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Credit and Jobs


The Days Ahead: U.S. inflation update and a big Treasury refunding. And oh, elections.   

Stocks were flat for the week. We had good earnings from some bellwether companies such as AAPL, GOOG and FB. Together these are nearly 10% of the S&P 500 and, interestingly, the value of the entire U.S. stock market 35 years ago. So good on you Silicon Valley. But lower oil prices, down nearly 10% on the week, took the energy sector down 5%. Even after a tough three years, during which energy stocks collectively fell nearly 50% peak-to-trough, energy is 7% of the index and a big driver of capex and employment.

But the week belonged to politics. On the home front, a surprise health care bill passed the House, perhaps damaging the administration’s lame duck credentials. In Europe, the French elections look good for Macron but the electorate is in a “none-of-the-above” mood and many may just abstain. So one way or another, Monday will bring some closure.  But as we’ve said a Le Pen victory may not be the economic disaster some people think. France will stay in the EU and probably in the Euro.

1. Jobs: Friday’s job numbers were of high interest to the market given March’s disappointment and the Fed’s probable June move on rates. As with almost any job number in the last few years you can make your point from either side. First, here’s the chart:

On the, yes, power on side, the headline number was nearly twice as large as the previous month, the unemployment rate fell, average weekly hours rose a bit and the U-6 unemployment rate, the one that measures the marginally-attached workforce, fell from 9.4% in January to April’s 8.6%.

But on the not so great side, labor force participation fell and average hourly earnings and wage growth slowed. Hospitality and healthcare services made up nearly half the growth in the new jobs and they pay 40% less than the national average and work 10 hours a week less. So, you know, lower paid and part time.

The job numbers helps the Fed hawks. They look more at the unemployment rate, plug in a Phillip’s curve model and come out with an inflation risk. The Fed probably had a pre-read of the jobs numbers at their mid-week meeting. They acknowledged, but dismissed, weak first quarter growth, and barely mentioned the weak inflation report. The core PCE rate came in at 1.56% compared to the target of 2%.

On balance, we think the Fed will increase the Fed Funds rate in June. They are looking at weak consumer economy (auto sales fell again), low inflation, reasonable employment and one big unknown on the tax and revenue side of the economy. But we also think that a rate hike will affect the short end of the curve more than the long (a so called bear flattener) and so would not change our fixed income strategy much. Ultimately, inflation kills bond markets. That’s all. Not deficits or debt levels.

2. The run up in sentiment: We, and many others, have talked about the soft/hard data conflict. Generally, sentiment has run high but real output, spending, investment and earnings have run low. Now in the past, the U.S. consumer kept spending ahead of earnings by running down savings or borrowing. But no more. We looked at consumer credit (in the catchy titled G.19 report), which comes out at the end of the day at the beginning of the month. Here’s the chart:

The green line is student debt, which exploded in the post-crisis period as private lenders fled the market. If you have college-aged kids or graduated in the last five years, that line will be painfully familiar. The columns show the change in student debt, revolving debt (so credit cards) or auto loans. The student debt is reported with a lag and, of course, it’s seasonal. But here's the thing. There’s nothing here to suggest consumers feel more confident or are about to go spending. And if GDP is to grow at the sustained 3% rate the administration wants, well, call us if you know where it’s coming from.

3. Emerging Markets: We've mentioned before how South Korea is a good place to watch if you want to see what’s going on in Asia. Why? Well 1) they export a lot to China and Vietnam 2) they sell stuff you can count easily (machinery, circuits and autos) and 3) they publish monthly data 24 hours after the month end. Which is seriously impressive. Anyway, here’s the latest exports from the Big 3 in Asia. We think of it as Japan for high-end goods, South Korea for intermediate goods and Australia for materials.

We can see some very strong numbers (the green lines show yearly growth) coming through, which suggest that Emerging Markets are well supported at current levels. They’re up around 13% year to date. 

Bottom Line:
Our focus will be on the Eurozone. The fundamentals improved last week with growth and various PMIs heading in the right direction. In the U.S., the earnings season is 85% done and it’s been a good one. Sales were up 8% and earnings up 12%. That’s enough to keep current valuations steady.

The world of fakes
Proposing in public. Don't.
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--Christian Thwaites, Brouwer & Janachowski, LLC

Please note that this discussion of our investments and investment strategy (including our research and investment process) represents our investments and investment strategy at the date of this commentary, and is subject to change without notice.  We cannot assure that the type of investments discussed in this commentary will outperform any other investment strategy in the future, nor can we guarantee that such investments will present the best or an attractive risk-adjusted investment in the future. This is for general informational purposes only; references to an individual security should not be construed as a recommendation to buy or sell that security.  The securities mentioned in this commentary are only several of the successful as well as unsuccessful investments by us, and do not represent all of the securities we have purchased, sold or recommended.  Although we deem reliable the sources of the statistical and other information referred to in this commentary, we cannot guarantee the accuracy or completeness of any statements or numerical data.  Past performance is no indication of future results.

All charts from Factset unless otherwise noted.