Apr 8, 2016 - Financial Market Weekly | 8 April 2016. 1. 3. 4 ... savers as savings rates are lower than inflation. ....
Financial Market Weekly CHRISTOPHER S. RUPKEY, CFA MANAGING DIRECTOR CHIEF FINANCIAL ECONOMIST ECONOMIC RESEARCH OFFICE (NEW YORK) (212) 782-5702
[email protected] The Bank of Tokyo-Mitsubishi UFJ, Ltd.
8 APRIL 16
A member of MUFG, a global financial group
U3, U4, U5, U6 UNEMPLOYMENT NOT A REASON FOR FED NOT TO HIKE, HIKE, HIKE, HIKE 17.1% Battle of the Unemployment 18 17
18 17
Rates U-3 versus U-6
Fed Chair Yellen says the economy is more or less at full employment. But on the other hand, she says some slack remains in the labor market. This slack is one of the headwinds the economy is still facing years after the Great Recession and so is one of the reasons for the Fed’s go slow approach on interest rate normalization. The gradual rate hikes that are still destroying the wealth of savers as savings rates are lower than inflation. Two handed economist talk.
16
16
The Fed used to raise interest rates before all the Americans who lost their jobs in the recession were put back to work
15 14 13 12
15 14
2007-09 recession
13
9.8% U-6
Lehman First Fed rate hike
11
12 11
10.0%
10
10
9
9
8
8
2001 recession
7
8.0%
5.0% U-3
6
6 5
5 4 3
7
4
4.4% 94
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The issue of just what is the real level of unemployment in the country has found its way into the presidential campaign with its exaggerated rhetoric. Republican candidate Trump told the Washington Post in an interview on April 2 that the true rate of unemployment was over 20% not at 5%: “I wouldn’t be getting the kind of massive crowds that I’m getting if the [5% unemployment] number was a real number.” Unemployment was last in the 20s back in the Great Depression in the 1920s. Fed Chair Yellen answers this common misperception by the public in a response to a question at the Economic Club of New York on Tuesday, March 29. “We are close to our maximum employment goal with a 4.9% unemployment rate (FOMC says longer-run normal rate is about 4.8%)…although as I’ve often pointed out and still continue to personally believe, I think there’s a little more slack in the labor market than one would surmise by looking at the U-3 to U-6 mainly involuntary part-timers unemployment rates alone. And I’m particularly 000s Rate Unemployed Labor Force Adds March 2016 7,966 159,286 - - - Traditional unemployment thinking about abnormally high levels of U-3 5.0 U-4 5.3 8,551 159,286 585 Discouraged involuntary part-time employment. And perhaps, U-5 6.0 9,686 159,286 1,135 Others Marginally Attached we have seen some decline in what I would call U-6 9.8 15,809 159,286 6,123 Part time for eco reasons the cyclical component of labor force participation, but it might be that there remains some cyclical depression, people who have become discouraged, who could be brought into the labor market.” 1
Financial Market Weekly | 8 April 2016
If they are discouraged they aren’t telling the Bureau of Labor Statistics (BLS). U-4 unemployment adds to U-3 unemployment 585 thousand people who are discouraged. A drop in the bucket really. The discouraged numbers were higher in the recession, about double, but the discouraged count does not look very cyclical. We can’t remember who said it: “The Fed fought inflation for too long (overdid the rate hikes), and now they are making the opposite mistake by fighting unemployment for too long (keeping rates at zero since 2008).” But this is what we think of when hearing Yellen go on about the slack still out there in the economy despite the 5.0% unemployment rate. Incredible as in not credible. So U-4 adds 585 thousand discouraged people who are classified as marginally attached to the labor force. U-5 adds another 1.135 million that are others who are also classified as marginally attached to the labor