STOCKS DO NOTHING AHEAD OF THE JOBS REPORT: Here's what you need to know

Stocks were little changed on Thursday ahead of Friday morning’s highly-anticipated March jobs report.

This was the final trading day of the first quarter, which will show modest gains for stocks when all is said and done, but the path to a roughly flat start to the year was quite eventful with stocks falling into a correction in February before a sharp reversal.

Gold, meanwhile, just had its best quarter in 30 years rising 15% to start the year.

First, the scoreboard:

  • Dow: 17,694, -22, (-0.1%)
  • S&P 500: 2,060, -3, (-0.2%)
  • Nasdaq: 4,872, +3, (+0.01%)
  • WTI crude oil: $38.20, -0.2%

US Economy

It’s a jam-packed week for the US economy and ahead of one of the busiest days for data that we can remember, readings on the labour market and manufacturing continued to show that while things might not be stellar, the economy is not rolling over.

The latest weekly jobless claims number showed claims totaled 276,000 last week, more than the prior week but making the 56th consecutive week that initial filings for unemployment insurance were less than 300,000.

“The week ending March 26 contained Good Friday, and the varied timing of that holiday across years often generates volatility in the claims data,” said JP Morgan’s Daniel Silver in a note following Thursday’s report.

“And even with the latest increase in claims, the trend still looks pretty favourable.”

The March reading on manufacturing activity in the US Midwest beat expectations Thursday morning with the Chicago PMI reading rising to 53.6, up from 50.7 and indicating continued expansion in the sector.

“The most significant result from the March survey is the pick-up in the Employment component which has remained weak for much of the past year,” said Phil Uglow, chief economist for MNI Indicators in a release. This data also comes ahead of Friday’s manufacturing readings from Markit Economics and the Institute for Supply Management.

As for the jobs report, you can read Akin Oyedele’s full preview here, but here are the expectations to know:

  • Nonfarm payrolls:+205,000
  • Unemployment rate: 4.9%
  • Average hourly earnings month-on-month: +0.2%
  • Average hourly earnings year-on-year: +2.2%
  • Average weekly hours worked: 34.5

China

Standard & Poor’s is worried about China.

In a release early Friday, the ratings agency left its rating on China’s debt unchanged, but cut its outlook for the country to “negative” from “stable.”

And the problem? Too much debt. Not news, but once this has gotten the attention of ratings agencies — investors have been on this theme for some time — its worth taking note.

“The negative outlook reflects our view of gradually increasing economic and financial risks to the government’s creditworthiness, which could result in a downgrade this year or next,” S&P wrote.

Adding:

A downgrade could ensue if we see a higher likelihood that China will seek to stabilise growth at or above 6.5% by increasing credit at a significantly faster rate than the nominal GDP growth, such that the investment ratio is above 40%. Such trends could weaken the Chinese economy’s resilience to shocks, limit the government’s policy options, and increase the likelihood of a sharper decline in the trend growth rate.

The ratings could stabilise at this level if the central government adopts policies to moderate credit growth at levels more in line with nominal GDP growth, accompanied by signs that rebalancing will progress more quickly than we currently expect. This could allow the investment ratio to come down to levels that we believe to be more sustainable.

Now, again, S&P affirmed its current rating on China, and so the full note is relatively pollyannish considering the predictions we’ve seen from hedge fund managers like Kyle Bass on the state of its economy and currency regime.

Inflation

Here’s Sonic CEO Cliff Hudson:

“I am not suggesting that there is not a challenge to move that kind of pricing, that kind of hourly wage pricing component, but these are proposed on a multi-year stage basis and there is no doubt that this is going to be inflationary as this relates to consumer product.”

Taking out the corporate earnings call speak, what he’s saying is that if Sonic has to pay its employees more the company — and others, too — will charge more for stuff.

Said another way: higher wages are inflation.

This is, as Bob Bryan notes, not a radical assumption or view. Inflation is caused by too much money chasing too few goods, and if wages are largely stale or going towards paying off debts or something, then you’re never going to see an inflationary dynamic that really presses prices higher and brings the Federal Reserve either to or above its 2% inflation target.

Raising the minimum wage, though, is about more than inflation and margins but gets into the area of economics and capitalism that deals with fairness. What should people be paid and why, more or less.

So thinking also about the idea of wages, inequality, the potential for “helicopter drops” of money as a way for monetary authorities to kickstart economic growth — this would basically entail the government direct depositing money into your back account — the FT’s Cardiff Garcia recently chatted with development economist Charles Kenny and the idea of how you raise ages and standards of living came up.

And Kenny sees this as, basically, a simple thing.

From the transcript (emphasis mine):

GARCIA: Let’s talk about unconditional cash transfers. Why is it a good idea to just give people cash? Why not tie it to better behaviour and expect something in return?

KENNY: Because the reason poor people are poor is because they don’t have money, and so a really easy way to deal with that problem is give them money. It comes down to that.

It turns out if you give very poor people money, they spend it on sensible things; they spend it on better nutrition for their children, they spend it on slightly better quality of life for their family in a bunch of different ways that lead to returns.

They invest, if you will, this money in better nutrition, in schoolbooks, in clothes for the kids so that they’re not embarrassed to go to school, all sorts of things that make a difference. So we don’t really need to condition it.

I think a lot of people would take a lot of issue with this idea.

But as Hudson laid out above: you give people more money they are going to spend it. Now, in his context as an executive this means the best way to get return for shareholders is then charge more for that product. Fine. This is a bit afield from what Kenny is talking about.

These ideas and the tensions in the economy between wages, inflation, morals, inequality, and so are very much related to each other.

At least I found it interesting.

Additionally

The world is about to get old. Really old.

Canadian GDP beat expectations.

PIMCO’s William De Leon isn’t worried about bond market liquidity.

One of New York’s busiest subway stations smelt like a toilet and the city finally figured out why.

Hollywood’s most successful agent makes 300 phone calls a day.

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