Good morning! Here’s what you need to know.
Jobs day. BLS will release non-farm payrolls data for March at 8:30 a.m. Expectations are for a gain of more than 200,000, compared with a reading of 176,000 in February. Ed Bradford, a bond trader in Connecticut who goes by @fullcarry on Twitter, has put together 10 reasons why the number could be huge — among them recent bullish data from other employment surveys, and the end of extreme weather.
275,000? Indeed, some forecasters are predicting a reading of 275,000. “While our forecast of +275k appears aggressive at first glance, it actually reflects a return to trend job creation of approximately +175k (the six-month average is +177k) with a weather-related payback of roughly +100k,” Deutsche Bank said. “This is consistent with prior episodes in which weather-impairment was followed by a temporary surge.”
Wage growth. Last month we saw a jump in wage growth, and today’s figures will tell us whether that was a fluke. “Specifically, it has been argued that some hourly wage workers still were paid even if the weather prevented them from working,” explains Maury Harris, chief economist at UBS. “If that were the case and if the hours worked of such workers were reported as down, reported average hourly earnings statistics would be upward biased. However, we have at least tentatively rejected that hypothesis. When we compared average hourly earnings changes and average workweek changes across industries in February, we did not observe the negative correlation implied by the hypothesis.”
PIMCO oversight. Large investors in PIMCO parent-company Allianz are calling on the German company to give more oversight to PIMCO as investors continue to withdraw billions from the mutual fund. “The leash is obviously too long because there is a performance issue now,” said one top-10 investor. “A fully owned subsidiary should not be run like this.”
Dallas Fed’s Fisher on guidance. Dick Fisher told an audience in Hong Kong that the Fed must extricate itself from time-based guidance. “Fisher said he worried that predictable commitments were unsound policy as they could lead to false complacency and market instability,” Reuters reported.
Booming Germany. German manufacturing orders climbed 0.6% in February, above the expected unchanged reading for the month, on strong domestic demand. “An excellent growth performance of the German economy in the first quarter is clearly in the making,” said economist Carsten Brzeski of ING in a research note according to Markewtach, though the pace will likely “return to more normal growth rates” in coming months.
Erdogan rattles lira. The Turkish lira dropped 0.6% against the dollar after Prime Minister Recep Tayyip Erdogan Friday called for a rate cut. “The Turkish central bank in January had surprised markets, and defied government pressure, with a hefty emergency rate rise that helped arrest an alarming slide in the lira,” Marketwatch.
Seamless NYSE debut. GrubHub, the parent company for food delivery megasite Seamless, will make its NYSE debut today on the ticker GRUB. The firm said Thursday it would sell at least 7.4 million shares at a price of $US26 apiece, up from the prior targets of selling about 7 million shares for $US23 to $US25 apiece, according to the Wall Street Journal.
China IOUs. David Wessel summarizes a report this morning in the Journal that 16% of China’s money supply comprises “transferable bank-guaranteed IOUs that firms are using lieu of scarce cash.” “Uh oh,” he Tweeted.
Markets. Stocks in Europe were higher led by London’s FTSE at 0.41%, while in Asia they were mostly lower. U.S. futures were higher. Commodity futures were up.
Belos is a Q&A with Ed Yardeni, president and chief investment strategist of Yardeni Research. He blogs at Dr. Ed’s blog.
BUSINESS INSIDER: What is the most under-reported story in markets?
ED YARDENI: hen look at headline news, about the economy it tends to be very focused on macroeconomic issues, the Fed is in the headlines on a regular basis, and major monthly econ indicators get reported and are closely analysed, and lately the weather’s also been making the headlines on the economy, clearly now evidence economy is rebounding, got spring thaw following winter freeze
However what I think is underreported is the dynamic and dramatic changes happening at the microeconomic level of the economy. I’m particularly interested in the technology revolution, which started in 1990s, and continues to this very day, to dramatically increase the ability of companies to produce more without significantly increasing payrolls or capacity. I think the microeconomic story is not just one about technology, but also the increasingly competitive market environment — that businesses are confronting, and that competition has something do with the tech revolution. Technology allows companies to achieve goals that that they may not have been able to achieve without innovations.
Another wrinkle is that while everyone is focusing on the potential of ultra-easy monetary policies to revive inflation, it may very well be that the Fed’s provision of easy money may actually be a force of deflation. And the reason for that is one of greatest barriers to entry is availability of capital. By making financing so easily available, the Fed is enabling more competition, which is inherently deflationary.
