February payrolls grew by 235k, 35k more than expected with the private sector adding 227k, 8k above the forecast and there was 9k gained in the revision to the prior two months but all of that was government jobs. January private sector jobs were revised down by 16k and December was lowered by 15k. The household survey was an area of particular strength as there was a gain of 447k here which was above the increase of 340k in the labor force which led to a one tenth drop in the unemployment rate to 4.7% as expected. Fortunately there was an increase of 181k jobs for those aged 25-54 yrs old, prime working age. Also, encouragingly, the participation rate rose one tenth to 63% and up for a 3rd month to the highest level March 2016 and March 2014 before that. This coincided with a drop in the number of people Not In Labor Force by 176k to the lowest since April 2016. The U6 all in rate in turn fell two tenths to 9.2%, matching the lowest level since 2008.
Confirming what ADP said, construction added 58k jobs thanks in part to the mild winter. Manufacturing jobs grew by 28k. So, the goods producing sector had its best month of job gains since 2000. We should see an inventory build to follow. The gains on the service side of 132k actually is a decline of 35k from last month and is the 3rd smallest rise since last June. Retail was particularly weak with a jobs decline of 26k.
On the wage side, average hourly earnings grew by .2% m/o/m which was one tenth less than expected but because January was revised up by one tenth we can call it a push relative to the consensus. The y/o/y gain of 2.8% is just one tenth from matching the best level of the recovery although still remains modest. Average weekly earnings was higher by 2.5%. Hours worked stayed at 34.4 for the 3rd month.
Bottom line, for all the excitement on the headline figure, private sector job gains actually missed expectations when we include the revisions to the two prior months and maybe that’s why bond yields are little changed after the report. Smoothing this out, private sector job adds are still good averaging 199k over the past 3 months vs 189k over the past 6 and 180k over the past 12. In 2015 they averaged 213k and 239k in 2014. Q1 GDP is expected to be soft but we should see a nice rebound in Q2 as pent up demand post election in both hiring and goods manufacturing with inventories most likely to build again off a lowered state. The growing headwind will be slowing auto sales, mixed picture on housing and the rising cost of capital for those that are LIBOR based borrowers. Key to a sustainable pick in growth will be whether capital investment picks up at a quicker pace and the results of tax reform will be an important determinant of that. If the Atlanta Fed is right and Q1 GDP will only be 1.3%, the strong pace of job growth in January and February means that productivity is still poor and that has negative implications for company profit margins.
The US 10 yr yield at 2.59% is at the top end of the 4 month range. If we sneak above here we’ll be at levels last seen in September 2014.
Looking at bond action overseas, the German bund 10 yr yield is also approaching the upper end of its recent trading range with a rise of 2.5 bps to .45%. The French 10 yr yield up a hair at 1.09%. The Japanese 10 yr yield closed unchanged at .09% while the 40 yr yield was higher by 1.4 bps to 1.05% (as a reminder, this touched 7 bps back in July. Sorry to the one who bought it then).
China reigned in the shadow side of loan creation in February. Aggregate financing totaled 1.15T yuan, 300b below the forecast and the shadow side of lending actually declined as bank lending totaled 1.17T, 220b yuan above the estimate. If we take the first two months of the year to smooth out the lunar holiday however, total financing was up 13.5% y/o/y which is generating growth at no more than 6.5% (and most likely less). More debt, slower growth. Ugh. Money supply growth slowed to 11.1%, the slowest since July and below the forecast of 11.4%. Lending did slow to households in response to government attempts to calm the excitement over buying property. I’ve said this before but will say it again, I have no idea what is organic growth in China anymore and what is juiced by temporary steroid shots so Chinese authorities can say the economy grew at whatever number they make up (6.5% now). The Shanghai comp was down .1% overnight and the H share index was lower by .3%.
Acknowledging the credit bubble in the Chinese economy, today the PBOC Governor Zhou said “Too much credit in the economy could trigger inflation and asset price bubbles” therefore “a more neutral monetary stance” can help companies deleverage. I still don’t understand the central banker mentality of acknowledging bubbles only after they have inflated. He’s also calling for a stable exchange rate this year. We’ll see.
This week in Germany we saw an awful factory order number but a better industrial production figure for January. Today they reported exports that grew by 2.7% m/o/m which was better than the estimate of up 2% and December was revised up. Imports also were better than expected. The trade surplus remains at a lofty 18.5b euros (but down from recent highs) and about 7% of GDP if I annualize that number. We also saw a February inflation stat out of Germany with wholesale prices (a different methodology than PPI) rising 5% y/o/y, near a 6 year high. With respect to this, Mario Draghi said the decision yesterday on policy to leave in the wording that they could still cut rates again was “pretty consensual” which is another way of saying that he had pushback and likely from the Germans. I still can’t believe that he thinks negative rates is a good idea. In fact, I believe it’s the dumbest idea in the history of economics. The euro is higher again, continues to hold the $1.05 level and trades pretty well relative to other currencies vs the dollar. I still like the euro.
Also out in Europe was UK industrial production where the manufacturing component was soft relative to expectations, falling by .9% m/o/m vs the estimate of down .7%. It did though rise 2.7% y/o/y. We did see a commodity price led improvement in oil/gas and mining. The pound continues to bleed this month (down for 10 of the last 11 days) and sits just above its low in mid January. Brexit is still a major overhang but the direction of the pound I believe will be more driven by what Mark Carney and what the BoE does this year. Carney is stuck between rising inflation and an economy that has done much better than he thought on one hand but his worry about the pace of growth from here as we await a trigger of Article 50 on the other.
The South Korean Kospi rallied .3% after President Park was officially impeached as a court upheld the government’s decision. The South Korean stock market is one of my favorites as its trading at just 10x earnings. It always has had a low multiple because of the domination of large conglomerates but if we’re on the cusp of corporate change and restructuring of the Chaebol’s, multiple expansion is very possible.