I would have thought the market to hold off ahead of what will be a very important December jobs report this morning, as looked to be the case on Wednesday. While the monthly labor-market figures are always the most-watched release, this one will be especially important as many believe it will produce the first monthly payroll increase in two years. (It will also be interesting to watch how the market plays the number if it does beat expectations. A what’s-bad-is-good mentality has ruled trading and if the number gets people believing the job market is going to begin a string of increases it is likely to boost views that the Fed’s Great Unwind will occur sooner than traders would like.)
Stock-index futures put pressure on early trading after China decided to raise an interbank market interest rate. They had signaled a move was coming on Wednesday by saying policy would focus on preempting inflation rather than myopically supporting growth. I doubt the Chinese government will go much farther in terms of taking away most stimuli; they have citizen uprisings to think about (and what appears to be quite a construction bubble that they would rather deflate than burst, if possible) and thus their hands will be tied somewhat, but the move did weigh on yesterday’s activity.
With about 30 minutes left in the trading session, Bloomberg News reported on a warning issued to the banks from the Federal Reserve, preparing them to guard against losses from an end to super-duper low interest-rate environment. They mentioned reducing exposure or raise capital if needed. Financial shares, and the market in general was pretty much unaffected by the announcement. Maybe they see this as more talk than a signal to action.
You’ve got to look at this warning as a duel strategy by the Fed.
One, it is a CYA move – telling the banks don’t blame us when interest rates rise. When the Fed does begin the Great Unwind it will likely be much more aggressive than the traditional 25 basis point moves per meeting.
Two, it is lip service. The more you talk about the exit strategy the longer it buys time to keep monetary policy floored – it helps to keep inflation expectations moored (Oh, the Fed is serious about price stability so we won’t push long-term rates higher, says the market – or so the Fed hopes). We’ll see if it works in containing inflation expectations.
In any event, at some point the gravy train for the banks is going to come to an end; the yield curve is not going to remain historically steep forever, at which point one of the biggest baddest no-brainer income sources of all time will disappear – one hopes the current level of delinquency rates will have eased dramatically by that time, but that may be a serious exercise in wishful thinking.
Jobless ClaimsThe Labor Department reported that initial claims held steady at the 430K handle, rising just slightly to 434,000 (5K less than forecasts) in the week ended January 2. The four-week average of initial claims fell 10,250 to 450,250 -- the lowest level since the week of September 12, which is the week before the Lehman collapse and the credit crisis began its crescendo.
Continuing claims fell 179,000 to 4.802 million – that’s for standard benefits that last 26 weeks. However, emergency unemployment compensation (EUC) claims have yet again more than offset this downward move as they jumped 235,626 for the latest week. This comes off of a massive negative revision to the prior week’s EUC claims, showing a 650,839 surge after first being reported as rising 191,669. While standard claims have dropped 400,000 over the past three weeks, EUC has surged 917,000.
For new readers who may not know, EUC and it various extensions provide up to an additional 73 weeks of unemployment benefits when the traditional 26 weeks run out. This huge increase in EUC shows that long-term unemployment remains very elevated. The number of unemployed for at least 27 weeks figure within the monthly job report continued to make new highs as of the latest data. Today we’ll find out if a new record high is put in. Even if it falls a bit, this claims data shows it won’t be by much.So the overall claims figures continue to illustrate the same picture: The trend lower in initial claims shows the pace of firings has very substantially eased. Unfortunately, hiring in earnest has yet to begin and that means the length of unemployment will remain elevated.
December Retail Figures and Looking Ahead
The December retail figures are coming in at quite respectable rates of increase, all things considered. Most retailers posted results that surpassed expectations and Retail Metrics estimates that cumulative same-store sales results rose 2.9% -- that’s based on the year-ago period when sales fell 3.6%.
Many people were concerned about the Northeast and Midwest snowstorms hurting sales. While those storms did dampen in-store traffic, it boosted online sales. Macy’s, for instance, reported a 29% jump in online sales relative to December 2008. Most of the apparel retailers did very well, no doubt the weather juiced winter-clothing sales.
The National Retail Federation will release official cumulative results on January 14.
Looking ahead, everyone understands that consumer spending is going to be restrained for a while as the jobless rate remains at hyper-elevated levels (10% has only been hit in two periods during the postwar era) and is likely to remain above 8.0%-8.5% for a couple of years at least.
It takes 100K-plus in monthly job growth for an extended period to meaningfully move the unemployment rate lower and a necessary condition for such job growth it at least average GDP growth, which means 3.5% annually – and it must be durable. Based upon the unusual amount of resource slack in the labor market today it may take growth of 4.5%-5.0% for a couple of years to get us down to 8% unemployment, which is the peak hit during the normal recession. A high jobless rate causes high delinquency rates and that means credit card lines will continue to be reduced, which will be another impediment to spending but I won’t get into that right now.
An additional burden for the consumer, and the reason I raise this looking ahead topic, may result from higher energy prices.
You have read me refer to the Fed as being in a box several times now. Here’s why:
If they move just a bit and take away the emergency level of rates by increasing fed funds from effectively 0% to 1.00% the members of the FOMC worry it will cause another round of housing damage – as well they should. (I do wish they would get to it and do this, it will cause some pain, but the longer they wait the more economic damage that will result. And just maybe a move to 1% fed funds will cause long rates to decline a bit, or at least hold steady, as the bond market sees a Fed that is at least offering a token gesture toward price stability.) Conversely, if they don’t move, and their latest comments seem pretty crystal clear that they won’t for some time still, then commodity prices will trend higher.
One of the more important commodities is wholesale gasoline, and it just broke the $2.08/gallon level – a level that had provided resistance, bumping against this mark three times since June but not surpassing until this week. The current price of $2.13 translates to roughly $2.75/gallon at the retail level (there is normally a 60-cent spread due to fuel taxes, transportation costs and profit margins). We’ll watch this price closely now as a move to the $3 handle is likely to cause issues for a consumer that already faces plenty of headwinds.
Have a great weekend!
Brent Vondera, Senior Analyst
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