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Jobs Report Preview, June 1, 2017

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For a second-straight month, the risks to tomorrow’s jobs report are balanced. A “Too Hot” number will increase the possibility of more than three rate hikes in 2017 while a “Too Cold” number will fan worries about the pace of economic growth, and the ability of economic growth to push stocks materially higher from current levels.

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“Goldilocks” Jobs Report Preview:

“Too Hot” Scenario (Potential for More than 3 Rate Hikes in 2017)

 >250k Job Adds, < 4.6% Unemployment, > 2.9% YOY wage increase.

A number this hot will guarantee a June rate hike, but more importantly it would likely reignite the debate over whether the Fed will hike more than three times this year. Likely Market Reaction: Withheld for Sevens Report subscribers—sign up for your free two-week trial to unlock.

“Just Right” Scenario (A June Rate Hike Is Guaranteed, But the Total Number of Expected Hikes for 2017 Remains at Three)

125k–250k Job Adds, > 4.7% Unemployment Rate, 2.5%-2.8% YOY wage increase.

This is the best-case scenario for stocks, as it would imply still-stable job growth, but not materially increase the chances for more than three rate hikes in 2017. Likely Market Reaction: Withheld for Sevens Report subscribers—sign up for your free two-week trial to unlock.

“Too Cold” Scenario (A June Rate Hike Becomes in Doubt)

< 125k Job Adds.

Given the recent unimpressive economic reports, a soft jobs number could cause a decent sell-off in equities. As the Washington policy outlook continues to dim, economic data needs to do more heavy lifting to support stocks. So, given the market’s focus on future growth, the bottom line is bad economic data still isn’t good for stocks. Likely Market Reaction: Withheld for Sevens Report subscribers—sign up for your free two-week trial to unlock.

Bottom Line

This jobs report isn’t important because it will materially alter the Fed’s near term outlook (it’d take a massive miss to do take a June hike off the table). Instead, it’s important because if it prints “Too Cold” it could send bonds and bank stocks through their 2017 lows. And while I respect the fact that stocks have been able to withstand that underperformance so far in 2017, I do not think the broad market can withstand material new lows in yields and bank stocks.

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Weekly Market Cheat Sheet, May 29, 2017

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Weekly Market Cheat Sheet May 29

Last Week in Review:

Economic data continued to underwhelm last week, and while for now, the lack of strong data isn’t preventing stocks from making incremental new highs. Beyond the short term, if we are going to see a material move higher from here, economic data needs to get better, period.

The two most important reports last week were the May Flash Manufacturing PMI and the April Durable Goods report, and both underwhelmed. The May flash manufacturing PMI dropped to 52.5, the lowest reading since of 2017, while Durable Goods was, as usual, a bit of a misleading number.

The headline on Durable Goods was better than expected at -0.7% vs. (E) -1.0%. We dismiss the headline because it’s massively influenced by the timing of airplane orders. Instead, we focus on New Orders for Non-Defense Capital Goods, Ex- Aircraft. That is the purest look at business spending and investment in the Durable Goods report, and there the results were a disappointment. NDCGXA was flat vs. (E) 0.2% increase while the March data was revised lower (from 0.2% to 0.0%).

Bigger picture, these soft business spending/investment numbers raise the question as to whether all this policy uncertainty regarding corporate taxes (will rates be cut, and what changes will occur with the deductibility of interest, etc.?) is starting to restrain business investment. To be clear, there’s no data that says it is being restrained, yet. However, it is a legitimate concern the longer we go with no clarity on taxes.

The other notable report from last week was the revision of Q1 GDP, and on the whole it was positive. Headline Q1 GDP was increased to 1.2% from 0.7%, and consumer spending (PCE) rose to 0.6% vs. (E) 0.3%. To be clear, that’s still pretty anemic consumer spending… but at least the numbers got a touch better.

Finally, turning to the Fed, the market traded slightly dovish last week after the release of the May FOMC minutes. In particular, worries about whether we’re losing upward momentum on inflation, combined with similar comments from Philly Fed President Harker a week ago, resulted in a slightly dovish move in currencies and bonds. But to be clear, the expectation for a June hike remains very high, and it’ll likely take a very soft core PCE Price Index (out today), and a bad wage number in Friday’s jobs report to put that June hike in doubt.

This Week’s Preview:

With the amount of economic data coming this week, it would be a busy week even if we had five days to absorb it all. So, it will be an especially busy week given we’ve got just four trading days this week.

First, it’s jobs week, so we get the ADP Jobs Report on Thursday (a day later due to Memorial Day), Jobless Claims on Thursday, and the government jobs report on Friday. We will send our standard “Jobs Report Preview” in Thursday’s report. As has been the case for virtually all of 2017, the wage numbers are almost as important as the actual jobs number itself, as signs of further deterioration could lead to a dovish Fed while a strong number could put upward pressure on the expected number of hikes in 2017 (from three to four).

