Payroll jobs grew by 227k, 47k more than expected. There were revisions that I’ll go back to September with which took off about 10k. The private sector added 237k jobs, 62k more than expected. The service sector contributed 192k while goods producing added 45k, 36k of which was in construction (good weather as ADP said?) and 5k was from manufacturing. In services, retail added 46k, more than the 34k in December which means seasonals had an impact as less people were hired for the holidays than seasonally adjusted for, therefore less were fired in January. The financial sector and leisure/hospitality also were the biggest additions to job growth.
The household survey had a different opinion of job growth as jobs fell by 30k which combined with a 76k person increase in the size of the labor force saw the unemployment rate rise one tenth to 4.8%. The U6 rate jumped by 2 tenths to 9.4% but the participation rate did rise by two tenths to where it was in September at 62.9%. Troubling was a 305k person drop in the number of 25-54 yr olds working, only partially offset by a 195k person rise in those 55 and older. Wage gains were disappointing, rising only .1% m/o/m and 2.5% y/o/y and weekly earnings were up also just .1% m/o/m and 1.9% y/o/y. Hours worked was unchanged at 34.4. There was a drop in those Not in Labor Force which is good to see but there was a jump in the number of people working part time because they can’t find full time work.
Bottom line, while the headline number was a great surprise, the internals were more mixed and maybe that’s why the US 10 yr yield fell in response from where it was just before the release to 2.44% but bounced later in the day and it basically unchanged now. The 2 yr note is lower. Smoothing out the figures has the 3 month private sector job gain at 193k vs the 6 month average at 180k and the 12 month at 182k. Job growth averaged 213k in 2015 and 239k in 2014k.
The January ISM services index was 56.5, .5 pt below the estimate and December was revised down by .6 pt to 56.6. This number has essentially flat lined after the post election bump. The index was 54.6 in October and 56.2 in November. The January figure also compares with the average in 2016 of 54.9 but is still below the 57.1 seen in 2015. New orders moderated by 2.1 pts to 58.6 and is now below where it was in September. Backlogs rose 2 pts to exactly 50 but fell 3 pts in December. Employment was up 2 pts to 54.7 but got as high as 56 in September. Export orders (only a few service firms report them) fell 5 pts to 48, the weakest since August. Price pressures continued upward with Prices Paid up by 2.9 pts to 59, the most since April 2014.
As seen in December, 12 of the 18 industries saw growth but 5 saw contraction vs 3 in the month before. After the initial full on optimistic jump in this figure post election, some questions are now arising over what comes next. ISM said “The non-manufacturing sector begins 2017 with a cooling-off in the rate of growth month-over-month. The sector still reflects strong growth. Respondents’ comments are mixed indicating both optimism and a degree of uncertainty in the business outlook as a result of the change in government administration.” With respect to the payroll number earlier today, it is easy to say that the headline payroll jump was in direct response to Trump optimism but if your business is highly dependent on imports, I’d find it hard to believe that you are going to aggressively add jobs until you know if we will have a border adjustment tax or not. Exporters on the other hand have much more reason to be hopeful on tax reform.
The ‘yield curve control’ game of the BoJ is getting tougher to control that yield. Overnight the 10 yr JGB yield intraday spiked to .15% (funny to say ‘spiked’ for this microscopic yield), the highest since January 28th, the day before the BoJ went to a -.10% deposit rate after they bought less JGB’s today than expected in a regularly scheduled program. The BoJ couldn’t let that happen and a few hours later announced soon after that they would buy unlimited amounts of 5-10 yr maturities at a fixed yield below where the market is trading in an unscheduled plan which then in turn brought that yield back down to .10%. Kuroda also had to defend this policy in front of Parliament today by saying they are still well below the 2% inflation target (that he never should have invented to begin with) and that “powerful easing” was still necessary.
Bottom line, there is a big problem brewing here because there is a limit to the amount of JGB’s he can keep on buying as supply of available for sale securities continues to shrink. I’ll say again, we are witnessing the last inning of global QE in its size and scope and remains a key component of my bearish case on global sovereign bonds. Central banks are finding the interest rate beach ball harder and harder to keep under water. Bond yields are higher in Europe and the US after yesterday’s bounce. For the ECB, German Finance Minister Wolfgang Schaeuble today in a speech asked the best question of the day, “How can the ECB taper without doing harm?”
We saw some more January PMI’s from overseas. The China private sector weighted manufacturing index weakened to 51 from 51.9 which was below the estimate of 51.8. It gives back the 1 pt increase in December. Caixin said “output and new orders increased at weaker rates amid a further reduction in employment…at the same time, inflationary pressures remained sharp, with both input costs and output charges increasing at rates scarcely seen throughout the past five years.” The positive within the report was companies “expressed the highest degree of optimism towards the 12 month business outlook since July 2016.”
Hong Kong’s PMI fell back below 50 at 49.9 from 50.3. With Hong Kong’s dollar peg to the US dollar and its rally vs the yuan has less mainland Chinese shopping in Hong Kong. Singapore’s PMI fell .4 pts to 51.6. Japan’s services PMI was down by .4 tp 51.9. Lastly, as India tries to crawl out from under its botched currency swap, its services PMI rose to 48.7 from 46.8.
China’s markets reopened for a day and the PBOC welcomed everyone back with a 10 bps increase in its 7, 14 and 28 day reverse repo’s. It’s the first time they’ve done this for 7 and 14 day maturities in 4 yrs. The Chinese government continues to battle the excessive credit growth on one hand and the desire for 6.5-7% growth on the other. The Shanghai comp fell .6% on the rate increase. Copper is down by 1% and industrial commodity stocks are trading lower overseas.
In Europe, their services PMI was revised to 53.7 from 53.6 and brings the manufacturing and services composite PMI to 54.4 from 54.3 in the 1st print and is unchanged from December. Markit said the eurozone, based on these figures, is growing at the quickest pace since mid 2011, equating to about 1.5% annual growth. Employment growth was a particular bright spot. Bottom line, the European economy has certainly recovered from its multi year malaise but growth is still mediocre which has more to do with their large welfare state and challenged banking system.
The UK services PMI for January fell to 54.5 from 56.2 and that was 1.3 pts below the forecast. It’s the slowest pace of gain since October but business expectations are the best since May 2016. Price pressures are near a 6 yr high and “higher costs are feeding through to increased pressure on consumer prices.” Employment grew at the slowest pace since August. The pound is back below 1.25 vs the dollar on the miss and the rising inflation that the BoE seems afraid to respond to.
Peter is the Chief Market Analyst with The Lindsey Group. He is Co-CIO at Bookmark Advisors, a member of the Advisory Services Network and a regular CNBC Contributor.