Sive Morten
Special Consultant to the FPA
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Fundamentals
Excluding political background, the hot spot of this week was an NFP report that keep shocking the imagination. Just recently Phil Fed Bank has released the analysis, showing of artificial boost of NFP data for ~1.8 Mln jobs, and here is again - we've got 300+K new jobs, almost 100K higher than expected. Let's mention briefly here that jobless claims has jumped to record levels this week as well... Yes this is not the same data, of course, but still... All eyes this week are on Middle East conflict, so some economical news were on a backseat. But there some interesting information that is worthy to be commented.
Market overview
The dollar hit a two-week low on Thursday as economic data supported expectations for quick interest rate cuts in the U.S., and fell against the battered yen.
An unexpected slowdown in U.S. services growth, supporting the idea of bringing interest rates down, had pushed the dollar lower on Wednesday. Still, the U.S. currency was able to pare some earlier losses after Minneapolis Federal Reserve President Neel Kashkari said rate cuts might not be required this year if inflation continues to stall.
Richmond Fed President Thomas Barkin said on Thursday that inflation data at the start of this year "has been a little less encouraging," and raises the question of "whether we are seeing a real shift in the economic outlook, or merely a bump along the way."
The rates picture, with U.S. 10-year yields at more than 4% and Japan's still close to zero, is keeping big Japanese investors' cash abroad, where it can earn better returns, depriving the yen of support from repatriation flows. Japanese authorities will likely intervene in the currency market if the yen breaks out of a range it has been in for years and weakens well beyond 152 per dollar, former top Japanese currency official Tatsuo Yamazaki said on Thursday.
While markets may be focusing on whether the dollar will rise above 152 yen, Japanese authorities likely won't see any break above that level alone as a strong enough reason to intervene, former top currency diplomat Hiroshi Watanabe told Reuters in an interview.
Analysts said the further drop in Swiss inflation in March reinforced the view that the Swiss National Bank would cut rates by an additional 50 basis points this year.
The dollar strengthened on Friday but was still set for a weekly loss after data showed U.S. employers hired far more workers than expected in March, potentially delaying anticipated interest rate cuts from the Federal Reserve this year. Nonfarm payrolls increased by 303,000 jobs last month, the Labor Department said in its closely watched employment report on Friday. Economists polled by Reuters had forecast 200,000 jobs, with estimates ranging from 150,000 to 250,000.
U.S. interest rate futures pared back the odds of a rate cut in June to 54.5% after the release of the jobs report, according to CME Group's FedWatch tool.
But economic strength and higher prices of commodities, including oil, copper, coffee and cocoa, is complicating the inflation picture. U.S. bond giant PIMCO has trimmed its expectations for interest rate cuts by the Federal Reserve this year to two after data on Friday showing the U.S. economy created more jobs than expected last month, said a portfolio manager.
Others in the market on Friday continued to stick to previous calls of three rate cuts this year because they anticipate inflation will moderate despite strong job growth.
Rick Rieder, BlackRock’s chief investment officer of global fixed income, said an expansion of the workforce was positive for the economy as long as it kept wages contained. Still, he said, Friday's jobs report put more emphasis on inflation readings over the next few months to assess the path of interest rates this year.
The equity risk premium - which compares the S&P 500 earnings yield against the 10-year Treasury yield - turned negative in the first quarter for the first time since 2002, said Keith Lerner, co-chief investment officer at Truist Advisory Services.
Data showing a cooling U.S. services sector and comments this week from Fed Chair Jerome Powell had reinforced the view that rate cuts were likely to commence in 2024. The year-over-year change in the average hourly earnings cooled and will restore confidence that wage increases are normalizing, said Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management in Boston.
Small business surveys show demand for workers is headed lower and wages are just above the run rate of the Fed's 2% inflation target, said Roosevelt Bowman, senior investment strategist at Bernstein Private Wealth Management in New York.
Next week's consumer price index (CPI), which is expected to show core inflation slowing to 3.7% in March from 3.8% the prior month, is likely to shape near-term Fed policy.
The U.S. dollar will remain strong over the coming months as financial markets continue to push back on expectations for the timing and magnitude of Federal Reserve interest rate cuts, according to foreign exchange strategists polled by Reuters. A strong U.S. economy and sticky inflation has forced financial markets to rethink their bets on the timing of the first Fed rate cut. None of the major currencies were expected to recoup their year-to-date losses against the dollar, at least in the coming three months, according to currency strategists in the March 28-April 3 Reuters poll.