Right behind the jobs report in importance this week is the May final manufacturing PMI, out Thursday. Obviously, with the disappointing flash PMI, a slightly better number this week will help inject a bit more confidence into the state of economic momentum here in the US.

And while the US number is important, the most important manufacturing PMI this week may be China, which comes tonight. Very quietly, Chinese data has been softening, and if we get a surprisingly bad number that could send a macro shock through markets.

Turning to inflation, our focus there will be a bit more acute this week given the FOMC minutes and Harker’s comments from last week. That means that today’s Core PCE Price Index, which is contained in the Personal Income and Outlays report, will be important. If it shows evidence of moving down further from the Fed’s 2.0% yoy target, that will create a dovish response from markets and sink Treasury yields further (which will be a negative for stocks).

Bottom line, the jury is still very much “out” on the current momentum in the US economy. In an absolute sense, data remains “ok,” but we are not seeing the acceleration everyone thought we would when the reflation trade was roaring back in Dec/Jan. If data continues to underwhelm, it will become a headwind on stocks beyond the short term… and again, that’s a point that is very important not to miss. We need better data to make this rally sustainable above 2400.

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Jobs Report Preview, May 5, 2017

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For the first time in 2017, the risks to tomorrow’s jobs report are balanced, as a “Too Hot” number will increase the possibility of more than three rate hikes in 2017 while a “Too Cold” number will fan worries about the pace of economic growth, and the ability for better economic growth to push stocks materially higher.

Here’s The Sevens Report traditional “Goldilocks” breakdown:

“Too Hot” Scenario (Potential for More than Three Rate Hikes in 2017)

  • >250k Job Adds, < 4.6% Unemployment, > 2.9% YOY wage increase. A number this hot would likely reignite the debate over whether the Fed will hike more than three times this year.
  • Likely Market Reaction: Withheld for subscribers. Unlock with a free trial at 7sReport.com.

“Just Right” Scenario (A June Rate Hike Becomes More Expected, But the Total Number of Expected Hikes Stays at Three)

  • 125k–250k Job Adds, > 4.7% Unemployment Rate, 2.5%-2.8% YOY wage increase. This is the best-case scenario for stocks, as it would imply still-stable job growth, but not materially increase the chances for more than three rate hikes in 2017.
  • Likely Market Reaction: Withheld for subscribers. Unlock with a free trial at 7sReport.com.

“Too Cold” Scenario (A June Rate Hike Becomes in Doubt)

  • < 125k Job Adds. Given the recent unimpressive economic reports, a soft jobs number could cause a decent sell-off in equities. As the Washington policy outlook continues to dim, economic data needs to do more heavy lifting to support stocks. So, given the market’s focus on future growth, the bottom line is bad economic data still isn’t good for stocks.
  • Likely Market Reaction: Withheld for subscribers. Unlock with a free trial at 7sReport.com.

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Last Week and This Week in Economics, April 10, 2017

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Last Week in Economics – 4.3.17

Signs of a slight loss of economic momentum continued last week, and while on an absolute level growth remains “fine,” stocks need consistently better data to off-set lack of action in Washington, and that’s simply not happening right now. As a result, stocks are “stuck” at the current levels and downside pressures are building.

Looking at the notable data releases last week, the jobs report was the headliner and it was “Too Cold” according to our preview. March job adds were 98k vs. (E) 175k while wages grew just 0.2% vs. (E) 0.3%. But, the unemployment rate dropped to 4.5%, which tempered the negative fallout and helped stocks shrug off the soft data.

The other two important numbers from last week were mixed. March ISM Manufacturing PMI slightly beat estimates at 57.2 vs. (E) 57.1. However, it declined from the February 57.7. Additionally, new orders, the leading indicator in the report, dipped to 64.5 vs. (E) 65.1.

March Non-Manufacturing PMI missed estimates at 55.2 vs. (E) 57.0, surprisingly hitting a five-month low. New Orders also dropped to 58.9 from 61.2 and employment plunged to a seven-month low at 51.6.

Looking at these PMIs, they’re a great reflection of the current economic data/market dynamic. On an absolute level, the data is strong (remember any-thing above 50 is expansion). But, incrementally we are not seeing improvement, and as such these data points are not helping power stocks higher like they were in Jan/Feb.

Finally, the most disappointing economic data point from last week was March auto sales, which dropped to 16.6M (seasonally adjusted annual rate, or saar) vs. (E) 17.4M saar. That number weighed on stocks last Monday, as worries about the car market and industry continue to quietly grow.

Turning to the Fed, there was a hawkish surprise in the FOMC Minutes last week, as they revealed the Fed may begin to decrease its balance sheet (i.e. buy less mortgage-back securities and Treasuries) later in 2017. Markets reacted hawkishly when this news hit on Wednesday (dollar up, bond yields up, stocks down) as this was a legitimate surprise (no one expected the balance sheet to start to shrink until 2018).

