I don’t think anyone should be surprised by the Beige Book. As to what it means for the next Fed meeting, will they focus most on the employment and inflation data and check off their dual mandate box with another hike or will they actually look at all the economic data and sit on their hands, again. I’ll say for the umpteenth time, the economic data certainly doesn’t call for a rate hike but the fed funds rate should never have been this low in the 7th year of an economic expansion. Quite the Fed induced conundrum.
July saw a new record high in the amount of US job openings. They totaled 5.87mm in the month, about 240k more than expected and up from 5.64mm in June. The level of hiring’s rose to a 4 month high but are 63k below that March level when there was 200k less job openings. This again points to the supply side (or lack thereof) of the labor market remaining a drag on faster growth as the demand is there for more hiring. We know very low participation rates are reflective of this and we can all debate on why that is. Below is the chart of the participation rate of 25-54 year olds, the core age group for prime workers. For those not participating, what are these people doing every day? Collecting disability checks? Do they not have the proper skills? Do they have cash jobs? Or is it something else?
The amount of those quitting their jobs was basically flat m/o/m and the quit rate at 2.1% was unchanged but holding at the average seen year to date. The hot labor market debate, particularly within the Fed, is the question of full employment and whether we are there or note. The U3 rate at 4.9% says we are, the U6 rate at 9.7% says we are clearly not. On paper (as most economists look at things), higher pay is the main thing that will lower the latter and get many of those non participating 25-54 yr olds off their arse. If we don’t get higher compensation, then staying on the sidelines for many of the able bodied workers will be more attractive.
Non voting member John Williams is repeating his call to raise interest rates this year. He said “consumer spending is strong, the labor market is running apace, and household balance sheets are improving. All in all, I see a solid domestic economy with good momentum going forward.” In this context he said “it makes sense to get back to a pace of gradual rate increases, preferably sooner rather than later.” He believes we are at full employment and inflation currently running at 1.5-1.75% at the core is near their target. He however doesn’t want to raise to slow growth but to tame imbalances, “History teaches us that an economy that runs too hot for too long can generate imbalances, potentially leading to excessive inflation, asset market bubbles, and ultimately economic correction and recession. A gradual process of raising rates reduces the risk of such an outcome…If we wait too long to remove monetary accommodation, we hazard allowing imbalances to grow, requiring us to play catch up, and not leaving much room to maneuver.” Message to John Williams: You’re too late, the imbalances, mostly in asset in prices especially credit, have already grown to massive proportions.
Williams also argued for raising the inflation target as a tool to fight a low natural rate of interest environment (which is self inflicted). Message to John Williams: Go into a WalMart at 11:45pm when many are stocking their carts waiting for 12am to strike when pay checks enter into their savings accounts and tell them why higher inflation will be good for them.
Rate hike odds aren’t blinking especially after a 6 ½ year low seen in the ISM services index yesterday. Odds for September are at 20% vs 34% last Thursday before the payroll report. Odds for December are at 46% vs 62% last Thursday. “Your lips move but I can’t hear what you’re saying…I have become comfortably numb” to any talk of rate hikes. I’ll say this, if the Fed hikes in two weeks in the context of the economic data we’ve seen over the past few weeks and thus the short end not expecting a hike and the SPX near 2200, we’ll have some serious fireworks and not in a ‘cool’ way.
Mortgage apps were up a touch w/o/w. Purchases rose for a 2nd week off its lowest level since February by 1.2% and are up 7% y/o/y. The main of issue of persistent 5%+ home price increases continues to temper first time household demand (among other things). Refi’s were up by .7% w/o/w and still a very good 43% y/o/y.
After touching its highest level since early 2015 two weeks ago at 56.7, Bulls fell for a 2nd week in the II data. Bulls were at 52.5 vs 55.9 last week. Bears rose 2.2 pts to 22.8. They were at 20.2 two weeks ago. The bull/bear spread thus fell to 29.7 from 35.3, still very wide but the least so in about two months. While markets are just shy of record highs, they’ve essentially been chopping around for the past month which coincided with the extremity in bullish sentiment.
The yen rallied after the Sankei newspaper said there is conflict in the halls of the BoJ over what to do next. Some want to go deeper into negative interest rates, some want to buy more JGB’s and others want to do nothing. JGB’s are rallying with the 10 yr yield lower by 3 bps but that was more in response to the rally in US and European sovereign bonds after the poor ISM data. The Nikkei fell by .4% while the Topix bank index was down by 1.8%.
Chinese FX reserve stash fell to $3.185T in August from $3.2T in July. That was below the estimate of $3.19T and is the smallest slush fund in almost five years. This pile was over $4T two years ago. The yuan finished August at near the lows for the month but the PBOC is trying its hardest to make the weakness as orderly as possible.
After a weak July factory order number yesterday in Germany, the July IP figure was soft as well. Production dropped 1.5% m/o/m, well below the estimate of up .1% and the y/o/y decline was 1.2%. This was only partially offset by a three tenths upward revision to June. This response was an obvious kneejerk off the UK referendum vote so we need to keep that in mind. That said, as for August data, we saw last week that the German manufacturing PMI fell for a 2nd month to a 3 month low. Also, the August IFO was at a six month low. If only money printing was able to generate faster economic growth!!!
Also in the immediate response to the UK vote, July UK manufacturing IP fell .9% w/o/w, three times the estimate while the y/o/y increase was .8%, about half the estimate. The August PMI data did improve from the initial shock of July but the pound is down nonetheless in response. House prices in August fell for a 2nd month and Halifax who releases the data said “house price growth continued the trend of the past few months in August with a further moderation in both the annual and quarterly rates of increase. There are also signs of softening in sales activity.”
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor.