Mother May I


“Sweater, n.: garment worn by child when its mother is feeling chilly.” ~Ambrose Bierce

The good news from last week’s market was twofold: one, stocks finally gained some ground again, perhaps aided by post-earnings season corporate buying and even more so by expectations for the former. Two, S&P 500 earnings have nearly recovered to breakeven (-0.4%) with a bit more than 25% of the index left to report. Zero earnings growth may not seem like much cause for celebration, but it’s a far sight better than the (-4.7%) estimate at the beginning of April. Besides, where else you gonna put your money, or so say the permabulls?

The bad news was that most of the volatility is still tied to the Fed rather than earnings or the economy. Fed Chair Janet Yellen noted the high valuations of the stock market on Wednesday (gee, do ya think?), even the bond market, which sent prices reeling, though not on the scale of Alan Greenspan’s infamous “irrational exuberance” remark in 1996. By Thursday markets were back in rally mode, partly on anticipation of the jobs report, in turn fueled by a 15-year low for jobless claims (though not for the insured unemployment rate), partly on UK election results, partly on the trader sense that one should take the other side of any Fed chair’s valuation remarks. Traders spent the rest of the week chattering about Yellen’s deja vu of Greenspan, to the point of taking it as a buy signal.

Let’s not forget overseas – the Conservative party in Britain secured an unexpectedly solid election result that sent its anti-austerity, more left-wing Liberal Democrat coalition partners into the dustbin as the latter lost most of its seats and nearly all of its leaders. Over in China, the central bank efforts to revive the economy have been so not successful (except for its stock market and some commodity trading) that it announced more easing over the weekend. A weak report on imports and exports may have sealed the deal for the central bank to ease yet again. If only the country could slide into recession, its stock markets could really take off.

But in continental Europe, the fun-loving Germans are talking more and more about shaking things up and letting Greece go from the euro. All for stability, of course (you can’t make this stuff up). So far Chancellor Angela Merkel has given little to no hint that she would want to be the one presiding over such an event, but she has also shown a fondness for triangulating public opinion in the past.

I can’t predict policy decisions and can’t predict this one either, except to say that giving Greece the boot would seriously undermine the eurozone and financial stability. We might not see it in prices right away, but we would see it. The net of it all is going to be more volatility. We will see it to the upside if Greece stays in, to the downside if it gets rolled (though that could well be followed by a sucker counter-rally).

But I will not be adding to positions. The cycle is too old, the stakes too high, the overnight risk factors too strong, the ending of this movie too familiar. I didn’t like the previous week’s portents either, so just sit tight.

The Economic Beat

The market reaction to Yellen lasted a day, while the jobs report inspired a two-day rally, one day in anticipation, one day for the report itself, making it the report of the week.

The headline number of a gain of 223,000 was about on consensus, usually reported as being somewhere in the 215K-225K range. Not being a surprise, the market liked it – no wage pressures (earnings up only 0.1%), no big number that moves the Fed’s rate timetable up, no dud that says the economy is falling off a cliff.

But the revisions of late have been substantial, and all to the downside, the 2K upward adjustment (seasonally adjusted, or SA) to February notwithstanding – the current tally for February remains 30K below its original estimate. January began at 257K and has since declined to 201K, while the already-light March number of 126K is now down to 88K. I have to wonder if the April number is going to stand up, or why the market seemed so pleased about the revision to March that took the month down. I heard economist Diane Swonk point to the household data as being much better, but I’m not sure why – the seasonally adjusted employment data for household data show a gain of only 322K for the first four months, an average of about 80K.

It may well be that many trading programs were buying on the revision down to 88K for March, given that it would seem to put the Fed on hold through the rest of the summer. The unemployment rate did tick down to 5.4%, while for once the not-in-labor-force category didn’t rise by a large amount. I can see some basis for calling it a “Goldilocks” type of report (not too hot, not too cold), but one feature of the data is troublesome. As it stands now, the April-December change in the unadjusted payroll count stands at minus 22K (the raw payroll count shrinks by about 2% every January, and then returns to that level by April or May). At the moment, that is the weakest first four months since 2010, when employment (a lagging indicator) was still shrinking. It isn’t a big gap compared to last year’s April-December change of plus 50K, but if the April number also gets revised down it will give rise to more than one thing to think about.

The excitement over the employment report obscured the negative implications of the wholesale sales and inventories report – or did it? The report showed inventories increasing at only 0.1% in March (SA), meaning downward pressure on the first quarter GDP number that had just taken an even bigger hit from the March international trade report. A bigger-than-expected surge in imports (a subtraction from GDP) was surely related to the West Coast port strike, but the weakness in export growth isn’t just the dollar. Before dismissing it all as “transitory” (a term over-used in connection with excuse-making for Q1 – what events aren’t transitory?), the inventory-to-sales ratio is still quite high. Imports may slow, but net inventory build could be negative in Q2. Look for the Q1 GDP number to eventually fall several tenths into negative territory, an expectation reinforced by a negative Q1 productivity result of (-1.9%).

The ISM purchasing manager reports are not good leading indicators, but the April non-manufacturing survey certainly is worry-free. An overall score of 57.8 (50 is neutral) was better than consensus, accompanied by a 14-4 growth/contraction score and included widespread good feeling from respondents.

Retail sales are due next week on Wednesday, with the consensus being a very beatable 0.2%. Weekly Redbook reports do hint at a slow month, but Redbook does report on a year-over-year basis and last April included Easter. The sum of all of the above is to reinforce my sense that the second quarter will see a rebound, but not as large as the one last year. Perhaps that is exactly the kind of Goldilocks environment the market craves.

Other reports on the docket include the Tuesday release of the labor turnover report (JOLTS), which at this point in the cycle may not mean much apart from whatever the stock market thinks it tells the Fed – faster, or slower? Producer price inflation is scheduled for Thursday, following import-export prices the day before, and Friday will see both the New York Fed manufacturing survey and the national bank’s industrial production report.

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