force. The 1.135 million were not discouraged; they had searched for work in the last year, just not in the last four weeks, citing reasons like family responsibilities, were in school, ill-health or disabled, and other reasons like child-care issues, transportation problems. Not really a reading on a “weak economy.” Involuntary part-time employment accounts for the majority of the difference between U-3 and U-6 unemployment. Part-time workers who want full-time work represents slack labor market conditions seven years after the recession ended… we just don’t buy it. For one thing, they have paychecks, so there’s some money coming in. Number two, it is a survey and subject to error as people often cannot make up their minds. It is a survey where the results are often skewed by cyclical perceptions of the economy where the current 6.1 million involuntary part-timers can vacillate between saying they would rather work full-time and saying they do not wish to, especially when at the same time there are 20.4 million saying they were working part-time and absolutely lovin’ it. 20.4 million voluntary and 6.1 not. As far as the abnormally high levels of involuntary part-time employment that Yellen cites, it is important to remember that this employment can be broken down into two distinct categories: those who say they cannot find full-time work because the economy is weak, and those who say they cannot find full-time work because, well, because this is the way that many companies hire any more. It is important to note that the numbers of those saying the economy is “weak” are back down to normal levels, so the “abnormally high levels” cited by the Fed Chair are difficult to reconcile with the actual data. 7.0 millions
Involuntary part-timers who say they cannot get full-time employment because of slack work or business conditions
Peak 2009 6.648
As you can see, the major difference between the 6.0 Part-time workers who want full-time work 5.0% standard measure of unemployment (U-3) exaggerates and U-6’s 9.8% unemployment is mostly these 5.0 "underemployment" part-time workers who desire full-time jobs. We 4.0 1992 don’t think U-6 adds any special insight into where 3.285 2003 3.118 the economy is in the cycle. Its trend mirrors the 3.0 Mar 2016 normal (U-3) unemployment rate. Telling people 2006 3.631 2.658 2.0 that unemployment in the country is really much 2000 1.957 worse at 9.8% is just a political scare-tactic that This measure of "slack" has all but gone 1.0 away as the numbers are back near the best exaggerates the problems with the economy. This of times in 2006. The recession weakness in this statistic was way back in 2009. is not a headwind facing the Federal Reserve that 0.0 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 argues for a go-slow normalization after the Great Recession. U-6 is simply not a sign of economic distress, and is not a weak economy that requires the support of the central bank. If Congress wants to aid these part-timers who say they cannot get fulltime work, that’s okay, but the numbers of these involuntary part-time people should not be an indicator up on the Fed’s dashboard showing how they should drive the economy or how they should position interest rates. Our conclusion is they need to normalize interest rates or they risk cementing market and business expectations such that interest rates cannot ever be raised. Rate hikes to 3% will not slow the economy and progress on getting them up there should not be delayed. 2
Financial Market Weekly | 8 April 2016
