Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
BREWING FINANCIAL CRISIS 2.0 Suggests RECESSION 2022 - 28th Jan 22
Financial Stocks Sector ETF XLF $37.50 Continues To Present Opportunities - 28th Jan 22
Stock Market Rushing Headlong - 28th Jan 22
The right way to play Climate Change Investing (not green energy stocks) - 28th Jan 22
Why Most Investors LOST Money by Investing in ARK FUNDS - 27th Jan 22
The “play-to-earn” trend taking the crypto world by storm - 27th Jan 22
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

U.S. Employment, the Economy & Interest Rates

Economics / US Economy Mar 10, 2015 - 05:44 PM GMT

By: Gary_Tanashian

Economics

The February Employment report was a strong +295,000 with unemployment dropping to 5.5%. In Friday's Market Notes update we highlighted that per BLS this was a services-driven report as the leading edge of the economy, the smaller but key manufacturing and industrial sectors, have begun to decelerate (notably in forward-looking 'New Orders').


From FloatingPath.com (markups mine) we see the breakdown...

Change in Non-Farm payrolls

So it makes sense that 'Jobs' were strong because the large 'back end' of the US economy is responding to the years of corporate profit increases, stock market gains (wealth effect) and an overall benevolent Fed that has, every step of the way since 2008, done all it could to keep asset markets aloft (1st) and in appreciation mode (2nd). Call them Things 1 & 2, mission accomplished.

Leisure and Hospitality... America's getting out there again, living it up and feeling secure with the gains that eventually came from the post-2012 period, after we got our first little inkling two years ago in January of 2013 with the Semiconductor Equipment ramp up. I had no idea then how strong the economy would eventually become, but the massive services sectors in the US are now fully kicked in and enjoying the benefits.

As for the other segments, they are all back-end services to one degree or another including, or even especially, Construction. So there is the underwhelming Manufacturing sector and poor old Mining and Logging pulling up the rear. Here I'll remind you that the progression we used going into the economic up phase was Semi Equipment → Manufacturing/ISM → Positive Economic Signals (incl. Corp. Profits, etc.) → 'Jobs', which is where the public that uses all those services, lives.

The clock is ticking on an economic deceleration, but just as Aircraft Carriers take a long time to turnaround in one direction, so too the turn to the other.

Economy

We have also been noting that the strong US dollar would eventually begin to wear at manufacturing, industrial companies and exporters. From FactSet.com, here is some interesting data...

Dow 30: Revenue growth in Europe

A strong currency zone exporting to an equal and opposite weak currency zone? Not a good recipe for success.

From FactSet: Overall, 11 of the 30 companies in the DJIA provided revenue growth numbers for Europe for the fourth quarter. Of these 11 companies, eight reported a year-over-year decline in revenues. This number was above the number of Dow 30 companies reporting a year-over-year sales decrease in the previous quarter (6). In fact, this was the highest number of Dow 30 companies reporting a year-over-year decline in revenue from Europe since Q4 2012 (9).

On a sequential basis, nine of the 11 companies reported a lower year-over-year sales growth rate from Europe in Q4 2014 relative to Q3 2014. Five of these nine companies have reported lower year-over-year revenue growth for three consecutive quarters.

We review the ISM data at nftrh.com each month. It has been generally and gently decelerating for a few months in a row now. This is perfectly in line with the strong dollar theme (with the caveat that it remains to be seen how much the West Coast port shutdowns have played into it).

Here is a more focused view of one item that has been a key indicator on the economy. Manufacturers' inventories are starting to build relative to sales. Is this going to be another false positive or is it leading to recession? I am going to lean toward this being just an early warning, but even if that is the case 2 of the 3 false positives shown on the St. Louis Fed graph below (markups mine) eventually led to a severe recession (2001) and an utter catastrophe (2008).

The bottom line is that Inventories are rising relative to sales and that is a negative for the economy and it is right in line with the 'strong dollar' theme. A temporary positive caveat is that the vast services sectors do not carry much inventory.

Manufacturer's Inventories

Interest Rates

Here is where the mainstream media get all abuzz. The hype is everywhere amid the strong trend in Employment data. The fact is that the sum of the economy is strong and that interest rates are responding as they should. Even as far down the curve as 1 year, the Treasury market is pricing in rate hikes. As yet however, the 3 month T Bill has gone nowhere due to the Fed's ZIRP policy on Fed Funds, now well over 6 years on.

3-Month T-Bill versus 1_yaer Treasury Yield

Further, the spread between 10's and 1's is portrayed as dangerous in the media, because an inverted yield curve (if it were to happen) often precedes recessions they say. Well, that is only logical because a yield inversion is the result of a boom and in an era of policy stoked financial markets, bust follows boom as surely as night follows day.

10ys/1yr Yield Spread Weekly Chart

For our purposes, these declining spreads continue to imply that the economy is fine at this snapshot in time. Using yield spreads as confidence indicators as we do, the picture is one of firm confidence in policy making with no sign of an inflation problem (caveat: see TIP-TLT, page 9) or a deflationary liquidation, each of which could be indicated by a rising curve depending on whether nominal yields are rising or falling.

As 'Jobs' Friday proved, one popular measure of the economy (employment) is cooking nicely. The stock market reacted negatively, I assume because smarter money leaking out of the markets is apparently aware of the implication of this chart.

Correlation of rates and Stocks
Created at SlopeCharts

On previous cycles the stock market has continued to rise to varying degrees along with the Fed Funds rate (and by extension, T-Bills). Those were relatively normal cycles with the one that topped in 2007 being instigated by Alan Greenspan's relatively normal inflationary policy and resultant credit bubble.

Again I ask you to reflect on the picture above, let it all sink in and then inform me as to how I may be wrong in the assertion that we are deep into uncharted territory regarding the amount, duration and intensity of a double barreled 6+ year helping of QE's 1-3 and ZIRP (with the odd Op/Twist and various other POMO and SOMA operations going on routinely behind the scenes).

The point I'd continue to make is that it does not make sense to automatically extrapolate or 'quant' previous cycles (ex: the stock market rises during a rate hike regime) because this cycle has been one for the policy record books. Though I don't pretend to understand their full nature, the distortions built in might also one day be recorded in the record books after they are revealed. One outcome could be that there is much less lag time (if any) between an initial rate hike and a stock market top on the current cycle.

That exercise behind us, let's move on to regular analysis... [which is exactly what #333 did in workmanlike, no frills fashion analyzing US and global stocks, precious metals, currencies and more]

Subscribe to NFTRH Premium for your 25-35 page weekly report, interim updates (including Key ETF charts) and NFTRH+ chart and trade ideas or the free eLetter for an introduction to our work. Or simply keep up to date with plenty of public content at NFTRH.com and Biiwii.com.

By Gary Tanashian

http://biiwii.com

© 2015 Copyright  Gary Tanashian - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Gary Tanashian Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in