ADP said 263k private sector jobs were added in March. That was well above the estimate of 185k but the offset was a 53k downward revision to February to 245k and a 12k person downward revision to January to 249k. Thus, the combined upside was 13k jobs, so close to in line with expectations for the first 3 months of the year. Small businesses led the pace of hiring and if there is a segment of the private sector that will benefit from less regulation, a hoped for overhaul of the ACA and lower taxes it is this. We saw another big gain in construction jobs as they grew by 49k after the spike of 58k in February and 49k in January, all helped by the mild winter. Manufacturing was a bright spot with a job gain of 30k. As for service providers, they created a net 181k jobs vs 145k in February and 187k in January. It has solely been manufacturing and construction that has driven the year to date job gains relative to expectations.
Bottom line, while markets are responding to the headline print, as stated the figures were about as expected when the revisions are included. That said, the pace of job growth this year has quickened to an average of 252k vs 181k last year. Construction and manufacturing has been the main driver of that with the former being boosted by weather as 156k construction jobs were added in the January thru March time frame compared with 86k in the same time period last year. The question now for manufacturing is what happens with auto sector hiring. I’ve seen stats that 4-5% of all jobs (services included) touch the auto sector in some fashion, many directly and others indirectly. Service sector hiring is no different this year than last year. For the 3 months this year they have averaged job gains of 171k vs 174k in 2016.
At the end of last summer I expressed my belief that the bond bull market was over for a variety of economic and non economic/central bank reasons after the spike in prices, plunge in yields after the UK referendum. I still believe those yields will not be seen again in our lifetime. I wish the analysis was simply looking at the growth and inflation outlook but my concern at least right now has more to do with the non economic reduction in easing from the Fed, ECB, BoJ (unspoken and subtle) and maybe the BoE this year. In the US, I believe the 10 yr yield range will remain in the 2.30-2.60% range for now until proven otherwise but don’t expect it to break below for any noticeable time. The $64k question that will build as the year progresses is what will the curve do when tapering of reinvestments actually begin. When the Fed starts buying less, they will join foreigners who are outright sellers. Will the curve flatten because growth will be threatened or will it steepen because we’re taking a big buyer out of the market? The German 10 yr yield back at .25% is ripe for shorting again with the ECB trimming its QE. Quietly, the Japanese 40 yr JGB yield closed at the highest level since February 2016 overnight at 1.088%. I keep highlighting that maturity because it’s the furthest from the yield curve control experiment that goes out 10 yrs.
See below the comments on inflation in Europe and Japan and the same can be said for the US. Yes, the influence of energy prices will start to reverse (the y/o/y change will go to zero this June) and capping the rise in the headline stats but looking at all industrial commodity prices has them still near the highest level since December 2014. The Journal of Commerce index of industrial materials is up 25% y/o/y and by June will still be up 20% y/o/y. This comes on top of services inflation that remains pretty steady.
After falling to the lowest level since November 9th at 49.5, II said Bulls rebounded by 6.3 pts to 55.8 and is right back to ebullient. It was on March 1st that it touched 63.1, a 30 yr high and that also coincided with the closing top for now in the SPX. About all of the rise in bulls came from those expecting a correction. Bears were up by .2 pts to 18.3. Bottom line, outside of AMZN, AAPL, TSLA, NFLX and FB, the rest of the market continues to churn and that churn started late February when the sentiment figures got overly bullish. Highlighting the divergences in the NASDAQ in particular, yesterday saw more 52 week lows than highs and the cumulative advance/decline line in the NASDAQ topped on February 21st.
With mortgage rates little changed w/o/w, mortgage applications to buy a home was basically flat with a .7% rise but that is still up 7.5% y/o/y as we get to the heart of the spring selling season. Refi’s on the other hand fell for a 3rd straight week and are down by 4.2% w/o/w and 33% y/o/y. Refi’s essentially sit just above the lowest level since 2000. Can there be anyone left who hasn’t refi’ed. People, if you haven’t already, wtf are you waiting for?
Ahead of the US services index today, Markit reported its March final read of its services index for the Eurozone which was 56 vs the initial print of 56.5 and the estimate of 56.5. It still though is near a 6 yr high as is the composite index which also includes manufacturing. The gains were led by Germany and France while we saw dips in Italy, Spain and Ireland. Employment was a particular bright spot at the best level in more than 9 ½ years. This is what they said about inflation: “Price pressures remained strong in March. Input cost inflation was close to February’s 69 month record, reflecting rising global commodity prices and the historically weak euro exchange rate. The pass thru of higher costs to clients, combined with improving pricing power, meant output charges rose to the greatest extent since June 2011.” Markit believes the eurozone grew by 2.4% annualized in Q1. I continue to like the euro vs the dollar and some European bourses. The euro is flat today as are most sovereign yields with a mixed performance in stocks. European banks are up almost 1% after a 3% drop over the two prior days.
In the UK, its services PMI rose almost 2 pts to 55, above the estimate of 53.4 and that’s a rebound after 2 months of declines off the 56.2 level seen in December. New orders rose but job growth slowed and we saw “average prices charged by service sector companies increased at the fastest rate for 8 ½ years in March. This was overwhelmingly linked to higher input costs during recent months. Survey respondents also noted that resilient demand had provided scope to pass on some of their increased costs to clients.” Markit estimates the UK economy grew by 1.6% in Q1 annualized and they see particular weakness on the consumer side because of falling real wages. The pound is higher on the number beat and the 10 yr gilt yield is up a hair. The UK 5 yr gilt inflation breakeven rate is higher by 2.5 bps to 3.25%, the highest since early February. Compare that for a moment to the .25% benchmark BoE rate that they think is prudent on top of max QE.
After a mixed Tankan report seen Monday and a drop in its Markit manufacturing index, the Markit services index for Japan rose to the best level since August 2015. Employment grew for a 3rd month and backlogs hit a 20 month high. With respect to prices, “the latest survey indicated that average operating costs continued to rise in March, led higher by increased prices for fuel and labor. Input prices have now been rising continuously for close to 4 ½ years, although the latest rate of inflation was a 5 month low.” Output prices for services companies though rose at the quickest pace since October 2015 while manufacturing output prices were little changed m/o/m. As mentioned above, super long term yields in Japan are at the highest level in 14 months. As for the Japanese economy overall, the missing piece to quicker growth remains the consumer and higher inflation is not going to help them. The Nikkei was higher by .3% overnight with the yen hovering around its highest level since November.