Recent appreciations of the dollar and gold are "anomalies" and the greenback should not be so strong due to the U.S. deficit, Co-Chief Investment Officer at Bridgewater Associates Karen Karniol-Tambour said on Wednesday. Geopolitical fears could explain the metal's price high prices, she added. But gold should only follow the appreciation of the dollar, not go up more than the greenback shot, Karniol-Tambour also said during comments at the Sohn Conference in New York.
The euro , trading around $1.08 on Wednesday, was expected to gain about 1.0% to $1.09 by the end of June, making small inroads into a 2.3% loss so far this year. It was then forecast to strengthen another 1.0% to $1.10 in six months, according to median forecasts from 90 foreign exchange analysts. The European Central Bank is increasingly confident that inflation is heading back to its 2% target and the case for easing borrowing costs from record highs is strengthening, the accounts of the bank's March 6-7 meeting showed on Thursday.
Markets are looking for confirmation from the European Central Bank that a June rate cut is really coming, though oil is on the rise again, clouding the inflation picture. The European Central Bank meets on Thursday in what is likely the final hurdle before it starts cutting interest rates. Traders see a nearly 100% chance of a 25 basis-point cut in June, so a green light is crucial to uphold market sentiment.
A flurry of policymakers have explicitly signalled June as the date of a first move. Even Austria's uber-hawk governor Robert Holzmann is not opposed. Data showing inflation falling unexpectedly to 2.4% in March should give the ECB further confidence. So the ECB is very likely to signal rate cuts are coming. The question is how explicit policymakers will be about June, given they want to review first-quarter wage growth figures that will be released in May.
The amazing job report again...
So market sentiment from above section is clear - rate cut is postponed, economy is growing, stock market will get more and more pressure. Job report was amazing again. But let's have a look. First is - somehow everybody forget about illegal (or even legal) immigrants. The pace of immigration is reached unbelievable levels during J. Biden presidency. Yes, obviously it follows mostly a political target - get more voices (with accelerated legalization and citizenship providing) to overcome domestic voters. But now we're interested with another issue:
So, on average we could acknowledge ~ 200K of monthly inflow, started since 2021. But, in 2023 it was even higher level. According to a recent report from John Burns Research and Consulting, the United States will experience the largest annual population growth in history in 2023 (+3.8 million people ~316K per month), largely due to illegal immigration. So the Biden admin and Democrat open-border policies are facilitating the largest invasion in the country’s history. Now, let's carefully look at those 303K of NFP, and in general on NFP. I provide you with a few charts below:
At the same time, while average work week has ticked up a bit, we do not see solid decrease in wide U-6 unemployment rate and lay-offs announcements. If take a look at recent NFP components, than we will see that government jobs, education and Health bring 50% of all new jobs created. Including hospitality and leisure brings another ~13%:
As a result - literally every new job in March was part-time while full-time jobs dropped again and are at a 14-month low. Average wage growth stands above 4% for 33 months in a row:
And just a conclusion another chart here. The gap between actual jobs and the pre-covid job trend narrowed again in March, but is still at a -3.9 million deficit. Explains the continued strength in the labor market and the 2.4 million spread between the of job openings (8.8 million) & of unemployed (6.4 million).
Should I explain or you will make the conclusion by yourself? Job market is not improving it is under restructuring. Sharp rise in cost of real estate and outstanding rally on stock market significantly boosted the wealth of US citizens (not migrants). Chart above shows acceleration in early retirements of baby-boomers generation. As a result, the level of lay-offs announcements remains at high levels. This might be one of the components. At the same time wide U-6 unemployment measure remains stubbornly stable, because it also includes those persons who either despear to find the job or remains unemployed longer than few months that stand beyond common unemployment measure (which is 3.8% now). Finally only part-time jobs are raising, full time jobs are falling or stagnating.
