"It's always too early to quit." -- Norman Vincent Peale
The Good, The Bad, The Ugly, and Job Creation
The day ahead could be fraught with peril for traders. Thursday brought us plenty of the good (a significant step toward tax reform), the bad (a complete collapse in U.S. worker productivity), and the ugly (the entire commodity complex). The FOMC, in their policy statement earlier this week, made clear their intent to simply keep on keepin' on, despite all of the recently squishy macro. Now, we approach April "Jobs Day". Just how much of a damper would a second consecutive disappointing employment report put on the Fed's belief that this weaker macro might be "transitory" in nature?
As a student of both the marketplace and of monetary policy, I truly think that the Fed will stay on mission, even if handed a ghastly number today for job creation. But, folks ... it's not really about whether or not the Fed stays on mission in the short-term. For today, it is about whether or not the market buys the story line. Barring a dramatic revision to the March data that would make it appear more in line with the trend, the market will likely reject a headline number that prints below 150,000 on a seasonally adjusted basis. This could turn into a negative sentiment trade. Move slow. Watch each others' back.
On top of today's numerically inspired trading session, the sheer number of Fed speakers showing up in public is almost staggering. Are they nervous about something? Do they need to get a certain message across today in the wake of Wednesday's statement, and after this morning's data is released? It may be important to note that both the Fed Chair, and the Vice Chair will be out and about, but also that some of the Fed's more volatile speakers are out there. In particular, James Bullard and Eric Rosengren, district presidents in St. Louis, and Boston respectively. Neither of these two vote this year (thankfully), and both are known for wildly swinging on opinion with little notice. This day may pass quietly. If it does not, well why don't you take tomorrow off?
Blood in the Water
Commodity prices were paid a visit this week by the "Ugly Stick", and the stick was very angry. WTI crude settled at its lowest level since November yesterday, going out at $45.52 a barrel. In Asian trading this morning, that particular product traded as low as $43.76 (Whooo doggie) before rebounding. Ugly. Gold scraped along the $1225 support level for most of yesterday's session after getting smacked around early in the day. Thursday finished as the worst day of the year for the yellow metal. Copper. Iron. All were left punished. The industrial metals were also central in this backyard beat-down. Gang, this was all in an environment that saw the US dollar weaken on the day too, particularly versus the euro. For newer readers, a weaker dollar actually disguises overall commodity weakness, as most commodities are priced in US dollars. So, the carnage, is in theory even worse than it appears.
There are several forces at work here. As far as market prices for gold go, the World Gold Council reported yesterday that global central bank demand was down 27% year over year for the first quarter, and that overall global demand took a 34% hickey over the same period. For those actively engaged, the sirens go off for me around the $1205 level. That's where you'll have to make a short-term decision on allocation. As far as industrial metals go, all of the Chinese PMIs for April walked off of a long pier hand in hand this week, which really has the long and wrong crowd running scared. Previously released data for Chinese Industrial Production had allayed some nervousness regarding forward looking demand in Asia. That fear is clearly back in the forefront. Oil? Well, my friends, that is another story.
What do I think? I used the steep selloff yesterday to get longer three of my names in the oil patch. Am I confident that oil will bounce, making my purchases seem less foolish? Not completely. This was discipline taking over for instinct. What I am confident in is some volatility as we approach this OPEC meeting, and a chance to get out of some shares purchased on the cheap as May 25 approaches. What I can guarantee is that, if I am still on this side of the dirt, my positions in these names will be smaller in three weeks.
Oh Yeah, OPEC
Remember when OPEC, and several non-OPEC oil producers, sat around the campfire singing songs about the old days, and agreed to cut production by 1.8 million barrels a day for the first six months of 2017? Ahh, good times. Well, that ploy worked for a while. The problem with cartels is that to have one, you have to control the marketplace. OPEC, still important, still a major player, especially when grouped with Russia, just does not completely control supply. Ramped up production from non-allied parties such as the kids in the Permian, but not just them, have put the whammy on OPEC.
As already mentioned, OPEC has another formal meeting coming up on May 25, and as a group they still do control more than a third of global production. What do they do? Do they simply extend the agreed upon production cuts? Do they enlarge those cuts? Does OPEC try to enlist help from smaller players? If so, who cheats? That has been a problem in the past, if not now. If revenues are cut further, how does the group police that? The ugly stick hunts. This space is only for those with a high tolerance for risk at this time.
