US companies added far more jobs in September than expected. This sent the unemployment rate down to 5.9%, the lowest level since July 2008.
Meanwhile, wages remained stagnant with average earnings showing no month-over-month growth during the period. This is good and bad.
Here’s your Monday Scouting Report:
The Goldilocks Economy: The jobs report reflects an economy that’s growing at a healthy clip with no major signs of inflation heating up. Reformed Broker Josh Brown characterised it has a “Goldilocks” report. It wasn’t too cold and it wasn’t too hot. It was just right.
The low inflation reading gives the Federal Reserve room to keep monetary policy loose for a long time.
Meanwhile, economists are cranking up their GDP growth forecasts. Here’s Deutsche Bank’s Joe LaVorgna: “The improvement in the labour market confirms our hunch that output is growing at an even faster pace in the second half of this year than what we had previously been projecting … In turn, we lifted our forecast for Q3 and Q4 real GDP growth by half of a percentage point each to 4.0% and 4.2%, respectively. This is up from 3.5% and 3.7%, previously. Stronger employment and hours versus our expectations prior to the September employment data, combined with better than expected data on durable goods orders and August international trade (which was released at the same time as September employment), account for the change.”
Keep An Eye On Housing: For a while, the US housing market recovery was the best thing we had going in the wake of the financial crisis. But lately, the data has been coming up lackluster.
“The one economic area I am concerned about is housing,” Blackstone’s Byron Wien wrote. “With the improvement in employment and continued low interest rates I would have expected the monthly figures on housing starts, new and existing home sales, and mortgage applications for purchase to be consistently strong, but the data have been mixed. I wonder if there are some secular changes taking place in terms of more flexible lifestyles, as well as delayed marriages and family formations. Housing is a key component of growth, so this is an area that bears close attention.”
- Job Openings And Labour Turnover Survey (Tues): Economists estimate US companies had 4.7 million job opening in August. “In July, job openings were unchanged at 4.7mn and the ratio of vacancies to unemployed workers declined slightly to 0.48,” Credit Suisse economists noted. “Despite the small tick lower, this ratio remains quite elevated relative to its post-crisis trend, suggesting its potential to drive down the unemployment rate. However, the rate of hiring and quits were unchanged in July, and both remain well below pre-crisis levels.”
- Consumer Credit (Tues): Economists estimated consumer credit balances increased by $US20.5 billion in August. “Non-revolving consumer credit growth has accelerated this year (likely due to an increase in auto loans),” Nomura economists said. “Revolving credit also showed an above trend gain in July. A continuation of this would suggest that consumers are more confident about their finances and could provide a boost for spending going forward.”
- FOMC Minutes (Wed): The Federal Reserve will publish the minutes of its Sept. 16-17 Federal Open Market Committee meeting at 2:00 p.m. ET. From Barclays: “We expect the minutes of the September FOMC meeting to show that most FOMC members were not ready to remove the “considerable time” language since they viewed resource slack as elevated and feared that removing this language would lead markets to conclude that rates would rise sooner than previously expected. We believe that the majority of the committee was not prepared to take such a strong position now, especially prior to the completion of the asset purchase program. Instead, we look for the minutes to say that monetary policy is not on a preset path and that the timing and pace of policy-rate firming was conditional on incoming data. We believe the minutes will show that most members revised their policy rate path modestly higher given the faster-than-expected improvement in labour markets in recent months. Finally, we look for the minutes to provide context to the exit strategy principles and the use of the overnight reverse repo facility as part of the corridor system to push the funds rate higher when necessary.”
- Initial Jobless Claims (Thurs): Economists estimate weekly claims climbed to 294,000 from 287,000 a week ago. “The four-week average in jobless claims fell to 294,000 in mid-August from 325,000 in early May,” UBS’s Kevin Cummins said. “It then rose to 304,000 in early September. The last three weeks averaged 288,000. Hopefully, the improvement in the last three weeks represents the start of a resumed downtrend. That said, it is rare for new jobless claims to stabilise below 300k for long — a signal of a still-strengthening labour market.”
- Factory Orders (Thurs): Economists estimate orders fell by 9.5% in August. “Durable goods orders dropped by 18.2% in August mainly owing to a reversal of the strong gains in non-defence aircraft orders in July and this should push down overall orders for August,” Barclays economists noted.
Wall Street’s equity strategists typically find themselves revising down their often too-optimistic earnings growth forecasts. But with US economic activity surprising to the upside, that pattern has recently reversed.
“2015 and 2016 estimates have been trending higher,” RBC Capital’s Jonathan Golub noted. Here’s his chart.
In his monthly commentary, Blackstone’s Byron Wien wrote that he worried about record-high stock prices despite elevated valuations.
“The valuation context could change if earnings fall short of estimates,” Wien wrote. “Right now analysts seem to be stepping up their forecasts. I started the year thinking the S&P 500 would earn $US115, but there are now forecasts out there as high as $US120 for this year and $US127 for 2015. This has occurred in spite of the preponderance of negative guidance being given to analysts by the companies they follow. The favourable earnings outlook would change if the United States slipped back into a recession, but most of the indicators I am reviewing suggest that is unlikely to happen anytime soon.”
For more insight about the middle market, visit mid-marketpulse.com.
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