Positives
- The BLS said 313k net jobs were created in February, well more than the estimate of 205k and the two prior months were revised up by a net 54k. The household survey saw a job gain of 785k which was about matched by an increase of 806k in the size of the labor force, the biggest one month rise since January 2000. Of the 785k, 446k came from the important 25-54 yr old contingent. The unemployment rate as a result was unchanged at 4.1%. The U6 held at 8.2%. Average hourly earnings were up by .1% after a .3% rise in January and while that was one tenth less than expected, average weekly hours rose to 34.5 from an initial 34.3 which was revised to 34.4. Average hourly earnings slowed to a 2.6% rise y/o/y from 2.8% last month but average weekly earnings improved to 2.9% from 2.8% and the near 3% level is the upper end of a multi year range. The participation rate was up by 3 tenths to 63%, matching the highest since March 2014. Also positive was the 3 tenths rise in the employment to population ratio. There was a reduction in the average duration of unemployment to 22.9 weeks, the least since May 2009. The service sector added 187k jobs which is the 3rd best over the past year. Relative to January, the retail and financial sector along with temp help (most since September 2016) were the main reasons. The goods side is where the real upside surprise came from as it contributed 100k jobs, the most since a month in 1998. Construction here was the main driver with a gain of 60k (likely in part to a weather rebound after the cold January). Manufacturing added 31k vs 25k in January and 39k in December. Also adding to the headline gain was 26k net people hired in the government all at the state and local level (education). That is the most since July 2016. The number of those not in the labor force fell to 95.4mm from 96.7mm and there was a drop in the number of discouraged workers. The private sector 3 month average in payrolls is 233k, the 6 month average is 202k, and this compares with the 2017 average of 180k, 178k in 2016, 213k in 2015 and 240k in 2014.
- The February ISM services index fell a touch to 59.5 from 59.9 but that was .5 pt above the estimate and is off the best level since 2005. Of the 18 industries surveyed, 16 saw growth vs 15 in January. The ISM said “The majority of respondents’ continue to be positive about business conditions and the economy.” There were more comments on growing cost pressures than usual.
- We also saw an improvement in Markit’s measure of US services but they said this about pricing. “On the prices front, cost burdens faced by service providers continued to rise in February. The rate of input price inflation accelerated to the fastest since June 2015. Where higher input costs were reported, panelists commonly linked this to higher fuel and raw material prices. Meanwhile, amid larger cost burdens and greater client demand, average charges also rose further as firms protected margins. Moreover, the pace of inflation quickened to the sharpest for 5 months.”
- The Fed’s Beige Book continues to reflect anecdotal evidence that wage growth is accelerating, great for employees.
- After a sharp rise in Q4 of $26b, revolving credit growth (mostly credit cards) slowed to just $700mm in January.
- Loan growth in China in January/February (adjusting for timing of Lunar New Year) did slow y/o/y by almost 12% but was about 100b more than expected. Still expect about 12% loan growth this year as that seems to be the country’s target growth rate. Also of note in China was the 8.8% y/o/y M2 money supply growth rate in February, a touch above the estimate and vs 8.6% in January.
- Completely distorted by the Lunar New Year, Chinese exports spiked by 44.5% y/o/y in February vs the estimate of up 11%. Taking January and February together still saw a 24% y/o/y rise from the first two months last year. An impressive rate of growth and reflective of the improved global economy. Imports were up by a robust 21% y/o/y for January/February y/o/y. As for total exports to the US, they were up 25% for the 1st two months this year y/o/y.
- February PMI’s in Hong Kong and Singapore both were up m/o/m
- The February Eurozone Retail PMI rose to 52.3 from 50.8 and vs 53 in December. It’s the 11th month in a row above the breakeven of 50. The problem for retailers is the rising level of input costs is squeezing margins. “Strong input price inflation contributed to a further squeeze on gross margins. The rate of contraction was broadly similar to that seen in January and solid overall. Retailers in Italy reported the sharpest fall, followed by those in Germany and then France.”
- The UK services index improved by 1.5 pts m/o/m to 54.5 and that was above expectations. It’s also the best in 4 months. Encouragingly, inflation pressures eased, “cost pressures moderated to their lowest for a year and a half. A number of survey respondents commented on efforts to stimulate demand through competitive pricing strategies and new promotional initiatives.”
- Merkel has finally formed a government.
