Initial jobless claims totaled 246k, 4k less than expected and down from 260k last week. The 4 week average though did tick up to 248k from 246k because a 237k print fell out of the calculation. Continuing claims, delayed by a week, fell by 39k after rising by 44k in the week prior. Bottom line, the song remains the same with employers holding on to their employees in a marketplace where it’s tough to find qualified employees at this late stage of the economic cycle. Also, hopes for an economic acceleration is also good reason to limit firing’s.
Productivity in Q4 grew by 1.3% annualized, a touch above the estimate of up 1%. I like to look at the y/o/y figure and it grew by 1% y/o/y which is the best since Q2 ’15 but it only brings the 2016 average to up .2% vs .9% in 2015. Unit labor costs were up by 1.9% y/o/y which brings the 2016 average to 2.6% vs 2.0% in 2015. Compensation per hour was up 2.9% y/o/y not much different than the 3% seen in Q3. Bottom line, it’s been said many times that productivity has been the missing link to faster growth and that remained the issue for 2016. Hopefully with better tax policy that will change, particularly on the investment side where full expensing in year one of capital expenditures will be part of the upcoming tax reform proposal.
Neither number is market moving today.
The dollar index earlier quietly fell to its lowest level since the Friday after the Presidential election. Whether its confusion with Trump trade policy (Bloomberg today referring to it as ‘anti globalization’) and where the Administration wants the dollar to go or nervousness on the part of our foreign friends who are repatriating money to other places (Japan said today that for the week ended January 27th, they sold foreign bonds in the biggest amount since April 2016) or the growing belief that the ECB, BOE and BOJ are nearing the end of their QE road or hearing DJT hung up the phone last night on the Australian Prime Minister because he was upset with a refugee deal by Obama. The Aussie$ in particular was at the highest level vs the US dollar since November 8th, the day of the election. Gold responded in kind and was up 1% to its highest level since November 16th. Now this can easily all reverse when we get more clarity on what US tax reform will actually pass but for now the dollar behavior is a temporary vote on what the world has seen so far post election.
One last possibility is maybe it’s just how the Fed is viewing inflation and the reality that they will continue to drag their feet in raising rates. I mean, is .625% the right rate right now? Really? In yesterday’s FOMC statement it said “Market based measures of inflation compensation remain low.” The underline is mine. Looking at the 5 yr inflation TIPS breakeven level has it at 2.05%, the highest level in 2 ½ years and up 50 bps since the day after the November FOMC meeting when they said “Market based measures of inflation compensation have moved up but remain low.” 2%+ is still considered “low” ? Then what is considered not low? See chart of 5 yr inflation breakeven.
On the issue of whether the ECB will further taper in 2017 after doing so beginning in April, December PPI in the eurozone rose .7% m/o/m and 1.6% y/o/y vs the estimate of up .5% and 1.2% respectively. To express how rapid these gains are, the November y/o/y rise was just .1% and the December gain is a 4 yr high. There is no question that energy prices are leading the way as they were up 3.9% y/o/y but ex energy PPI was still up .9% vs .4% in November, zero in October and negative prints before then. The .9% ex energy gain is the most since March 2013. There wasn’t much of a market response as the euro inflation 5 yr 5 yr swap rate is unchanged at 1.78% and European sovereign yields are a touch lower, following the long end yield drop in the US late yesterday.
The BoE left policy unchanged and this was unanimous but there are some stirrings within the committee. They said “there were limits to the degree to which above target inflation could be tolerated. For some members, the risks around the trade off embodied in the central projection meant they had moved a little closer to those limits.” The BoE seems to be putting themselves in the same sort of 1970’s central bank trap by preferring the focus on employment rather than price stability in saying “Attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth.” The BoE expects inflation to get up to 2.8% by the first half of 2018 and then settle in around 2.4% “in three years’ time.”
I don’t see how Mark Carney and the committee can have their benchmark rate at just .25% and have QE back on all with a straight face with large inflation pressures front and center. They even acknowledged, “continued moderation in pay growth and higher import prices following sterling’s depreciation are likely to mean materially weaker household real income growth over the coming years.” Their policy is off the rails and the pound is falling in response to the statement.