MONDAY SCOUTING REPORT
According to Friday’s jobs report, the economy added 165,000 new nonfarm payrolls in April, which was much more than what economists had expected.
Furthermore, the numbers for February and March were revised up significantly.
And it was just a few days ago everyone was worried that the economy was heading for a spring slowdown.
This will be a relatively quiet week for economic data. This should give economists some time to think more about the mixed signals being sent by the economy.
- One Great Jobs Report Won’t Prevent The Spring Slowdown: “The news is not all positive,” said High Frequency Economics’ Jim O’Sullivan. “Both ISM indexes fell in April, as did the average workweek in the employment report; the manufacturing ISM index fell 0.6 points to 50.7, the non-manufacturing index fell 1.3 points to 53.1 and the average workweek fell 0.2 hours to 34.4 hours. Those data suggest a weak start for GDP growth in Q2 after the only moderate 2.5% annual rate in Q1.”
- But…: “…but the employment data suggest that any such soft patch at present will be shorter and shallower, especially if claims stay below 350k,” said Deutsche Bank’s Joe LaVorgna.
- About That labour Force Participation Rate: sceptics have been quick to point out that jobless Americans have been falling out of the labour force, which has actually helped the unemployment rate fall. But in April, the unemployment rate slipped to 7.5% while the labour force participation rate stayed unchanged. “While one month of stability clearly does not signify a turn in any compelling fashion, we think the developments in April may be hinting of a broader change of trend for participation,” said Deutsche Bank’s Joe LaVorgna who notes that participation rates rebound when companies ramp up hiring. “This follows logically, because a stronger economy and a more robust labour market tend to draw marginal participants back into the labour force—because job and income prospects are more appealing. When jobs are scarce and income growth is tepid, participation deteriorates.”
- Senior Loan Officer Opinion Survey (Monday): “The survey has been signaling an easing of lending standards on consumer and business loans, but not on residential mortgages yet,” said High Frequency Economics’ Jim O’Sullivan. While this report is overlooked by most, savvy economists keep a very close eye on it thanks to its predictive powers. “Easier lending standards are usually associated with later employment growth,” said UBS economist Ethan Harris.
- Consumer Credit (Tuesday): Economists estimate that consumer credit expanded by $16.0 billion in March following an $18.1 billion increase in February. “Consumer spending growth has been relatively slow over the past year, but is getting a bit of lift from the rising consumer credit,” said Wells Fargo’s John Silvia. “Growth has been heavily skewed toward nonrevolving credit, driven in large part by student loans and auto lending. Revolving credit, on the other hand, has risen only 0.7 per cent over the past year as consumers remain cautious in their purchases of more discretionary items and lenders have reduced the amount of credit extended through revolving accounts.”
There’s an old adage on Wall Street: “Sell in May and go away.” Indeed, since 1950 this rule has had unbelievable and almost unexplainable success.
“The other half of the proverb is ‘Buy Back on Saint Crispin’s Day,'” said United-ICAP’s Walter Zimmerman. “That would be 25th October.”
JP Morgan’s Tom Lee sees the warning signs for another sell-off this year. But he thinks selling this year would be a mistake.
“We want to take the other side of this trade for multiple reasons,” wrote Lee in a note to clients. Among other things, he points to falling gas prices, falling initial jobless claims, strength in the junk bond market, and the contrarian signal being sent by the bearish hedge fund industry.
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