Taking it together with immigration statistics, you see that ~ 200K of illegal migrants arrives every month. If even half of them get part-time job - you get ~100-150K NFP surplus every month, because this is report based on companies' survey, not based on individuals. Other words speaking, you should not have the green card to get the job and appear in NFP numbers. Lay-offs could even raise, because migrants are ready to work for lower wages, it lets keep hourly earnings inflation stable or even to decrease it. It could work fine until crisis hurts the prosperity of the citizens and mass lay-offs start because of economy conditions and drop on stock market.
The post-Covid normalization of economic activity levels was mainly driven by immigration. At the same time, the number of pensioners continues to remain in trend.
The bottom line is that even with around 1 million people have died from Covid, around 5 million local workers are "missing in action". These 5 million workers are the reason the labor market is tight and why wage inflation is likely to remain high - even with migrants agreement to work for lower money, the gap is too high to push wages lower. This explains why hourly earnings are stubbornly high at 4%. And it needs years (that the US do not have) to recover this situation.
The recovery is very fragment across the country. The president is campaigning for an industrial renaissance, but the number of jobs has not reached the states that are critical to his re-election. ️In Michigan, Pennsylvania and Wisconsin, manufacturing jobs have not recovered to 2019 levels.
Besides, the Phil Fed report that points on manipulations with 1.8 Mln jobs by BLS is not cancelled. So, our conclusion that market is totally wrong, when it based its expectations on this job data. Until it holds, nobody recognizes the fake, but when situation will start to change, this plan will fall apart like sand castle. This data is bad foundation for long term investing strategy. Stay with Gold and you will be safe.
At the same time, it makes direct impact on EUR/USD balance. We have the picture of prosperity, saft landing and economy growth, making ECB to act ahead of the Fed. They do not have so good numbers. PIMCO things the same.
Why Inflation will not drop
Last week we've considered L. Summers article that has turned public this week. And not only his article has been published. WSJ has joined this startup and has shown real consumer goods inflation in his report. As you understand, such events never happen occasionally. I do not believe in miracle surprises. It is attempt of direct impact on public opinion changing, showing that situation in the future will worsen. This might be the reason why gold has accelerated this week. Those who understand such a hints have taken some action.
As we've mentioned in Telegram, for the sixth month in a row, short-term super-core PCE performance has outpaced last year's performance. An undeniable sign that inflation is accelerating again, as well as its expectations.
Excluding political background, the hot spot of this week was an NFP report that keep shocking the imagination. Just recently Phil Fed Bank has released the analysis, showing of artificial boost of NFP data for ~1.8 Mln jobs, and here is again - we've got 300+K new jobs, almost 100K higher than expected. Let's mention briefly here that jobless claims has jumped to record levels this week as well... Yes this is not the same data, of course, but still... All eyes this week are on Middle East conflict, so some economical news were on a backseat. But there some interesting information that is worthy to be commented.
Market overview
The dollar hit a two-week low on Thursday as economic data supported expectations for quick interest rate cuts in the U.S., and fell against the battered yen.
An unexpected slowdown in U.S. services growth, supporting the idea of bringing interest rates down, had pushed the dollar lower on Wednesday. Still, the U.S. currency was able to pare some earlier losses after Minneapolis Federal Reserve President Neel Kashkari said rate cuts might not be required this year if inflation continues to stall.
Richmond Fed President Thomas Barkin said on Thursday that inflation data at the start of this year "has been a little less encouraging," and raises the question of "whether we are seeing a real shift in the economic outlook, or merely a bump along the way."
The rates picture, with U.S. 10-year yields at more than 4% and Japan's still close to zero, is keeping big Japanese investors' cash abroad, where it can earn better returns, depriving the yen of support from repatriation flows. Japanese authorities will likely intervene in the currency market if the yen breaks out of a range it has been in for years and weakens well beyond 152 per dollar, former top Japanese currency official Tatsuo Yamazaki said on Thursday.
While markets may be focusing on whether the dollar will rise above 152 yen, Japanese authorities likely won't see any break above that level alone as a strong enough reason to intervene, former top currency diplomat Hiroshi Watanabe told Reuters in an interview.
Analysts said the further drop in Swiss inflation in March reinforced the view that the Swiss National Bank would cut rates by an additional 50 basis points this year.
