ADP said 216k private sector jobs were created in November, well above the estimate of 170k. This was somewhat offset however by a 28k downward revision to 119k in October so taken together we can average it out at 168k. The breakdown in November was mixed as the goods producing sector shed a net 11k jobs with manufacturing losing 10k of that. Construction added 2k. Services again drove the job gain by adding 228k with administrative/support services, health care/social assistance and leisure/hospitality making up more than half of these service jobs. Retail job gains were also good and the press release said “retailers may be accelerating seasonal hiring to secure an adequate workforce to meet holiday demand, although total expected seasonal hiring may be no higher than last year’s.”
Bottom line, smoothing out the monthly job gains puts the 3 month average at 177k vs the 6 month average of 195k, the 12 month average of 187k and vs 209k seen in 2015. Thus, the pace of job gains is moderating notwithstanding the November jump but much of that is due to the stage of the economic cycle we are in where most able bodied and willing workers are already working. Yes, there are still many sitting on the sidelines but we’ll need higher wages and less generous transfer payments in order to bring them back. This also gets to the growing inflation concerns particularly on the wage front in light of hopes for Trump economic stimulus. Will the supply of labor be able to meet the potential increase in demand?
The 10 yr yield is 2.37%, up 7 bps on the day. Combined with the jump in oil prices, inflation breakevens are up 3-4 bps.
The Chicago manufacturing index for November jumped 7 pts to 57.6, the best since January 2015 and that was 5 pts better than expected. As this index is all over the place month to month, let’s smooth it out. The 3 month average is 54.1 vs the 6 month average of 54.4 and the 12 month at 52.2. New orders were the biggest contributor to the headline gain as it rose 10.7 pts to 63.2. Backlogs got back above 50. Employment was the one fly in the ointment as it fell back below 50. Inventories grew at the quickest pace since October 2015 and is back above 50. Prices paid were down a touch.
A special question was asked of business, “how they expect business activity to fare in 2017.” The answer, “most respondents expected businesses to do somewhat better than in 2016. Most respondents expected their business to grow less than 5% next year but there were many who were more optimistic and expected growth to be above 10%. The path of interest rates and the election outcome were said to be important factors that could impact activity in the coming year.”
Bottom line, the election uncertainty is over, confidence lifted and now we get to deal with the tradeoff between a more business friendly government on one hand and a rising interest rate environment on the other.
Capturing the month of October where the average 30 yr mortgage rate was 3.72% vs 4.23% today, pending sales of existing homes rose by .1% m/o/m exactly as expected and the y/o/y gain was .2%. A decline in the South offset gains in the 3 other regions. The NAR added this interesting stat in the release that due to the tight inventory situation, “40% of sales in October sold at or above list price, an increase from 33% last October.” With respect to the November spike in rates, the NAR said “those obtaining a mortgage last month were likely the last group of buyers to lock in a rate near historically low levels…”
Looking forward, we now of course have higher funding costs which hopefully can be offset by a slowdown in the rate of home price increases. I assume we’ll see the latter but to the extent will be the question. The NAR said “low supply has kept prices elevated all year and has put pressure on the budgets of buyers. With mortgage rates expected to rise into next year and put added strain on affordability, sales expansion will be contingent on more inventory coming onto the market and continued job gains.”
Bottom line, all October housing data is old news in that we’ve entered a potentially new realm with the 50 bps rapid increase in mortgage rates.
The October PCE inflation deflator rose .2% m/o/m and 1.4% y/o/y, both one tenth less than expected but the core rate gain of .1% m/o/m and 1.7% y/o/y was in line. The headline y/o/y print is the most since October 2014 while the core rate matches the most since August 2014. A rate hike that brings the fed funds rate to .625% is still ridiculously behind the curve and this is the last inflation stat the Fed looks at before they meet in two weeks. Inflation breakevens are up 20 bps since the November FOMC meeting with the 10 yr rate currently at 1.93%, just a few bps from two year highs.
Income grew by .6% m/o/m with private sector wages/salaries in particular up by the same amount. The y/o/y gain in this important category was up by 4.5% vs 4.9% in September and 4.6% in August. Thus, around recent trends. Spending grew by .3% m/o/m which was two tenths less than expected but that was offset by a two tenths upward revision to September so we’ll call it a push. Spending on goods, both durable and nondurable, offset a decline in services spending in October. On a real basis, spending grew by just .1% after a .3% rise in September.
Nothing in this data is market moving today because its mostly in line. We can also consider it old, pre election news. We all eagerly await to see what happens now.
Here are important bullet points from the just released Beige Book from the Fed. Nothing surprising.
“Reports from the twelve Federal Reserve Districts indicate that the economy continued to expand across most regions from early October through mid-November.”
“Demand for manufactured products was mixed during the current reporting period, with the strong dollar being cited as a headwind to more robust demand in a few Districts.”
“Modest to moderate increases in capital investment are expected in several other Districts. Business service firms saw rising activity, especially for high-tech and information technology services.”
“A majority of Districts reported higher retail sales, especially for apparel and furniture.”
“New motor vehicle sales declined in most Districts, with a few Districts noting a shift in demand toward used vehicles.”
“Residential real estate activity improved across most Districts. Single-family construction starts were higher in a majority of Districts, while multifamily construction reports were mixed. Activity in nonresidential real estate expanded in many Districts.”
“Banking conditions were largely stable, with some improvement seen in loan demand.”
“A tightening in labor market conditions was reported by seven Districts, with modest employment growth on balance.” BUT, “As in the past four Beige Books, wage growth was characterized generally as modest, on balance, by district contacts.” If the former continues, the latter won’t.
“Districts noted slight upward pressure on overall prices.”