead.

GDP growth in the United Kingdom is slowing. The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe. The United Kingdom is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.

Domestic inflationary pressures are projected to remain strong over the first half of the forecast period. Firms generally report that they expect to increase their selling prices markedly, reflecting the sharp rises in their costs. The labour market has remained tight, with the unemployment rate at 3.8% in the three months to May and vacancies at historically high levels. As a result, and consistent with the latest Agents’ survey, underlying nominal wage growth is expected to be higher than in the May Report over the first half of the forecast period.

TXPR closed at 617.59, up 1.01% on the day. Volume today was 1.28-million, about the median of the past 21 trading days.

CPD closed at 12.26, up 0.74% on the day. Volume was 51,390, near the median of the past 21 trading days.

ZPR closed at 10.25, up 0.79% on the day. Volume of 191,830 was above the median of the past 21 trading days.

Five-year Canada yields were up significantly to 2.83% today.

PerpetualDiscounts now yield 6.10%, equivalent to 7.93% interest at the standard equivalency factor of 1.3x. Long corporates continue to yield 4.84%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 310bp from the 320bp reported July 27.

Excitement in the bond market today, which I have seen attributed to San Francisco Fed President Mary Daly’s remarks:

The Federal Reserve’s work of bringing down inflation is “nowhere near” almost done, San Francisco Fed President Mary Daly said on Tuesday, adding U.S. central bank officials are “still resolute and completely united” in the task of achieving price stability.

Daly, in an interview streamed on LinkedIn and hosted by a CNBC anchor, said, “We have made a good start, and I feel really pleased with where we’ve gotten to by this point,” but she cautioned there is still “a long way to go” to lower inflation from four-decade highs.

These remarks, in turn, have been attributed to correcting an earlier misinterpretation:

Look at this one-week range for the yield on 2-year US government bonds.

These are substantial moves for a short-dated maturity and caused primarily by Fed Chair Powell’s unscripted “neutral” remark and then the walk-back by other Fed officials.

No wonder people chuckled when told the Fed doesn’t wish to amplify volatility in markets.

And the confusion arose because:

One of Federal Reserve Chair Jerome Powell’s unscripted remarks at his press conference on Wednesday — that interest rates have reached a “neutral level” after the just-announced 75-basis-point interest-rate increase — is sure to prompt much discussion among economists in the weeks and months ahead. Judging from how markets reacted the minute he made this remark, it is clear what conclusions the vast majority of investors want these economists to reach.
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In today’s world, this is translated by markets into the view that the Fed now believes that it has already done the bulk of what is needed to tighten monetary policy to deal with what Powell himself described as inflation that remains “much too high” and is inflicting “considerable hardship” on Americans.

TXPR closed at 611.97, up 1.75% on the day. Volume today was 1.40-million, well above the median of the past 21 trading days. The last two days, while gratifying, were not enough to put the month in the black – TXPR was 616.25 on June 30.

CPD closed at 12.10, up 0.83% on the day. Volume was 74,630, above the median of the past 21 trading days.

ZPR closed at 10.13, up 1.40% on the day. Volume of 227,560 was well above the median of the past 21 trading days.

Five-year Canada yields were unchanged at 2.64% today.

TXPR closed at 601.46, up 1.02% on the day. Volume today was 1.49-million, well above the median of the past 21 trading days.

CPD closed at 12.00, up 1.61% on the day. Volume was 42,290, well below the median of the past 21 trading days.

ZPR closed at 9.99, up 0.91% on the day. Volume of 103,910 was below the median of the past 21 trading days.

Five-year Canada yields were down sharply to 2.64% today. I find this all very peculiar. It seems that the market has decided that since the central banks have huffed and puffed, inflation has been blown down and we can start worrying about new things. Well, it may be true, but I’m not as sanguine as all that – they haven’t even finished hiking their policy rates yet! Another factor, I think, is that fourteen years of financial repression has convinced many players that sub-1% interest rates are completely normal. This is another thing I have difficulty swallowing. We’ll see!