- Kim/Trump
Negatives
- While the target was really on China, we’ve added tariffs on 75% of our steel imports and about 45% of our aluminum imports (55% come from Canada alone). This joins lumber (price is just off a record high), washing machines and solar panels. What’s next and what’s the overseas response?
- I viewed Gary Cohn as a rational economic thinker and firewall against those in favor of tariffs to fix trade deficits.
- Initial jobless claims rose by 21k w/o/w to 231k and that was 11k more than expected and off the lowest level since 1969. I believe last week was distorted by the President’s week holiday so we’ll smooth it out. The 4 week average was 223k vs 221k last week and vs 226k in the week prior. Continuing claims, delayed by a week, fell by 64k and is a hair off its lowest level since 1973.
- The Fed’s Beige Book continues to reflect anecdotal evidence that wage growth is accelerating, higher costs for employers who need a pick up in productivity to offset. Also, Q1 unit labor costs revised higher to a 1.7% y/o/y gain from 1.3% and that’s the most since Q3 2016.
- The January trade deficit came in at $56.6b and that was $1.6b above the estimate and December was revised higher by $800mm. We now have the widest trade deficit since October 2008 and thus the weaker dollar did nothing to help. The reason for the widening in January was the 1.3% m/o/m drop in exports led by a drop in goods exports. Imports were unchanged m/o/m.
- With the average 30 yr mortgage rate steady at a 4 year high at 4.65%, mortgage applications were little changed. Purchases fell by .5% w/o/w and the y/o/y change is now about flat lining, up 1.3%. Refi’s were up 1.5% w/o/w after 3 straight weeks of declines. The y/o/y drop though is almost 13%.
- US dollar 3 month LIBOR has fallen just twice since late January. It now stands at 2.06%. It has almost doubled over the past 12 months. The y/o/y gain in bank loans and leases is now just 3.5% vs 5.7% one year ago and 7.5% in the year prior.
- US Consumer debt accumulation on the nonrevolving side continues its dramatic rise with another $13.2b accumulated in January after $47b added in Q4. At $2.8T, it is up 72% from the peak on 2008. Rising student debt is a lot of this.
- The consumer price index in China jumped by 2.9% y/o/y, almost double the pace seen in January (again, distorted by the holiday) and was 4 tenths above the estimate. A spike in food prices was the main reason but was still up 2.2% y/o/y ex food/energy if we average the 1st two months, in line with trend. Producer price gains slowed to 3.7%, about in line and down from 4.3% in January. The main reason for the recent slowing is solely due to tougher comparisons. Industrial raw material prices are still near 3 1/2 year highs.
- Japan reported that regular base pay was up by just .2% y/o/y vs .6% in December and .3% in November. The headline gain was up .7% helped by a jump in bonus pay.
- After 12 straight months of rebuilding their FX reserves, China said in February they shrunk by $27b to $3.13T. The forecast was for them to stand at $3.16T. It seems that the US dollar bounce and weakness in US Treasuries were the main reasons as it impacted the value of the existing reserves.
- China’s private sector weighted Caixin services PMI for February fell to 54.2 from 54.7 and that was a hair below the estimate of 54.3.
- The February services PMI for Japan fell slightly and India’s dropped back below 50.
- While the pace of QE is slowing, Mario Draghi and Haruhiko Kuroda remain dangerously addicted to their easing. The RBA, BoC and BoK all left rates unchanged as expected.
- In Europe, industrial production in January missed the mark in Germany, France and the UK. Seasonality and weather likely played a part.
- German factory orders in January missed the estimate with a 3.9% m/o/m drop vs the estimate of down 1.8%. Also, December was revised lower but still to a good gain of 3%.
- The February Eurozone services PMI was revised lower than expected to 56.2 from 56.7 initially and vs the estimate of no change. This does match a 4 month low. The combined manufacturing and services composite index fell to 57.1 from 58.8 in January which was a multi year high. Markit said “The eurozone economy looks to have hit a speed bump in February after a steller start to the year. It’s too early to read too much into the February fall in the PMI, and some pull back from January’s high was always on the cards. It’s more appropriate to look at the elevated levels still being recorded by the surveys.” On inflation, prices remain elevated but “inflationary pressures are more varied…with Germany seeing an especially strong upward trend in prices while France and Italy are notable in seeing companies report greater difficulties in passing higher costs on to customers.”
- While we are soon to get the 66th different Italian government in 72 years, the make up of this one potentially might not be that friendly to business or the EU. Watch closely.