BI: What is your near-term outlook for Japan?
EY: It reminds me of the movie Groundhog Day: In the early ’90s Japan’s economy went into recession, as their real estate stock market bubble burst. It eventually started to show signs of recovering from that recession in 1996, then they hit the economy in April 1997 with an increase of the sales tax, and that pushed them back into recession and set the stage for long period of deflation and subpar growth. And now they’re doing it again: After a spectacular easing of their monetary and fiscal polices over past year, with so called Abenomics, and here again April 2014, and they’re doing it again, raising the sales tax.
It seems to me that could give them negative growth in Q2, and might even put them back to the morass prior Abenomics with subpar growth and renewed deflation. So short-term outlook not very promising, and it looks like Abenomics, the monetary stimulus, is losing effectiveness.
Repetitious rounds of easing in the U.S. seem to have lost their effectiveness. If Japan just decided to go big with it, by doing another round, I don’t think it’s going to work, it won’t have anywhere near the punch the first round had, and the first round was actually quite disappointing, it was basically a monetary devaluation of currency.
The problem there Japan was that companies get their parts from oversees, and when you bring down the currency it costs them more. They also have to pay more for oil and food, so you succeed in bringing inflation up at the cost of purchasing power. It’s not clear wages are going to be increased.
Japan’s a mess.l The demographic outlook is grim — the fertility rate too low, the population shrinking, there’s not much in way of entrepreneurship in Japan, so I think they’re going to go back to muddling along. They may be working on — first there was the lost decade, then last decade disappointed, so they could be working on a 30 lost years.
BI: Are emerging markets coming back?
EY: Some of the emerging markets have been submerging of late, for over year now. As an asset class they have underperformed other equity markets around world. They are cheap — the forward P-E is around 10, which is considerably lower than what have in U.S. at 15, Europe is at 13, so they do look attractive. But the arithmetic of the stock market is P-E x E, and the question is, what is E? What are earnings going to be this year and beyond? And each seem to have own unique problems that suggest not great enough earnings all by themselves.
And of course a good part of that growth was driven by China, which now looks to be in a chronic managed slowdown. So I think if emerging markets are going to surprise on the upside, we’re going to have to see surprises to the upside the U.S. and Europe. So if developed economies start to rock and roll it will trickle down, and it’s not clear whether that will happen. So I think emerging markets will continue to underperform. There might be a trade now and then, I think overall they will underperform.
BI: Where are you seeing warning signs of deflation?
EY: We don’t have outright deflation in consumer price indices, the consumption deflator is still running around 1%. If you’re looking for inflation you can certainly find it in the rent component of CPI, but when you drill down, there’s definitely deflation in consumer durable goods. Some of that may simply be because we import a lot of those products, and their prices continue to decline. This also includes electronics, those products are getting increasingly commoditized so empirically there’s deflation in consumer durable goods.
Now it’s conceivable with the energy revolution in America, as long as geopolitical issues don’t come to the fore, that oil prices could at some point be heading lower, and at some point that would be stimulative to the U.S. economy, but it it goes too low, it takes the incentive out of producing oil and gas domestically.
We’re seeing near zero inflation rates in medical services, hospital inflation rates have come down to zero, and this may be the impact of Obamacare, more likely it’s health insurance programs increasing copays and deductibles so that the consumer is experiencing the cost of healthcare and being more careful about how often they go to the hospital.
BI: How will we look back on the post-recession period of Fed policy?
EY: We can always look back to the 2008-2009 experience and have opinions on how the Fed handled the crisis. All-in-all it was a masterful job, it was clever the way the Fed came up with these liquidity facilities just at the right time, so I do think they were quite successful in averting an outright financial meltdown. Of course there’s always going to be controversy over the extent to which they set stage for that meltdown in the first place — it’s an old twist on that phrase from Reagan, ‘I’m from the Fed and I’m hear to help.’ We’ll need af ew more years to see whether the Fed got us through this morass unscathed. The big issue now is whether they will do it again, provide easy money for too long, and inflate asset bubbles, which then burst and create another round of problems, and how they get us out that when interest rates are already near zero will be quite a challenge. So I would say the initial response to the financial crisis including QE-1 probably gets a letter grade of ‘A.’ The grades drop off form there — QE-2 gets a ‘B,’ QE’s 3 and 4 a C and D. The jury is still out on whether the Fed will get us through this without setting the stage for another financial crisis.
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