The dollar strengthened on Friday but was still set for a weekly loss after data showed U.S. employers hired far more workers than expected in March, potentially delaying anticipated interest rate cuts from the Federal Reserve this year. Nonfarm payrolls increased by 303,000 jobs last month, the Labor Department said in its closely watched employment report on Friday. Economists polled by Reuters had forecast 200,000 jobs, with estimates ranging from 150,000 to 250,000.
U.S. interest rate futures pared back the odds of a rate cut in June to 54.5% after the release of the jobs report, according to CME Group's FedWatch tool.
But economic strength and higher prices of commodities, including oil, copper, coffee and cocoa, is complicating the inflation picture. U.S. bond giant PIMCO has trimmed its expectations for interest rate cuts by the Federal Reserve this year to two after data on Friday showing the U.S. economy created more jobs than expected last month, said a portfolio manager.
Others in the market on Friday continued to stick to previous calls of three rate cuts this year because they anticipate inflation will moderate despite strong job growth.
Rick Rieder, BlackRock’s chief investment officer of global fixed income, said an expansion of the workforce was positive for the economy as long as it kept wages contained. Still, he said, Friday's jobs report put more emphasis on inflation readings over the next few months to assess the path of interest rates this year.
The equity risk premium - which compares the S&P 500 earnings yield against the 10-year Treasury yield - turned negative in the first quarter for the first time since 2002, said Keith Lerner, co-chief investment officer at Truist Advisory Services.
Data showing a cooling U.S. services sector and comments this week from Fed Chair Jerome Powell had reinforced the view that rate cuts were likely to commence in 2024. The year-over-year change in the average hourly earnings cooled and will restore confidence that wage increases are normalizing, said Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management in Boston.
Small business surveys show demand for workers is headed lower and wages are just above the run rate of the Fed's 2% inflation target, said Roosevelt Bowman, senior investment strategist at Bernstein Private Wealth Management in New York.
Next week's consumer price index (CPI), which is expected to show core inflation slowing to 3.7% in March from 3.8% the prior month, is likely to shape near-term Fed policy.
The U.S. dollar will remain strong over the coming months as financial markets continue to push back on expectations for the timing and magnitude of Federal Reserve interest rate cuts, according to foreign exchange strategists polled by Reuters. A strong U.S. economy and sticky inflation has forced financial markets to rethink their bets on the timing of the first Fed rate cut. None of the major currencies were expected to recoup their year-to-date losses against the dollar, at least in the coming three months, according to currency strategists in the March 28-April 3 Reuters poll.
Recent appreciations of the dollar and gold are "anomalies" and the greenback should not be so strong due to the U.S. deficit, Co-Chief Investment Officer at Bridgewater Associates Karen Karniol-Tambour said on Wednesday. Geopolitical fears could explain the metal's price high prices, she added. But gold should only follow the appreciation of the dollar, not go up more than the greenback shot, Karniol-Tambour also said during comments at the Sohn Conference in New York.
The euro , trading around $1.08 on Wednesday, was expected to gain about 1.0% to $1.09 by the end of June, making small inroads into a 2.3% loss so far this year. It was then forecast to strengthen another 1.0% to $1.10 in six months, according to median forecasts from 90 foreign exchange analysts. The European Central Bank is increasingly confident that inflation is heading back to its 2% target and the case for easing borrowing costs from record highs is strengthening, the accounts of the bank's March 6-7 meeting showed on Thursday.
Markets are looking for confirmation from the European Central Bank that a June rate cut is really coming, though oil is on the rise again, clouding the inflation picture. The European Central Bank meets on Thursday in what is likely the final hurdle before it starts cutting interest rates. Traders see a nearly 100% chance of a 25 basis-point cut in June, so a green light is crucial to uphold market sentiment.
A flurry of policymakers have explicitly signalled June as the date of a first move. Even Austria's uber-hawk governor Robert Holzmann is not opposed. Data showing inflation falling unexpectedly to 2.4% in March should give the ECB further confidence. So the ECB is very likely to signal rate cuts are coming. The question is how explicit policymakers will be about June, given they want to review first-quarter wage growth figures that will be released in May.
The amazing job report again...
