Busy, very busy weekend on my paid JubakAM.com site this weekend as I tried to make sense of the market reaction to Friday’s disappointing jobs numbers for September.
On Friday, on this free site, I noted that the early sell off in U.S. stocks followed by a strong rally didn’t exactly clarify market sentiment.
In four posts this weekend on my subscription JubakAM.com I 1) laid out a fundamental scenario through the end of 2015 that pointed to a grind lower in U.S. stocks; 2) in a video explained why I think the debt ceiling deadline on November 5 is more of a danger to the markets than the expiration of the temporary funding bill on December 11, 4) projected that the big trend for the week ahead would be the weak dollar as traders speculate on the Fed holding its fire until March or3later, and 4) gave an update on what technical analysts are saying about why this market is still in a downtrend but with signs of hope to the upside.
That’s what I’m worked on at my subscription JubakAM.com site–I think there’s some value to you in passing on the direction of my thinking about the market on that site. Hope so anyway.
And, of course, there’s an ulterior motive: If you decide that you’d like more detail on those posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)
Well, I was sort of right in yesterday’s post when I said the reaction to today’s jobs report for September would tell us a lot about the worries and hopes of the financial markets.
Of course, what we got was one summary of worries in the morning and a totally different take on market fears in the afternoon.
And I was just a bit wrong about the numbers themselves. I thought that the numbers were likely to show a strengthening U.S. economy.
But… instead of the 200,000 net new jobs that economists surveyed by Bloomberg had projected, the U.S. economy added just 142,000 jobs in September. Revisions took a total of 59,000 jobs out of the figures for July and August. Average hourly wages, which were supposed to increase, instead fell by a penny from August. People left the workforce, again, with the labor participation rate falling to 62.4 from 62.6% in August. (Unemployment did stay at 5.1% thanks to the decline in labor participation.)
In the morning that news led U.S. stocks down with the Standard & Poor’s 500 falling 1.5%. Fear that the U.S. economy might be slowing and would therefore play into—rather than counter—a slowdown in the global economy drove the losses.
In the afternoon, however, stocks rebounded with the S&P 500 finishing up 1.43% on the day. In the afternoon session stocks, U.S. Treasuries, and commodities rallied as the U.S. dollar fell. The weak jobs numbers would postpone any Federal Reserve interest rate increase, investors and traders decided. The odds of a December increase fell to 34% from 46% before the data release, according to the Fed Funds futures market. Odds on a January increase fell below 50%.
With the likely first move on U.S. interest rates delayed later into 2016, the U.S. dollar fell. (A delay in raising U.S. interest rates removes part of the reason to buy dollar-denominated assets now.) A weaker dollar pushed up the prices of commodities denominated in dollars andalso led to yields on benchmark 10-year U.S. Treasuries falling below 2% for the first time since August.
So where does that leave us in terms of figuring out market sentiment?
Pretty much where we went in with financial markets suspended between fear of faltering global growth and hope for a delay in rates.
It’s interesting to me that the market did have a rationale for ignoring or at least downplaying the weakness in these numbers since the September and August jobs figures are notoriously subject to revision once government statisticians get a better handle on seasonal adjustments from the start of the school season.
But the market chose not to take that out. And instead took the drop in jobs at face value. To me that’s an indication that in the glass half full/half empty debate between growth and interest rates, the market is inclined to go with the half empty view that slowing growth is indeed the bigger worry. Earnings season could confirm that view if a large number of U.S. exporters complain about pressure on revenue and earnings from a slowdown in China and other parts of the global economy.
Global central banks have to feel like The Godfather’s Michael Corleone: “Just when I was out, they pull me back in.”
The People’s Bank of China, the European Central Bank, and the Bank of Japan just can’t get their economies growing fast enough to produce a sustained recovery that would let them step back from using the printing press to stimulate the economy.
Only the U.S. Federal Reserve might have built strong enough growth so that it can start to reduce its intervention in the economy—but that still remains an open question.
In today’s news the People’s Bank of China cut the minimum down payment required of first-time homebuyers to 25% from 30%. The down payment had been just 20% in 2010. That year the central bank raised the required down payment from 20% in order to rein in speculation in the real estate market.
Now with growth projected to slow to 6.8% for 2015 by economists surveyed by Bloomberg, which would be below the government’s target of 7% growth, stimulating the real estate market seems a good idea again. Home prices have been on the rebound as the government gradually removed purchase restrictions with new home prices climbing in 35 of 70 surveyed cities in August. That’s up from 31 cities in July and only two cities back in February. The real estate sector, if you include property related goods, accounts for 25% of final demand in China, according to the UBS Group.
Also today inflation in the EuroZone turned negative in September marking a huge set back to the European Central Bank’s program of buying massive amounts of bonds to move inflation back toward 2% and to weaken the euro to cause an export-led increase in growth. Consumer prices fell by 0.1% year over year, while unemployment stayed stuck at 11% in August. Falling energy prices led inflation lower but economists are now predicting that the central bank will increase the size of its $1.2 trillion asset purchase plan by the end of the year. Core inflation, which does not include more volatile food and energy prices, was unchanged at an annual 0.9%. Economic growth in the EuroZone looks to be picking up with a 0.4% rate of growth expected in the third quarter.
That may not seem like much of a growth rate but that kind of growth would be greeted with cheers in Japan. Industrial production fell by 0.5% in August after dipping 0.6% in July. That has put a recession on the table. The Japanese economy contracted by 1.2% in the second quarter and economists are now looking for a 1% contraction in the third quarter. Two down quarters in a row meets the definition of a recession.
