The number of job openings in December totaled 5.5mm, a bit below the expectation of 5.58mm and little changed with 5.51mm in November. These figures compare with the 2016 average of 5.6mm. The level of hirings grew by 40k but that just kept the hiring rate unchanged at 3.6%. The number of those quitting (hopefully due to getting a better job or confidence in the ability to get one soon) fell by 98k which brought the quit rate down to 2% which is back to where it was in May from 2.1% in November.
Bottom line, the level of job openings is still near historic highs but the amount has definitely flat lined over the past year (see chart). The issue for the US economy has been more so on the demand side for work as many in the important job cohort of 25-54 yr olds has mysteriously decided to do something else. The drop in the quit rate was somewhat disappointing. This all said, it can be argued that this is old news in that we have a new sheriff in town that has a different set of plans for the economy. Either way, this number is never market moving but still reflects the unusual state of the labor market at this late stage of the economic cycle.
On the heels of the Patrick Harker’s (a newly voting member on the FOMC) comments after the close yesterday that a March rate hike is on the table, the US dollar was well bid with the dollar index back above 100. Regardless of what Harker thinks we know that it really only matters what Yellen, Fischer and Dudley think (Fischer speaks on Saturday). As it’s clear that the Fed only likes to raise rates on days where there is a press conference and they are scheduled for 4 this year at the same time they want to hike 3 times, they better get moving then.
Then today, Newly voting member Neel Kashkari has bathed himself in dovish clothing in an essay posted on his Fed website titled “Why I voted to keep rates steady.” He said the current “level of accommodation seems appropriate today given where we are relative to our dual mandate.” On the economy he also said “the job market has improved substantially, and we are approaching maximum employment. But we aren’t sure if we have yet reached it. We may not have.” Ok. His caveat is based on the elevated U6 unemployment rate (it’s at 9.4%, when it was that level in 2004 the fed funds rate was at 2%). On inflation, he focuses on the core rate which at 1.7% is still below target. He acknowledges the jump in market based inflation expectations but said “I don’t think we should put too much weight on these recent market moves yet” because we don’t know what we’ll get from Trump and Congress. He also said he doesn’t see much wage pressures. Thus, he is pretty sanguine on inflation and doesn’t want to listen to the message of the markets.
He asked himself: “Is current monetary policy accommodative, neutral or tight?” He then went on to site the models on the ‘neutral rate’ in order to help him figure this out. He thinks its zero on a real basis. Thus, they are about 100-125 bps below this level. Lastly, he has drunk the Kool Aid of the institutionalized belief within the Fed of the ability of monetary policy to work. He said “Monetary policy has been at least this accommodative for several years, including the effects of the Fed’s expanded balance sheet, without triggering a rapid tightening of the labor market or a sudden increase in inflation. This suggest monetary policy has only been moderately accommodative over this period.” He therefore is drawing a direct causation between monetary policy and their modeled expected response and draws the conclusion that rates at zero for 7 years and a quintupling of the balance sheet was only ‘moderately accommodative.’ Oh my.
Lastly, he remains obsessed about “the systemic risks posted by the largest banks.” Neel, get over it, you keep fighting the last battle. Meanwhile, where inflation has really roared over the past 7 years, that being asset prices, he said “at the moment, although stock prices, housing prices and especially some commercial real estate prices appear somewhat elevated, they do not appear to pose an immediate financial stability risk.” Maybe not immediate but…
Bottom line, sorry to bore you with his comments but we have a new dove in the house.
Gold continues to trade well, the yellow metal is at a 3 month high, notwithstanding the US dollar strength. I reiterate my positive stance.
The 3 yr note auction, sensitive to expectations on Fed policy, was decent. The yield of 1.423% was a hair below the when issued. The bid to cover of 2.78 was a hair below the one year average of 2.80. The bright spot was the amount of the auction taken by direct and indirect buyers which took about 65% of the auction vs the 12 month average of 60%, thus leaving dealers with the balance.