This is a potentially significant event, and it’s something we’re going to be detailing more this week, as any balance sheet reduction will increase upward pressure on bond yields. As we said last week, this was the first true surprise of 2017.

This Week in Economics – 4.10.17

As is usually the case following a jobs report week, the economic calendar is pretty sparse, with the three key reports all coming Friday (which is Good Friday, and markets will be closed).

March retail sales and March CPI will be released Friday morning. Retail sales is important because it’s the first opportunity for “hard” March data to move higher and meet surging sentiment indicators. A beat by retail sales would be a positive for the market and imply actual economic activity is starting to close the gap on sentiment surveys.

CPI is important because of the reflation trade. The market is pricing in rising inflation and better growth, so this CPI number needs to be Goldilocks. It has to be strong enough to show that inflation is consistent, but at the same time it can’t surge so much that it makes the Fed hawkish (an unlikely scenario).

Bottom line, if Retail Sales and CPI can show 1) Better growth and 2) Steady but not accelerating inflation, it’ll help offset the recent mild data disappointments and be a net positive for stocks.

Jobs Report Preview, April 6, 2017

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For the second month in a row the major issue for tomorrow’s jobs report is simple: Will it cause the Fed to consider more than three rate hikes in 2017? If the answer is “yes,” then that’s a headwind on stocks. If the answer is “no,” then stocks should comfortably maintain the current 2300-2400 trading range.

So, tomorrow’s jobs report is once again potentially the most important jobs number in years, as it has the ability to fundamentally alter the market’s perception of just how “gradual” the Fed will be in hiking rates.

“Too Hot” Scenario (Potential for More than Three Rate Hikes in 2017)

  • >250k Job Adds, < 4.6% Unemployment, > 2.9% YOY wage increase. A number this hot would likely ignite the debate about whether the Fed will hike more than three times this year (or more than 75 basis points if the Fed hikes 50 in one meeting). Likely Market Reaction: Withheld for subscribers. Unlock by signing up for your free trial: 7sReport.com.

“Just Right” Scenario (A June Rate Hike Becomes More Expected, But the Total Number of Expected Hikes Stays at Three)

  • 125k–250k Job Adds, > 4.7% Unemployment Rate, 2.5%-2.8% YOY wage increase. This is the best-case scenario for stocks, as it would imply still-stable job growth, but not materially increase the chances for more than three rate hikes in 2017. Likely Market Reaction:Withheld for subscribers. Unlock by signing up for your free trial: 7sReport.com.

“Too Cold” Scenario (A June Rate Hike Becomes in Doubt)

  • < 125k Job Adds. Given the market’s sensitive reaction to the soft auto sales report earlier this week, a soft jobs number could cause a decent sell-off in equities. As the Washington policy outlook continues to dim, economic data needs to do more heavy lifting to support stocks. So, given the market’s focus on future growth, the bottom line is bad economic data still isn’t good for stocks. Likely Market Reaction:Withheld for subscribers. Unlock by signing up for your free trial: 7sReport.com.

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What to Expect in Tomorrow’s Jobs Report. March 9, 2017

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Jobs Report Preview: For notable releases like tomorrow’s jobs report, the Sevens Report offers a “Goldilocks” outlook to give a few different scenarios: too hot, too cold, and just right.

This gives our subscribers clear talking points to explain the importance of the report to clients and prospects clearly and without a lot of jargon. As always, the Sevens Report is designed to help you cut through the noise and understand what’s truly driving markets—all in seven minutes or less and in your inbox by 7am each morning. Sign up for your free 2-week trial today and see the difference this report can make for you.

Wednesday’s ADP Jobs Report clearly put upward pressure on expectations for tomorrow’s government report. And, there’s good reason for that. Over the past five months, the ADP report has been within 10k jobs of the official jobs report (the one outlier was November, when ADP was 50k over the actual jobs report). So, yesterday’s 298k jobs blowout implies a big number tomorrow.

Given that, the major issue for tomorrow’s jobs report is simple: Will it cause the Fed to consider more than three rate hikes in 2017? If the answer is “yes,” than that’s a headwind on stocks. If the answer is “no,” then it shouldn’t derail the rally.

Getting a bit more specific, the only reason the dollar is still generally stuck at resistance at 102 (and below the recent high at 103), and the 10-year yield is still below 2.60% is because the market assumes that the Fed will still only hike rates three times this year.

If that assumption gets called into doubt via a very strong jobs and wage number tomorrow, we will see the Dollar Index likely surge through 103 and the 10-year yield bust to new highs above 2.60%, and then they will begin to exert at least some headwind on stocks.