That’s certainly not what the program of massive bond buying designed to weaken the yen and increase both exports and inflation (Sound familiar?) was supposed to accomplish. At its last meeting the Bank of Japan stood pat rather than expanding the size of its purchase program. That’s likely to change now with analysts and economists pointing to the end of October for a big bump up in the buying program from the current $670 billion a year. It now looks like the slowdown in China has managed to put an end to improvements in economic indicators that showed a drop in unemployment, rising wages, and increasing inflationary pressures.
Back in the United States Friday will bring September jobs numbers from the Department of Labor that will show if the U.S. economy still looks strong enough for the Federal Reserve to consider an initial increase in interest rates in December. Economists surveyed by Bloomberg are expecting the economy to add 200,000 jobs with a range of forecasts at 120,000 to 215,000. Today’s ADP employment survey showed the economy adding 200,000 jobs over the last month up from 190,000 in the prior period.
200,000 net new jobs for September would alleviate some of the worries about growth raised by data from China, Japan, and Europe. But no one on Wall Street believes that even the domestically centered U.S. economy can escape what looks like continued slow growth elsewhere. It would sure help if the central bank policies in China, the EuroZone, and Japan showed some signs of working.
Anybody got a deal that these economies can’t refuse?
Last week’s (September 17) decision not to raise interest rates looks like it has come back to bite the Federal Reserve with a vengeance. By linking an initial increase in short-term interests from the current 0%-0.25% range to turmoil in China and other emerging markets the Fed has succeeded in throwing financial markets into confusion. In my comments on September 17 I said that a decision not to raise interest rates could increase volatility in emerging markets because it would leave traders and investors worried over when the Fed might move http://jubakpicks-1565237904.us-west-2.elb.amazonaws.com/2015/09/17/fed-does-nothing-today-but-speaks-clearly-comments-likely-to-put-more-pressure-on-emerging-markets/ . It now looks like I was too optimistic.
Exactly what is the Fed’s policy? Does the Fed need to see a lessening of volatility in emerging stock markets and developing nation currencies? How much of a lessening? Will a bit less volatility be enough? Does the Fed need complete stability in one market (China) or in all? Does the U.S. central bank need to be convinced that China isn’t about to devalue the yuan again before it moves? (Remember that China’s devaluation of the yuan by what is now 3% against the dollar threw global markets into confusion.)
The Fed had, up until last week, made sending clear signals of policy a priority. But it now looks like the central bank has squandered months of hard work.
And with no one sure what the Fed needs to see before it moves, traders and investors seem inclined to sell on bad news—or indeed on any news–just to be safe.
Almost all the world’s major stock markets are down today. The Dow Jones Industrial Average was down 0.48% at the close and the Standard & Poor’s 500 was down 0.34%%. In Tokyo the Nikkei 225 index was lower by 1.17% over night and in Europe the French CAC 40 fell 1.93% and the German DAX was down 1.92%.
The only exceptions came in China where the Shanghai Composite closed up 0.82% over night and the Shenzhen Composite moved ahead 1.21%. While that may seem counterintuitive—isn’t China the locus of fears about slowing economic growth?—the gains on the mainland Chinese exchanges are completely in line with the recent pattern of massive intervention organized by the Chinese government. That invention has followed a pattern of big purchases by these “friends” of the nation beginning in the afternoon and continuing to the close. And sure enough in today’s session buying began about 1 p.m. Shanghai time that lifted the index from 3124 to a close at 3134, a gain of 29 points from the low of the day and 27 points from the prior close. (Not a huge move, I’ll grant, but not bad under the circumstances.)
Commodity producers and industrial companies were hit on worries about global growth. Freeport McMoRan Copper and Gold (FCX), for example, was down 1.1% as of 1:30 New York time and closed down 0.1%. Caterpillar (CAT) tumbled 6.27% at the close after reducing its forecast for 2015 sales and announcing plans to cut as many as 5,000 jobs.
Federal Reserve chair Janet Yellen gave a speech on inflation tonight after the market close that stuck to the Fed’s assertion that an interest rate increase is still possible in 2015. Did she manage to explain Fed policy on the timing of an interest rate increase with enough clarity to calm traders and investors? I’d like to think so but any optimism is tempered by remembering that clarity isn’t the Fed’s strong suit.
The Federal Reserve did nothing today with its Open Market Committee voting, with only one dissent, to keep benchmark short-term rates at 0% to 0.25%.
But for once the Fed said something very clear—and very important—to traders and investors. Over and over again in the Fed’s statement it referred to the high level of global risk and volatility as the major reason for standing pat. For example, “The committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad.” Or this “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”
Why is this language important?
First, the Fed has pointed toward an indicator that isn’t likely to turn around very quickly. It’s unlikely, for instance that questions about falling growth rates in China will get resolved by the October or even the December Fed meetings. Volatility in the Shanghai market is likely to still be with us by then. And let’s not forget that commodity deflation, which is working to keep U.S. inflation way below the Fed’s target of 2%, shows no sign of ending quickly. By emphasizing global economic and market uncertainty, the Fed raised the odds against an interest rate increase in 2015 and raised them on a 2016 increase.
Second, by putting so much emphasis on global risk and global uncertainty, the Fed virtually guaranteed that traders and investors will pay even more attention to problems of global economic growth, emerging market currency weakness (and dollar strength), and the rising debt burdens of developing economy companies that used dollar-denominated debt for financing. Rather than ending the recent emerging market sell-off, I think that today’s statement may accelerate the downturn in the short term. (Frankly, I was hoping for a quarter-point interest rate increase today because I thought it would support sentiment on emerging markets.)
Tomorrow I’ll take a look at some research from investment bank Macquarie that argues that we’re looking at a long downturn in emerging markets.