Archive for month: October, 2014

Tom Essaye discusses the outlook for Europe on CNBC’s Closing Bell.

http://video.cnbc.com/gallery/?video=3000317632 

Labor Market Conditions Index

• September LMCI rose 2.5 points in September.

Takeaway

There was a lot of talk about this number last week, as it is a new publicly published, comprehensive labor market index the Fed used to use internally (it’s been around since the 1970s). It’s comprised of 19 different labor market indicators (all of which are public). Basically, this is the Fed’s employment indicator “dashboard” and as such it’s something we all need to follow.

Much was made last week about the fact that the index rose just 2.5 points compared to an average of 4.9 points each month for the first 6 months of 2014. As a result this was construed as “dovish” and was partly responsible for the big sell-off we saw in the Dollar Index.

It’s odd, then, that virtually every major job indicator in September was good, yet the LMCI was “soft.” And, that likely had to do with the fact that the LMCI probably puts a lot of weight on hours worked, changes in the participation rate, or wages themselves (all of which were subdued in the jobs report Friday).

Given the release contains just the monthly change and not an absolute level, it’s hard to get too much of a gauge on how important this report really is from a Fed standpoint, and frankly I’m thinking not that important. For instance, the absolute level of this index could be at multi-year highs, and as such the incremental monthly 2.5-point disappointment really isn’t that big a deal (because the absolute level is good). Point being, a 2.5 point increase if the absolute level were at 100 (which could be a 6 year high) is a lot less disappointing than a 2.5 point gain when the absolute level is at 40 (a multi-year low). I’m guessing it’s more towards the later.

Regardless, while it was taken as “dovish” yesterday and helped the dollar to sell off and bonds to rally, I don’t think it negates the strong September jobs report and really isn’t that dovish in a fundamental sense (and definitely won’t change any Fed policy decisions).

But, it’s a new monthly number we all need to watch—so going forward we’ll be keeping an eye on it.

Last Week

The were multiple and varied important economic data points released last week, but the general takeaway is this:  While the global economic recovery is clearly losing steam, data in the U.S. consistently show the recovery is not only solid but also gaining momentum. This dichotomy between the direction of the U.S. economy and other major global economies (Japan, Europe and China) is accelerating and will continue to have implications across asset classes (and it’s the main reason the greenback continues to surge).

Looking then to the specific data from last week, focus was on last Friday’s jobs report (which was almost perfectly “Goldilocks”), but the most important numbers last week were the global September PMIs.

By now you know they were universally disappointing, led by a surprise drop in the German reading to 49.9.  The broader EMU number wasn’t much better and is teetering above 50 (50.3, to be exact), while the official government number from China also barely stayed above 50.  Even the U.S. PMI missed at 56.6, but on an absolute basis that’s still pretty strong, so it isn’t really that much of a negative.

Bottom line with the September PMIs (ex-U.S.) was that they were weak. They imply the EU economy is further decelerating and that it’s inching closer to a triple-dip recession. Meanwhile both Japan and China are seeing the rate of growth slow—raising fears of a potential “hard landing,” although that’s a bit premature.  Regardless, though, the data last week demonstrated that global growth is diminishing, and that’s a risk for global stock prices if it continues.

Staying global for a moment, the second most important thing that happened last week was the ECB meeting, which was initially taken as “disappointing” mainly because ECB President Mario Draghi didn’t further (and more forcefully) allude to “QE.”  Also, Bloomberg reported over the weekend there were three dissents to the measures announced—so while they were passed, that’s not going to help alleviate concerns the ECB isn’t truly committed to doing what’s necessary in Europe (i.e., QE).

But, to focus for a moment on what the plans they actually implemented (which is more important than the soft analysis), the ECB did include “retained” covered bonds in its “private market” QE program, which begins later this month.

This means the “private market” QE program, which is the ECB buying Asset-Backed Securities and covered bonds, is going to be bigger than initially thought.  That’s important because size matters here — the bigger the  private-market QE program, the larger the expansion of  the ECB balance sheet.  And, the larger the balance sheet expansion, the more help should be provided to the economy … and the greater the upward pressure on Europe.  So, although the reaction was one of disappointment, the news from the ECB was bullish for European stocks beyond the very near term.

Finally, turning to the jobs report, it was almost perfectly “Goldilocks.”  The headline number was a strong beat (248K) and we also encouragingly saw positive revisions to August (from 142K to 180K).  So, clearly this number reflects that the jobs market continues to improve.  But, what made the number “Goldilocks” was the fact that year-over-year wages increased only 2.0%, which implies the pop in wage inflation we saw earlier this year hasn’t stuck. As such, the jobs number won’t result in more pressure on the Fed (because the jobs gains are resulting in wage inflation).  Also, the unemployment rate fell to 5.9% but that’s because of the participation rate—not substantial job gains.

So, bottom line is the jobs number was a good report and came at the right time (we needed a reminder that the U.S. recovery is doing fine). But there is enough weakness in the details that this report (wages and the participation rate) that it’s not going to cause the Fed to become incrementally more “hawkish.”

This Week

It’s a very quiet week, economically speaking.  The most important event this week will be the minutes release from the September FOMC meeting (Wednesday).  As usual, the market is going to be looking for any clues as to just how “hawkish” the discussion about policy was at the meeting.  In particular, any sort of commentary on the anticipated pace of interest rate increases will be especially important (remember the “dot” projection for ’15, ’16 and ’17 all increased at this meeting).  So, it’ll be important for stocks that the minutes reflect a “not too hawkish” Fed.

Outside of the FOMC minutes it’s very quiet domestically, as weekly claims is the only other notable number.  Internationally, composite Chinese PMIs are the highlight (Tuesday), while we also get a Bank of England meeting Thursday (there will be no change to policy) and some sporadic second-tier international economic data.  But, nothing released this week should materially alter the economic outlook for Europe, China or Japan, even if there are positive/negative surprises.

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