2015 is off to an interesting start.
The big story continues to be inflation, or rather the lack of inflation. Energy prices continue to tumble. Meanwhile, wages are going nowhere.
Here’s your Monday Scouting Report:
The American Wage Mystery. According to Friday’s jobs report, average hourly earnings unexpectedly fell 0.2% month-over-month in December. On a year-over-year basis, growth slowed to 1.7%, the lowest rate since October 2012. This confirmed what we read in the minutes of the December FOMC meeting: “most participants saw no clear evidence of a broad-based acceleration in wages.”
So, what’s happening here? If the economy is growing and the unemployment rate is falling, then the labour market should be getting tighter and wage growth should be picking. “The fall in earnings is a bit puzzling because there was nothing in the mix of employment (i.e., a shift toward lower-paying jobs) or an increase in the workweek that explains why earnings fell by such a large amount,” Deutsche Bank’s Joe LaVorgna said.
“We have a number of theories about the softness in average hourly earnings growth, none of them quite satisfying,” UBS economists said on Friday. They advance four theories: changing demographics with the average age of employees rising at a slow rate; the long-term unemployed with stalling skills returning to work; incentive pay, which isn’t captured in average hourly earnings; and the softness in inflation, especially with energy prices falling.
- Job Openings & Labour Turnover Survey (Tues): Economists estimate US companies had 4.85 million job openings in November. From Credit Suisse: “Job openings rose in October to 4.8M, driving the ratio of vacancies to unemployed workers up to 0.54 — just above its pre-crisis average. Along with the recent rapid declines in the unemployment rate, these numbers confirm that the US labour market has effectively recovered to “normal” cyclical conditions. Measures of job turnover — the hires rate and quit rate — slowed down after a sharp rise in September, but both measures remain at elevated levels. These indicators can provide early signs of wage pressure, and if the current trend holds, it may suggest a firming in wage growth over 2015.”
- Monthly Budget Statement PMI (Tues): Economists estimate the US had a budget surplus of $US3.0 billion in December. From Morgan Stanley’s Ted Wieseman: “We estimate the federal government ran a $US10 billion budget surplus in December, way down from $US53 billion a year ago but because of special factors. In particular, GSE dividends declined to a more normal $US7 billion from $US39 billion last December, when Freddie Mac adjusted its accounting for deferred tax assets. A calendar shift also sharply boosted growth in Medicare outlays after depressing them in November. Those impacts we estimate will result in a 37% year/year gain in outlays (GSE dividends count as negative spending). Growth in tax receipts was quite strong, however, rising an estimated 15% on particularly strong 35% upside in corporate tax payments. ”
- Retail Sales (Wed): Economists estimate sales fell by 0.1% in December. Excluding autos and gas, sales are estimated to have increased by 0.5%. “Retail gasoline prices likely fell over 11% in December (after seasonal adjustment), and depressed gas station sales, which are measured in nominal terms,” BNP Paribas economists said. “However, we expect households to have spent a large fraction of this savings on other goods and services during the holiday.”
- Beige Book (Wed): The Federal Reserve will publish its collection of economic anecdotes at 2:00 p.m. ET. From Nomura: “We expect the Fed Beige Book prepared for the 27-28 January FOMC meeting to show that economic activity in the past month expanded at steady pace as incoming data since the previous Beige Book have been relatively positive. We will look for insight into how the decline in energy prices is affecting mining activity, business investment decisions and consumer activity. Also, with employment growth accelerating and the unemployment steadily declining, we will see if there is any evidence of wage pressures building in the labour market.”
- Empire Manufacturing (Wed): Economists estimate this regional activity index jumped to 5.0 in January from -3.5 in December. “We look for a January reading of 4.0 for the Empire State manufacturing index, consistent with a return to modestly expansionary territory in the beginning of the year,” Barclays economists said. “New orders and shipments both contracted in December; however, the employment index remained firm, suggesting a rebound in this month’s reading.”
- Producer Price Index (Wed): Economists estimate producer prices fell by 0.4% month-over-month, or climbed 1.0% year-over-year. Excluding food and energy, core prices are estimated to have climbed by 0.1% and 1.9%, respectively. From Morgan Stanley’s Wieseman: “Wholesale gasoline prices plunged 20% between the PPI survey periods, which, along with severe declines also in other petroleum products and lesser softness in utility rates, we estimate will leave PPI energy down 8.5%. Food prices should also be down moderately, with the farm price report showing substantial weakness in dairy in particular. For the core — ex food, energy, and trade services — stepped up auto discounting and broader pressure on goods prices from dollar strength and energy price impacts we expect will leave core goods flat. Core services should receive some support, however, from a rebound in transportation services, which have been down the past several months in PPI despite our freight analysts seeing broadening pricing power.”
- Initial Jobless Claims (Thurs): Economists estimate the weekly jobless claims fell to 292,000 from 294,000 a week ago. “Initial jobless claims have been choppy in the past several weeks due to seasonal adjustment issues during the holidays,” Nomura economists said. “With the holiday season behind us, we expect the data to give us a better read on the labour markets and show that labour market conditions continue to improve.”
- Philadelphia Fed Business Outlook Thurs): Economists estimate this region activity index slipped to 19.1 in January from 24.5 in December. “The index decreased to 24.3 in December from an unexpected spike to 40.2 in November, and we look for a modest decline this month in line with the recent trend of an overall cooling in manufacturing sentiment,” Barclays economists said.
- Consumer Price Index (Fri): Economists estimate consumer prices fell by 0.4% month-over-month, or climbed 0.7% year-over-year. Excluding food and energy, core prices are estimated to have climbed by 0.1% and 1.7%, respectively. “The dominant story in the coming months will continue to be the slide in oil prices,” Wells Fargo’s John Silvia said.
- Industrial Production (Fri): Economists estimate production slipped 0.1%, while the capacity utilization rate fell to 80.0%. “Mild weather should lead to considerable weakness in utilities output and auto production schedules point to a temporary slowdown in durable manufacturing,” Credit Suisse economists said. “A strong month for mining growth (after two months of deterioration) may balance out some of the weakness in other volatile sectors.”
- U. Of Michigan Sentiment (Fri): Economists estimate this index of sentiment climbed to 94.3 in January from 93.6 in December. “Continued declines in gasoline prices and robust employment gains likely boosted sentiment over the holiday season,” BNP Paribas economists said.
Volatility is back. For many market bulls, volatility is an important part of a healthy, well-functioning market.
FundStrat’s Tom Lee thinks that 2015’s ugly start is the “best case scenario” assuming we’re still in a bull market.
“Since 1900, 12 of the 13 times (non-recession periods) the market has fallen first 4 days, it subsequently surged to gain 17% by year-end,” Lee said on Friday. “The sole exception was 1962 (period was the Kennedy slide). In fact, across 77 bull market years, the best odds of finishing higher occur when markets are down the first 4 days.”
For more insight about the middle market, visit mid-marketpulse.com.
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