Bottom line, the market clearly doesn’t expect a March rate hike as the 3 yr note yield today falls to the lowest level in 2 months. Rate hikes for that March meeting are at 24%, exactly back to where it was before Patrick Harker said March was a possibility last night. As I wrote earlier, Neel Kashkari has now diluted that opinion. The decent auction on the shorter end of the curve is helping to rally the longer end too with the 10 yr yield down to 2.37-.38%. The 2s/10s spread is narrower by 3 bps to 123 bps, the smallest spread in 3 weeks. What’s the message? I could state the possibilities but you likely know them.
The US trade deficit narrowed in December to $44.3b from $45.7B in November. The estimate was $45b. Exports rebounded by 2.7% m/o/m after two months of declines and was mostly driven by a 3.9% jump in the exports of goods. Service exports were up by .4% m/o/m. The absolute level is the highest since April 2015 and was helped by gains in capital goods and industrial supplies. Imports were also up by 1.5% to the most since March 2015, also driven by the imports of goods (led by auto’s).
Bottom line, this number was never market moving and even less so now because we get an advance look at the goods deficit two weeks before. We also saw trade data within the Q4 GDP figure (which will be adjusted after today) a few weeks ago that saw trade as the biggest drag on Q4 growth as it took 1.7 pts off the figure. As for the influence of the dollar, the trade weighted dollar index was flattish in December. It seems that global trade as seen in many Asian stats seems to have bottomed after a tough few years. Politics unfortunately might take over from here in driving trade flows based on what we’ve heard from our new Administration. The Ryan tax plan that DJT seems to be on board with will also dominate.
The amount of China’s FX reserves now has a 2 handle as it came in at $2.998T in January, down from $3.011T in December and slightly below the estimate of $3.004T. It was February 2011 the last time it was below $3T. The State Administration of FX blamed some of the decline on outflows related to the Lunar New Year as residents travel outside the country but there is also no question that more FX intervention in order to stabilize the yuan had an impact. Defending the size of their reserves notwithstanding the continued decline, SAFE said “No matter measured by the absolute size or by other indicators, our country’s reserves are sufficient.” They also said the $3T threshold is not relevant. We’ll see. In response to the reserve drop below $3T, both the onshore and offshore yuan are weaker vs the US dollar.
Bottom line, China is stuck between fighting outflows with restrictive capital controls while their reserves also further bleed or they back off and let the currency find its own levels, potentially much lower. Knowing how the Chinese crave order, we can assume they will continue with the former. The other main battle is of course the desire for 6.5-7% economic growth on one hand and dealing with the epic credit bubble on the other. DJ is quoting a Chinese official “who leads efforts to combat money laundering at a local bank in eastern China’s Zhejiang province.” He said during the Chinese holiday “all my relatives were asking me about was how to transfer money out to buy property overseas.” The Shanghai comp and H share index were both little changed overnight.
After the blowout German factory orders yesterday, the December industrial production missed badly. It fell 3% m/o/m vs the estimate of up .3% and fell .7% y/o/y instead of rising by 2.5%. The Economic Ministry is downplaying the number by saying it was due to timing issues and less days working because of the holidays. Considering all the other economic data from Germany of late, I’ll give them the benefit of the doubt on this but if there is any country out there that should be worried about tough trade talk out of the US, it is Germany and their export machine which makes up about 40% of their economy. The weaker euro has it now below $1.07. The DAX is bouncing by .6% on the euro fall after yesterday’s 1.2% drop in stocks. European bank stocks though are down after BNP missed numbers.
German Bundesbank President and ECB member Jens Weidmann speaks today and I look forward to see if there is any vocal pushback against the ECB in defense of German savers.
The 10 bps spread blowout between German and French 10 yr yields yesterday that took it to the highest in more than 4 yrs is narrower by 3 bps today. Italian, Spanish and Portuguese sovereign bonds are also bouncing after yesterday’s messy day lower. The other area of sovereign bond focus, Japan, is seeing little change in yields overnight. The tone has changed in global sovereign bond markets and everyone better be paying attention because the potential implications are enormous.