08:30 - Employment Situation (April)
Non-Farm Payrolls: Expecting 188,000, March 98,000. The 98,000 seasonally adjusted jobs that were created in March just did not add up for me. I mean, we all know that some macro has been coming in sloppy across several fronts, but ADP reported a downward revised 255,000 for that month as far as private payrolls are concerned. Knowing that over 12 months the ADP numbers and BLS data will most likely square off with each other, I'm thinking that an upward revision to that number might just be in the cards. If not ... oooh, boy.
Average Hourly Earnings: Expecting 2.7%, March 2.7% y/y. Expectations are for a slight improvement for this (the second most important component of Jobs Day) item on a month-over-month basis, but not so for the yearly data. Payrolls and wages are the only things that some traders will look at before taking a plunge one way of the other, and that is where your knee-jerk will come from. The Fed statement made me believe that only something cataclysmic would knock FOMC policy intentions off the rails.
Average Workweek: Expecting 34.4, March 34.3 hours. Even if substantial wage growth is not there, the work week likely was extended back to an average of 34.4 hours for April, which is key to labor market recovery. It was not long ago that the average was more like 34.6. Economists follow this tertiary way of measuring income than do traders, at least upon release.
Participation Rate: Expecting 63.0%, March 63.0%. The 63% that the Participation Rate has printed at the last two months equals the highest level seen since Autumn of 2013, and is the one sign of an improving labor market that I think I actually might trust the most. Wages are important, no doubt. Unemployment, and underemployment rate methodology renders them far less relevant than they once were, but people getting back in the game -- that's huge.
Unemployment Rate: Expecting 4.6%, March 4.5%. An increase in participation could end up pushing the headline unemployment rate a smidge higher. Yesterday, Gallup released their own U.S. unemployment rate for April, which printed at 5.5%, down from 5.6%. Gallup's data are not seasonally adjusted, leaving it more volatile, and not truly comparable to the BLS rate.
Underemployment Rate: March 8.9%. The underemployment rate, or what is known on Table A-15 as U-6, is considered by many to be a fairer measure of labor market health than headline unemployment. This number had been on the mend over the past year, but Gallup's version of this info took a turn for the worse in April, ramping up from an un-adjusted 13.5% all the way up to 14.0% in just one month's time.
13:00 - Baker Hughes Rig Count (Weekly): Last Week total 870, oil 697. After WTI crude futures were paid a visit by the "Ugly Stick" yesterday, this number will surely get some focus. U.S. oil producing rigs in operation have been steadily rising, and grew by nine last week. Yesterday's smack-down will likely not be felt until next week's data.
15:00 - Consumer Credit (March): Expecting +$14.9 billion, February +$ 15.2 billion. Credit growth has been slow in recent months. The lion's share, as far as credit is concerned, is non-revolving credit such as auto loans and student debt. We know that auto loans were probably tough in March. Economists are looking for improvement in revolving (credit card) debt, after that sub-component ran backwards in January, only to barely make up the lost ground in February. We'll find out today if there was any pent-up demand for credit.
Fed Speakers (I think we found the hive):
11:30 - Federal Reserve Vice Chair Stanley Fischer
12:45 - San Francisco Fed Pres. John Williams
13:30 - Federal Reserve Chair Janet Yellen
13:30 - St. Louis Fed Pres. James Bullard
13:30 - Chicago Fed Pres. Charles Evans
13:30 - Boston Fed Pres. Eric Rosengren.
In an effort to save space, and keep you, the reader, from nodding off, I've grouped the incredible quantity of Fed speakers making public appearances today into one tidy package. The Fed Chair is obviously the big fish today, but the topic of her speech in Providence, Rhode Island is going to cover women in economics over the last 125 years, so I do not know how deeply she intends to go into current monetary policy. I would think that the event that could provide the most market risk, despite both the Fed Chair, and Vice Chair speaking, would be a panel scheduled for 13:30 ET at Stanford, California that includes Bullard, Evans, and Rosengren. Evans is the only current voting member of the FOMC among the three, but Bullard and Rosengren are both wild cards with a history of rapidly changing direction on policy preferences. On top of that, questions for the panel will be taken from both the media, and the audience.
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: 2404, 2398, 2391, 2385, 2377, 2369
RUT: 1407, 1400, 1392, 1386, 1377, 1367
Today's Earnings Highlights (Consensus EPS Expectations)
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