So market sentiment from above section is clear - rate cut is postponed, economy is growing, stock market will get more and more pressure. Job report was amazing again. But let's have a look. First is - somehow everybody forget about illegal (or even legal) immigrants. The pace of immigration is reached unbelievable levels during J. Biden presidency. Yes, obviously it follows mostly a political target - get more voices (with accelerated legalization and citizenship providing) to overcome domestic voters. But now we're interested with another issue:
So, on average we could acknowledge ~ 200K of monthly inflow, started since 2021. But, in 2023 it was even higher level. According to a recent report from John Burns Research and Consulting, the United States will experience the largest annual population growth in history in 2023 (+3.8 million people ~316K per month), largely due to illegal immigration. So the Biden admin and Democrat open-border policies are facilitating the largest invasion in the country’s history. Now, let's carefully look at those 303K of NFP, and in general on NFP. I provide you with a few charts below:
At the same time, while average work week has ticked up a bit, we do not see solid decrease in wide U-6 unemployment rate and lay-offs announcements. If take a look at recent NFP components, than we will see that government jobs, education and Health bring 50% of all new jobs created. Including hospitality and leisure brings another ~13%:
As a result - literally every new job in March was part-time while full-time jobs dropped again and are at a 14-month low. Average wage growth stands above 4% for 33 months in a row:
And just a conclusion another chart here. The gap between actual jobs and the pre-covid job trend narrowed again in March, but is still at a -3.9 million deficit. Explains the continued strength in the labor market and the 2.4 million spread between the of job openings (8.8 million) & of unemployed (6.4 million).
Should I explain or you will make the conclusion by yourself? Job market is not improving it is under restructuring. Sharp rise in cost of real estate and outstanding rally on stock market significantly boosted the wealth of US citizens (not migrants). Chart above shows acceleration in early retirements of baby-boomers generation. As a result, the level of lay-offs announcements remains at high levels. This might be one of the components. At the same time wide U-6 unemployment measure remains stubbornly stable, because it also includes those persons who either despear to find the job or remains unemployed longer than few months that stand beyond common unemployment measure (which is 3.8% now). Finally only part-time jobs are raising, full time jobs are falling or stagnating.
Taking it together with immigration statistics, you see that ~ 200K of illegal migrants arrives every month. If even half of them get part-time job - you get ~100-150K NFP surplus every month, because this is report based on companies' survey, not based on individuals. Other words speaking, you should not have the green card to get the job and appear in NFP numbers. Lay-offs could even raise, because migrants are ready to work for lower wages, it lets keep hourly earnings inflation stable or even to decrease it. It could work fine until crisis hurts the prosperity of the citizens and mass lay-offs start because of economy conditions and drop on stock market.
The post-Covid normalization of economic activity levels was mainly driven by immigration. At the same time, the number of pensioners continues to remain in trend.
The bottom line is that even with around 1 million people have died from Covid, around 5 million local workers are "missing in action". These 5 million workers are the reason the labor market is tight and why wage inflation is likely to remain high - even with migrants agreement to work for lower money, the gap is too high to push wages lower. This explains why hourly earnings are stubbornly high at 4%. And it needs years (that the US do not have) to recover this situation.
The recovery is very fragment across the country. The president is campaigning for an industrial renaissance, but the number of jobs has not reached the states that are critical to his re-election. ️In Michigan, Pennsylvania and Wisconsin, manufacturing jobs have not recovered to 2019 levels.
Besides, the Phil Fed report that points on manipulations with 1.8 Mln jobs by BLS is not cancelled. So, our conclusion that market is totally wrong, when it based its expectations on this job data. Until it holds, nobody recognizes the fake, but when situation will start to change, this plan will fall apart like sand castle. This data is bad foundation for long term investing strategy. Stay with Gold and you will be safe.
At the same time, it makes direct impact on EUR/USD balance. We have the picture of prosperity, saft landing and economy growth, making ECB to act ahead of the Fed. They do not have so good numbers. PIMCO things the same.
Why Inflation will not drop
Last week we've considered L. Summers article that has turned public this week. And not only his article has been published. WSJ has joined this startup and has shown real consumer goods inflation in his report. As you understand, such events never happen occasionally. I do not believe in miracle surprises. It is attempt of direct impact on public opinion changing, showing that situation in the future will worsen. This might be the reason why gold has accelerated this week. Those who understand such a hints have taken some action.
As we've mentioned in Telegram, for the sixth month in a row, short-term super-core PCE performance has outpaced last year's performance. An undeniable sign that inflation is accelerating again, as well as its expectations.