US GDP was down a bit:

A key measure of economic output fell for the second straight quarter, raising fears that the United States could be entering a recession — or perhaps that one had begun.

Gross domestic product, adjusted for inflation, fell 0.2 percent in the second quarter, the equivalent of an 0.9 percent annual rate of decline, the Commerce Department said Thursday.

The 0.2 percent decline followed a contraction of 0.4 percent in the first three months of the year — meaning that by one common but unofficial definition, the U.S. economy has entered a recession a mere two years after it emerged from the last one.

Most economists still don’t think the economy meets the formal definition of a recession, which is based on a broader set of indicators including measures of income, spending and employment. The G.D.P. data itself will also be revised several times in the months ahead.

There were no big surprises in the FOMC announcement of a 75bp policy hike:

Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.

The NYT commented:

Mr. Powell’s comments were precisely what stock investors wanted to hear.
Investors have worried about the Fed tipping the American economy into recession, so Wall Street on Wednesday honed in on signals that the Fed could slow its pace of interest rate increases in the future and that Mr. Powell is aware of early signs of a slowdown in the economy.

The S&P 500 stock index ended the day up 2.6 percent, and the Nasdaq Composite posted its best day since April 2020. Markets can quickly change their tune, though, especially with new data on growth coming out Thursday. The last two times the Fed raised rates, the S&P 500 rallied on the day of the announcement but fell sharply the day after.

And there is good news from US politicians, at last. I’ve been hoping for this for years:

Dozens of former Republican and Democratic officials will announce on Wednesday a new national political third party to appeal to millions of voters they say are dismayed with what they see as America’s dysfunctional two-party system.

The new party, called Forward, will initially be co-chaired by former Democratic presidential candidate Andrew Yang and Christine Todd Whitman, the former Republican governor of New Jersey. They hope the party will become a viable alternative to the Republican and Democratic parties that dominate U.S. politics, founding members told Reuters.

Party leaders will hold a series of events in two dozen cities this autumn to roll out its platform and attract support. They will host an official launch in Houston on Sept. 24 and the party’s first national convention in a major U.S. city next summer.

Whether or not it gains any traction is another matter, of course, what with Americans so fond of hating each other. But we can hope!

PerpetualDiscounts now yield 6.19%, equivalent to 8.05% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.84%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has skyrocketted to 320bp from the 265bp reported July 20.

US PMI contracted:

The S&P Global flash composite purchasing managers output index slid 4.8 points to 47.5, the weakest reading since May 2020, the group reported Friday. Outside of the early months of the pandemic, the July figure is the weakest in data back to 2009. Readings below 50 indicate contraction. The new orders gauge expanded modestly after contracting the previous month.
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Similar results were seen in Europe. The group’s index of activity in the euro area unexpectedly shrank for the first time since early 2021. Output worsened among manufacturers, while growth in the service sector came close to stalling.

The US contraction was led by a steep decline in service-sector activity. The group’s services gauge slid to 47, the lowest print since May 2020. Excluding the pandemic, the July figure was the weakest in records back to 2009. Even so, firms continued to add jobs at a solid pace.

Meantime, the group’s manufacturing index eased to a two-year low of 52.3 in July. New orders shrank for a second month and employment growth slowed. Export orders also contracted as a stronger dollar and grimmer global picture weighed on foreign demand.

Lagarde now says the ECB Terminal Rate is whatever it takes:

The European Central bank will raise its interest rates until inflation falls back to its 2% target, the ECB’s President Christine Lagarde said in an interview with Germany’s Funke Mediengruppe published on Friday.

It was Lagarde’s strongest commitment to date to fighting inflation, which hit 8.6% in the euro zone last month, despite growing fears of a recession in the bloc as a result of Russia’s invasion of Ukraine.

“We will raise interest rates for as long as it takes to bring inflation back to our target,” she told the German network of newspapers.

From yesterday’s reporting, I thought the “Terminal Rate” was an ECB forecast, but it turns out that it’s just a calculated market number: