There wasn’t much in the economic data today to make the financial markets reconsider their belief in the return of Goldilocks. Global growth numbers supported the view that key world economies will turn in decent performances. But none were so strong as to suggest putting higher interest rates from the Federal Reserve back on the schedule.
Imports in China increased by 5.1% year over year in May. That’s not stunningly impressive growth but it does mark the first time that imports have moved up after 16 months of declines.
U.S. benchmark West Texas Intermediate and international benchmark Brent crude rose 1.59% and 1.94%, respectively, as of 3 p.m. New York time as U.S. oil inventories fell by 3.2 million barrels for the week. That kept the trend pointed in the right direction but the drop, reported by the Energy Information Administration today, was only slightly greater than the 3.1 million barrel decrease predicted by energy analysts surveyed by the Wall Street Journal. Again good news but not too much of it.
As of 3 p.m. the Standard & Poor’s 500 stock index was ahead 0.37% to 2119.87 as it continued to close in on the May 2015 all-time high of 2135. The dollar continued to weaken on the belief that the Federal Reserve won’t raise interest rates until September.
So strong is the current Goldilocks view that financial markets were willing to completely overlook any contrary data points.
For example, the World Bank slashed its 2016 global growth forecast today to 2.4% from its 2.9% forecast in January. The forecast for commodiy-exporting emerging markets dropped to a very small 0.4% growth rate for 2016. That is down from a forecast of 1.2% growth back in January. Commodity importing emerging markets will do much better on lower energy and other commodity prices. But even in that segment of the global economy, the World Bank lowered its 2016 forecast, dropping its expectations to 5.8% from the previous 5.9%.
Forecasts for developed economies took a hit as well with projections for the United States falling 0.8 percentage points to 1.9% growth in 2016. Projections for the EuroZone economy dropped to 1.6%.
Among individual emerging market economies, the forecast for China remained unchanged at 6.7% in 2016. (That comes after growth of 6.9% in 2015; the World Bank expects growth in China’s economy to drop to 6.3% by 2018.) Economic growth in India, at a projected 6.7%, stayed in line with January forecasts. The current recessions in Brazil and Russia were projected to be even deeper in 2016 than was forecast back in January.
Goldilocks will get a significant gut-check tomorrow, Thursday, June 9, with the release of the weekly numbers on initial claims for unemployment. If the number of new claims filed remains at the low level of the last few months, then some investors will question the weak May jobs number released last Friday and the consensus that the Fed has moved to the sidelines on interest rates until at least September. A much higher level of new claims will stoke fears that the U.S. economy might be headed to recession. A rising level of new claims frequently signals that the job market has stalled and that the economy might be headed toward a recession. Economists surveyed by Bloomberg are looking for the weakly number to rise slightly to 270,000 from the 267,000 of the prior week, but that would not be a big enough increase in new claims to set off alarm bells. Economists note that initial claims from oil producing states have stopped rising and are now declining–which makes an increase in initial claims on the national level less likely.
Forecasts that the U.S. is headed into recession took another lump from the economic data with today’s release of the Labor Department’s report on initial claims for unemployment. For the week ended on February 13, new claims for unemployment fell by 7,000 to seasonally adjusted 262,000. That’s the lowest level of initial claims since November and below the projection of 275,000 new claims by economists surveyed by Reuters.
The four-week moving average, a less volatile read on the underlying trend, fell by 8,000 to 273,250 with last week’s report.
Again, no evidence from this report that the U.S. economy is about to shift into higher gear. But also no evidence that the economy is sliding toward recession.
Is this kind of indicator of modest growth enough to reassure the Federal Reserve about the underlying strength in the U.S. economy so that the Fed raises interest rates once or twice in 2016? That’s the big question right now since the market decided a week or two ago that the Fed wouldn’t raise interest rates at all in 2016 and that the first increase might not come until relatively late in 2017. It doesn’t take much in the way of economic strength–an upside in industrial growth yesterday and slightly stronger initial claims numbers today–to raise doubts about that consensus.
All it takes is a little doubt when the market isn’t pricing in any doubt at all.
There was enough good news in this morning’s February jobs numbers to keep alive hopes that the recent sluggishness in the U.S. economy is “only cold weather.”
But with the Standard & Poor’s 500 at new all-time highs this week, I’ve got to wonder how long the “I’ll gladly give you job growth tomorrow for another 1% advance in the stock market today” scenario can run.
At some point the economy needs to deliver something other than mediocre job growth.
In February net nonfarm payrolls added 175,000 jobs. That was above the consensus among economists surveyed by Briefing.com of 163,000 net new jobs for the month. The Labor Department also revised its estimate of job additions in January to 129,000 from the prior 113,000. The unemployment rate inched upwards to 6.7% from 6.6% as more workers searched for jobs.
The worst part of the monthly report was that the stronger than expected jobs number didn’t add more to wages in the month. Read more
This morning’s January jobs number was disappointing. The economy created 113,000 net new jobs against a consensus among economists surveyed by Briefing.com of 175,000. The very, very disappointing December total of 74,000 was revised upward, but only by a tiny 1,000 jobs.
And yet the U.S. stock market is up strongly today. As of 2:30 p.m. New York time the Dow Jones Industrial Average was up 0.93% and the Standard & Poor’s 500 was up 1.15%.
It’s important to try to figure out why. Even if you conclude the market is wrong, you need to know what it is thinking since it’s that thinking that drives stock prices in the short run.
Here’s my survey of possible reasons: Read more
I think tomorrow’s jobs number for January is likely to have a big effect on the markets. But I’m not sure we’ll really learn much of anything about the economy because of uncertainties in the data.
I know what the financial markets want to hear—that the paltry 74,000 jobs added in December was an anomaly, that the initial December total has been revised upwards, and that the January total at least matches the consensus forecast of economists surveyed by Briefing.com of 175,000 net new jobs
Those results would argue that the strength in today’s initial claims for unemployment—a decline of 20,000 in the weekly total for the first drop in three weeks—and the improvement in the Purchasing Managers Index for the service sector to 54 in January from 53 in December are truer indications of the strength in the U.S. economy than the drop in the Purchasing Manager’s Index for manufacturing or disappointing retail sales numbers.
But although I think that kind of news would move global stocks higher—and disappointing numbers would push them lower—I’m not sure that the data will mean as much—one way or the other—as the market wants in its current search for direction.
Why ? Read more