JOBLESS CLAIMS—BEST OF BEST TIMES REVISED: IT’S RIGHT NOW Unemployment claims fell 9K to 267K in the April 2 week. A couple of weeks ago, the Department of Labor made its annual revisions to the weekly claims data back to 2011. Good news in the revisions. It is the best of best times right now. Before the revision, the lowest best level of unemployment claims since the 1970s was 255K in the July 18, 2015 week. Now the new low on initial jobless claims is 253K in the March 5, 2016 week. The improvement in claims looks remarkable moving into early March. We are waiting to see if it brings further improvement to the labor market even though the economy has already reached full employment. Initial jobless claims near 253K best levels since the 1970s
Continuing unemployment claims moving sideways
375
375
350
2850 5.5 5.5 5.4 5.5 5.3 5.3 5.1 5.1 5.0 5.0 5.0 4.9 4.9 5.0
000s
000s
Unemployment rates
First-time claims Apr 2 267K Mar 26 276K Mar 19 265K Mar 12 259K
350 Auto plant retooling
325
Market recession worry
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2761
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2672
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2583
150
2494
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2406
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2317
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0 Mar 5 253K
-50
225
II
III 2014
IV
I
II
III 2015
IV
I
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III 2016
IV
I
Total payrolls Mar +215K Feb +245K Jan +168K
2139
Mar 26, 2016 2.191 million
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225
I
2228 Payroll jobs left axis
2050 J J 2014
II 2017
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TREASURY CURVE NARROWS FROM 130 BPS AFTER FED LIFTOFF 31-Mar Q2 Q3 Q4 Q1 Q2 Q3 The yield curve between 2-yrs and 10-yrs was 2016 2016 2016 2016 2017 2017 2017 +102 bps on Friday versus +105 bps last 30-Yr Bond 2.61 3.00 3.10 3.20 3.30 3.30 3.50 1.77 2.30 2.50 2.70 2.80 2.90 3.10 week. Selling at start of week on Rosengren 10-Yr Note 1.21 1.80 2.00 2.20 2.40 2.50 2.70 comments about the market having taken too 5-Yr Note 2-Yr Note 0.72 1.30 1.70 1.90 2.10 2.30 2.60 many rate hikes off the table. It was all rally 3-month Libor 0.63 0.85 1.10 1.35 1.60 1.85 2.35 from that low point though with European Federal Fund Rate 0.50 0.75 1.00 1.25 1.50 1.75 2.25 105 100 80 80 70 60 50 stocks tumbling Tuesday and the dollar falling 2s/10s spread sharply against the Yen, Thursday especially; if Yen is a safe haven currency, so are U.S. Treasuries perhaps. Rally stopped Friday with Yellen less dovish Thursday night. 10-yr yields closed 1.72%. 2yr/10yr Treasury curve 130 bps before December 16 Fed liftoff
Treasuries Held in Custody for Foreign Central Banks at the Fed $bln, changes
150 bps 140
150 Dec 3 Draghi Dec 16 disappoints Fed lift off
Next Supply: Th4-7TBA 3s/10s/30s Apr 12-14 $56bln vs $56bln
Feb 3, 2016 Treasury cuts $1 bln off 10-yr and 30-yr auction amounts (now 20 and 12 bln) Feb 18, 2016 Treasury cuts $1 bln off 5-yr and 7-yr auctions (now 34 and 28 bln)
140
70
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Dec +0.8 Jan -44.1 Feb -26.0 Mar +9.6 Apr 6 -7.0
Apr 6 Outstanding $2.933 tln
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130
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10 Mar 16 Fed two hikes
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110 -30 Feb 10 Yellen risks ahead
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Financial Market Weekly | 8 April 2016
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FEDERAL RESERVE POLICY The Fed meets April 26-27 to consider its monetary policy. The Committee is split with 7 out of 17 for three or more hikes this year against the 10 of 17 for just two. That’s why the Fedspeak seems to go back and forth. This week Boston Fed President Rosengren sounded hawkish, although he really just objected if that’s the word to the market pricing in just one or none for rate hikes this year. We guess he’s in favor of two or three rate hikes, keeping in mind the original “gradual” was a rate hike every quarter at every Fed press conference meeting or 100 bps per year.