So, tomorrow’s jobs report is potentially the most important jobs number in years, as it has the ability to fundamentally alter the market’s perception of just how “gradual” the Fed will be in hiking rates.

“Too Hot” Scenario (Potential for More than Three Rate Hikes in 2017)

  • >250k Job Adds, < 4.9% Unemployment, > 2.9% YOY wage increase. A number this hot would likely ignite the debate about whether the Fed will hike more than three times this year (or more than 75 basis points if the Fed hikes 50 in one meeting). Likely Market Reaction: Restricted for subscribers: Access today by signing up for your free 2-week trial.

“Just Right” Scenario (A March Rate Hike Is A Guarantee, But Three Hikes for 2017 Remain the Expectation)

  • 125k–250k Job Adds, > 5.0% Unemployment Rate, 2.5%-2.8% YOY wage increase. This is the best-case scenario for stocks, as it would imply still-stable job growth, but not materially increase the chances for more than three rate hikes in 2017. This is the most positive outcome for stocks. Likely Market Reaction: Restricted for subscribers: Access today by signing up for your free 2-week trial.

“Too Cold” Scenario (A March Hike Becomes in Doubt)

  • < 125k Job Adds. This would be dovish, and while the fallout would be less than previous months given the market’s focus on future growth, the bottom line is bad economic data still isn’t good for stocks. Dovish isn’t bullish any-more. Likely Market Reaction: Restricted for subscribers: Access today by signing up for your free 2-week trial.

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Economics: This Week and Last Week. February 21, 2017

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An excerpt from today’s Sevens Report. Subscribe now to get the full report in your inbox before 7am each morning.

Both economic growth and inflation accelerated according to last week’s data, and while the former continues to help support stocks despite a darkening outlook from Washington, the latter also is increasing the likelihood of a more hawkish-than-expected Fed in 2017, and a resumption of the uptrend in interest rates. For now, though, the benefit of the former is outweighing the risk of the latter.

If, however, we do not see any dip in the data between now and early May, I do expect the Fed to hike rates at that May meeting, which would be a marginal hawkish surprise. To boot, if we get a strong Jobs report (out Friday, March 3), then a March rate hike two weeks later isn’t out of the question. Point being, upward pressure is building on interest rates again.

Last Week

Both economic growth and inflation accelerated according to last week’s data.

Looking at last week’s data, it was almost universally strong. Retail Sales, which was the key number last week, handily beat expectations as the headline rose 0.4% vs. (E) 0.1% while the more important “Control” retail sales (which is the best measure of discretionary consumer spending) rose 0.4% vs. (E) 0.3%. Additionally, there were positive revisions to the December data, and clearly the US consumer continues to spend (which is more directly positive for the credit card companies).

Additionally, the first look at February manufacturing data was very strong. Empire Manufacturing beat estimates, rising to 18.7 vs. (E) 7.5, a 2-1/2 year high. However, it was outdone by Philly Fed, which surged to 43.3 vs. (E) 19.3, the highest reading since 1983! Both regional manufacturing surveys are volatile, but clearly they show an uptick in activity, which everyone now expects to be reflected in the national flash PMI.

Even housing data was decent as Housing Starts beat estimates on the headline, while the more important single family starts (the better gauge of the residential real estate market) rose 1.9%. Single family permits, a leading indicator for single family starts, did dip by 2.7%, but even so the important takeaway from this data is that so far, higher interest rates don’t appear to be negatively impacting the residential housing market, and a stable housing market is a key, but underappreciated, ingredient to economic acceleration.

Finally, looking at the Fed, Yellen’s commentary was marginally hawkish, as she was upbeat on the economy, basically saying the nation had achieved full employment and was closing on 2% inflation, and reiterated that a rate hike should be considered at upcoming meetings. None of her comments were new, but the reiteration of them reminds us that the Fed is in a hiking cycle, and the risk is for more hikes… not less.

This Week

The big number this week is the February global flash manufacturing PMI, out Tuesday. With last week’s strong Empire and Philly Surveys, expectations will be pretty elevated for the flash manufacturing PMI, so there is some risk of mild disappointment. On the flip side, if this number is very strong (like Empire and Philly) you will likely see a hawkish reaction out of the markets (dollar/bond yields up) and the expectation for a rate hike before June increases. That, by itself, shouldn’t cause a pullback in stocks, but upward pressure will build on interest rates.

Outside of the flash manufacturing PMIs, the FOMC minutes from the January meeting will be released Wednesday, and investors will parse the comments for any clues as to the likelihood of a March increase. Yet given the amount of political/fiscal uncertainty, and considering the FOMC meeting was before the strong January jobs report and recent acceleration in data, I’d be surprised if the minutes are very hawkish (although given they are dated, I don’t think that not-dovish minutes reduces the chances of a May or even March hike).

Bottom line, the focus will be on the flash manufacturing PMIs, and a good number this week will be supportive for stocks.

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