"A truly American sentiment recognizes the dignity of labor and the fact that honor lies in honest toil." -- Grover Cleveland
Enter The Macro
It's "Jobs Day", gang. We've talked about the political, and geo-political risks to the marketplace all week. We've talked about keeping the Trump economic agenda, also known as the tripod (taxes, repatriation, deregulation), on the rails. We've talked about an earnings season, which has been mostly been better than decent for a few weeks now. Today will be about the macro. Last night's backyard beat-down for Amazon AMZN, Chipotle Mexican Grill CMG, FireEye FEYE, GoPro GPRO and Hanesbrands HBI aside, today's prints for nonfarm payrolls and wage growth will usurp all other items in terms of market impact.
Today will bring us a more focused look at January. The month has a chance to show a significant improvement from where this economy went out in 2016. This week's print for ISM Manufacturing showed, at least at the headline, the fastest growth seen for that highly troubled sector of the economy since November 2014. Regionally, manufacturing has rebounded with the most gusto in Philadelphia and Richmond, which is where traditionally you would hope to see this kind of activity centered. The Dallas region has also seen rapid growth. That's important, because that was where the collapse of manufacturing was felt the hardest due to collapsing energy prices. Key to almost all of these reports has been new orders -- precisely the component where you need to see strength. Pricing has also been hot. That suggests future inflation. (I'm going somewhere here.)
Today's Bureau of Labor Statistics data and the ISM service sector print truly could be pivotal to trajectory. Next week is extremely light on the macro front, but the Fed will be out in force. The way they paint economic progress in a light that undoubtedly will be shaped today. Then we will have to wait for data on retail sales and consumer inflation to be released on the 15th -- and we already know that auto sales will hurt that number at the headline level.
Lions, Tigers. and Modern Stagflation Fears
What keeps me awake at night? What could ambush this economy killing our hopes and dreams in the cradle? Stagflation. What? that makes no sense. Hear me out, kids. Stagflation is, by definition, slow economic growth coexisting with high unemployment and rising inflation. I know it by heart; I was a kid in the seventies. Let's look at this closely.
1) Slow economic growth? Check! No need to explain.
2) Rising inflation? Not so much at the core, but Joe and Jane Consumer don't give a rat's tail what they're paying more for, if they're paying more, and these rising prices look like they could be global, not just domestic. We are not there yet, but we do not need this without growth.
3) High Unemployment? OK, by textbook definition, this is not a problem. But then, why did it take eight years for the Phillips Curve to work? Replace the word unemployment in the aggregate with underemployment on the individual level, and ... "Houston, we have a problem". Maybe.
Remember, economics is an art, not a science. In science, the same conditions produce the same result every time. In economics, the main ingredient is the human response to those conditions. Feel better? Now, we can stay up all night together. Have a great weekend.
08:30 ET - Employment Situation (January)
Non-Farm Payrolls: Expecting 173,000, December 156,000. This is the single most important number that traders look at in terms of impact every month. Now that the economy has approached what central bankers are calling "full employment", these numbers have started to dwindle from where they were during the height of recovery era job creation. The ADP employment report printed at its highest level in over a year on Wednesday, and that increased small business optimism was at least partially responsible. For that reason, I think that the marketplace may take an "at consensus" print today in this space as disappointing. There would clearly be an element of upside risk in this release -- perhaps it will take a 190,000 tag to get that "at consensus" response. A print above 220,000 will likely bring movement in Treasury markets, and financial share prices.
Average Hourly Earnings: Expecting 0.3%, December 0.4% m/m. The sizable month-over-month gain is this space for December put this series back on trend after November's outright contraction. The expectation actually seems to be somewhere between 0.3% and 0.4%. Anything less than 0.2% will likely push out probabilities in the fed fund futures markets for their next increase, and thus be taken poorly by the marketplace.
Average Workweek: Expecting 34.3, December 34.3 hours. Traders will get around to looking at this tertiary way of measuring demand for labor after taking in the top two items in this BLS release. I see a strong likelihood of this item returning to 34.4 hours, which will not surprise. A further drop of another one tenth of one hour on average across the nation would rattle a few cages. Remember, we started 2016 out at 34.6 hours, and the 34.3 hours that we been running at for two months now, equals the weakest average in this space since 2010.
Participation Rate: December 62.7%. The Participation rate improved at year's end as overall confidence brought some folks back into the labor force, after this item crumbled throughout the autumn. Participation has not hit 63% since 2013. To keep this number in perspective, the modern low is 62.4% (September 2015), and prior to the financial crisis, normal was considered to be above 66%.
Unemployment Rate: Expecting 4.7%, December 4.7%. It always bothers me when I hear respected economists cite the headline unemployment rate as evidence of underlying strength in the economy. Conditions have undeniably improved, but far too many folks have been forced to replace full-time jobs that placed them firmly in the middle class with either part-time work, or much lower paying jobs. That's the simplest explanation for why the Phillips Curve failed work throughout this recovery in the way it does in the textbooks. For comparison's sake, Gallup released their January data for the US Employment Situation yesterday. Gallup's numbers are not seasonally adjusted, and not truly comparable, but they do tend to move with the BLS data. Gallup showed an increase in participation for January, and an increase in unemployment to 5.8% from December's 5.2%.
Underemployment Rate: December 9.2%. The underemployment rate, or U-6 as it's known from its designation on Table A-15 on the monthly BLS release, is what most non-academic folks refer to as the true rate of unemployment. Gallup also showed an increase here in yesterday's numbers. Gallup put a 14.1% tag to the tape for underemployment, up from December's 13.7%. Note, the data released by a private sector entity always seems to be a bit less cheery than the stuff we get form the government entity.
09:15 - Fed Speaker: Chicago Fed Pres. Charles Evans will be the first speaker out of the gate in the wake of Wednesday's policy decision. Evans will be in Olympia Fields. Illinois to discuss current U.S. economic conditions. The Chicago district president is thought of as one of the more dovish members of the FOMC, and will take questions from both the media, and the audience today.
09:45 - Markit Services PMI (January-rev): Flashed 55.1. This number has been steadily improving over the better part of six months. Like Markit's manufacturing release, the investing public generally waits the fifteen minutes until the ISM data prints in order to react, thus making these numbers somewhat irrelevant to traders.
10:00 - Factory Orders (December): Expecting 1.1%, November -2.4% m/m. This Census Bureau report allows for rather complete information, combining durable goods with non-durable goods. The market impact, though, is muted due to both the dated nature of this release, and the fact that the marketplace has already digested much of what is inside this report.
10:00 - ISM Non-Manufacturing Index (January): Expecting 57.0, December 57.2. After expansion in the services sector seemed to slow in August, the pace of headline growth returned throughout the autumn to what would now have to be considered "above trend". Like with the ISM's manufacturing report, new orders have been a strength within this data, and that's exactly what you want to see. Pricing has also been strong, not like the intensely hot pricing that we are seeing the manufacturing pace.
13:00 - Baker Hughes Rig Count (Weekly): Last Week 712 total 566 oil. WTI crude prices seem to be working their way higher in early February, yet remain about a full dollar per barrel below their most easily identifiable levels of resistance. That said, late January support has been found about a full dollar higher than was mid-month support. For that reason, I believe it likely that U.S. rigs currently in production continue their rapid increase.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2300, 2292, 2282, 2272, 2265, 2258
RUT: 1375, 1370, 1363, 1354, 1348, 1342
Friday's Earnings Highlights (Consensus EPS Expectations)