Mild Winter Jobs Blowout, Importance of ECB

Watch your Trump twitter feed because ADP just reported a blowout private sector job figure. February saw a net job increase of 298k, well above the estimate of 187k and January was revised up by 15k to 261k. The sharp upside was in the goods producing sector that saw an increase of 66k construction workers (we do have to thank the benign winter) and 32k manufacturing jobs. The commodity space, including energy, added 8k. The total of 106k that the goods side added is the most since at least 2002 that I have data on. The service sector added 193k vs 207k last month. It’s 3 month average is 191k vs 176k for the past 6 months.

Bottom line, the mild winter definitely helped in getting stuff done outside which led to the sharp rise in each of the 3 components of the goods producing areas. But the services side (where many businesses service the goods side) also saw a nice pick up in job gains. The question now for the labor market is whether the demand for labor (job openings still historically high and firings slow) will be met by an increase in supply as the U6 unemployment rate still reflects the potential for a rise in the participation rate. This data comes a day after the Atlanta Fed cut its Q1 GDP forecast to just 1.3% so let’s expect a pick up in Q2 if this job figure is not some weather induced outlier. Either that or we still have poor productivity and labor costs will be sapping profit margins further.

As for the Fed, one of their biggest fears was waiting too long to hike rates which would then force them to quicken the pace in order to play catch up. Unfortunately their biggest fear is now coming to life. I’ll use this joke again, the Fed is so far behind the curve that they couldn’t make my son’s little league team. The 2 yr note yield touched 1.36%, the highest since June 2009. We are now above 50% odds of a 3^rd hike this year.

Lost in Trump, lost in Fed, I’m doing my best to also stay very focused on the ECB and European sovereign bonds as we are now about three weeks away from a 25% cut in QE and await tomorrow’s press conference.  Also I believe of great importance and hopefully discussed and made clear is what the ECB plan is in reversing negative interest rates. It likely won’t happen for a while but will we get a message that rates won’t stay negative forever and some sense of when this poisonous policy gets reversed. Yes, its poison to the European banking system as its the destruction of capital.

The consequences are also enormous for all the negative yielding paper out there. Part of this is also a function of the daily suck of quality collateral that the ECB is taking out of the market which forces holders to lock in losses all because they need the collateral.

Think what you want about the direction of inflation and growth in the US, if German Bund yields start heading higher soon, US yields will too. In 2015 when the German 10yr went from 6 bps to 70bps in a month and then to nearly 1% a month later, the US 10 yr yield went from 1.87% to 2.5%. Again, a train wreck will befall European bonds. Stay short European bonds my friends, stay very short. Ahead of tomorrow, sovereign bonds are weak across the board. Only a week and a half after touching the lower end of the US 10 yr yield range of 2.30%, we are now close to testing the upper 2.60% range at 2.54%.

With the cooling off of the upward stock market momentum and now a rate hike to deal with, bullish sentiment backed off as well. After touching a 30 yr high last week at 63.1, Investors Intelligence said Bulls fell to 57.7. II said “The contraction in bulls is a sign the peak for the current rally may have occurred.” We’ll see but there still are barely any bears as most of the decline went into the Correction side which rose by 4.6 pts. Bears were up just .8 pts to 17.3 and have literally been beaten into a bloody pulp. What’s most amazing and disconcerting is that after nearly 8 years of persistent selling, retail is now piling into passive ETF’s at this stage of the bull run. The first two months of 2017 saw the biggest inflow into ETF’s ever in any two month period. Of the $52b that came into ETF’s specifically in February, $24b went into US stocks. Here we go again. I thought two 50% market declines in 15 years would have taught some lessons.

The MBA said mortgage applications to buy a home rose 1.7% w/o/w and 3.8% y/o/y. Refi’s were up by 5.2% w/o/w but still down 34% y/o/y. The average 30 yr mortgage rate was up 6 bps to 4.36% which matches a 5 week high and has shifted higher since with the uptick in US yields. Bring me more millennial’s who want to buy a home and I’ll bring you a better housing market and as said a million times, first time households are more inclined to rent right now historically speaking. Just look at the homeownership rate sitting near 50 year lows.

Chinese exports in February fell 1.3% y/o/y, well worse than the estimate of up 14% but we need to combine the first two months of the year to smooth over the impact of the Lunar Holiday. January/February exports were up 4% y/o/y. For the same time period last year, exports fell 21% y/o/y in the midst of the dramatic slowdown in global trade. Imports are up by 26% y/o/y for the 1^st two months of the year. The rise in commodity prices certainly goosed the import numbers. Combining the two months and this data brings the trade surplus to $42b, down by about half from last year. The yuan is weaker on the shrinking trade surplus with the offshore yuan quietly at a two month low vs the US dollar.

After the terrible January factory order number yesterday (which I gave a pass because of its monthly volatility), Germany said industrial production in January rose 2.8% m/o/m, one tenth more than expected and off a higher than expected base as December was revised up by 6 tenths. Manufacturing/mining and capital and consumer goods led the way. The German Economic Ministry said “Overall, industrial production got off to a good start into 2017.” I agree and this matches up with other better European data points. The euro is little changed but as mentioned above, bonds are weak.