Selected Fed assets and liabilities Fed H.4.1 statistical release billions, Wednesday data 6-Apr 23-Mar 16-Mar Factors adding reserves U.S. Treasury securities 2461.345 2461.326 2461.283 Federal agency debt securities 29.257 29.257 29.257 Mortgage-backed securities 1753.087 1753.082 1762.933 Primary credit (Discount Window) 0.000 0.017 0.004 Term auction credit (TAF auctions) 0.000 0.000 0.000 Asset-backed TALF 0.000 0.000 0.000 Maiden Lane (Bear) 1.722 1.722 1.722 Maiden Lane II (AIG) 0.000 0.000 0.000 Maiden Lane III (AIG) 0.000 0.000 0.000 0.146 0.048 0.053 Central bank liquidity swaps Federal Reserve Assets 4529.4 4527.3 4538.3 3-month Libor % 0.63 0.63 0.63 Factors draining reserves Currency in circulation 1445.716 1443.285 1441.401 Term Deposit Facility 0.000 0.000 0.000 Reverse repurchases w/others 27.455 127.119 70.075 Reserve Balances (Net Liquidity) 2467.091 2336.085 2431.826 Treasuries within 15 days 0.394 23.587 23.587 Treasuries 16 to 90 days 80.207 67.034 67.034 Treasuries 91 days to 1 year 117.586 117.592 117.589 Treasuries over 1-yr to 5 years 1156.730 1155.990 1152.298 Treasuries over 5-yrs to 10 years 474.170 464.882 468.561 Treasuries over 10-years 632.257 632.241 632.214 **September 10, 2008 is pre-Lehman bankruptcy of 9-15-08
9-Mar
Sep 10 2008** pre-LEH
2461.239 29.257 1758.082 0.022 0.000 0.000 1.722 0.000 0.000 0.076 4531.8 0.64
479.782 0.000 0.000 23.455 150.000
1439.520 0.000 48.389 2455.521 23.587 67.034 117.587 1152.291 468.555 632.186
834.477 0.000 0.000 24.964 14.955 31.549 69.272 170.807 91.863 101.337
The two biggest downshift days in market expectations for the number of Fed rate hikes this year was (1) March 16 of course after the latest “go-slower” Fed meeting, and (2) Yellen’s Economic Club of New York remarks on Tuesday, March 29. In the Economic Club Q&A she gave another defense if that’s the word of why they skipped a March rate hike. It’s the entire world that worries her: “I highlighted the pace of global growth and the prospects for oil prices.” (1) Slower growth abroad can slow U.S. exports. (2) “The financial market repercussions of slower growth which tends to mean a stronger dollar, lower equity prices and so forth, higher risk spreads.” Her number two argument against a rate hike no longer looks problematic with the dollar, credit spreads and stock market all back in the clear. Number 1 will receive an update on Tuesday, April 12 at 9am EDT when the IMF puts forward its World Economic Outlook which is widely expected to be trimmed back a couple of tenths. Their January 2016 update showed world growth at 3.4 and 3.6 percent for 2016 and 2017, respectively. But an important downward revision will likely come from the United States as the IMF had growth fairly high, faster than the FOMC forecasts, at 2.6% in 2016 and 2.6% in 2017. Fed Individual Forecasts
The final Fedspeak this week was from New York Fed President Fed funds rate by year-end Longer Votes 2016 End 2017 End 2018 End run Dudley who used to be a Wall Street economist at Goldman. 1 0.625 1.625 2.125 3.000 He was a little downbeat, not a surprise as an ex-economist 2 0.875 1.625 2.375 3.000 perhaps, but it was a surprise as the FOMC in general does not 3 0.875 1.625 2.375 3.000 4 0.875 1.625 2.500 3.000 see downside risks for the economy as Yellen said at the 5 0.875 1.875 2.625 3.000 Economic Club of New York. On Friday he said, “Although the 6 0.875 1.875 2.875 3.250 7 0.875 1.875 2.875 3.250 downside risks have diminished since earlier in the year, I still 8 0.875 1.875 2.875 3.250 judge the balance of risks to my inflation and growth outlooks to 9 0.875 1.875 3.000 3.250 be tilted slightly to the downside.” We guess this means he is 10 0.875 2.125 3.125 3.250 11 1.125 2.125 3.125 3.250 not not a Two-Dot Person, a popular characterization that Philly 12 1.125 2.125 3.125 3.250 Fed President Harker first floated in the press. We’ll see what 13 1.125 2.375 3.250 3.500 they say in April. Not much of a heads up if they are actually 14 1.375 2.375 3.250 3.500 15 1.375 2.375 3.375 3.750 going to hike rates and make it a truly “Live” meeting. Market is 16 1.375 2.625 3.375 3.750 not expecting it. Market is not really “Live” itself lately. The only 17 1.375 2.750 3.875 4.000 real important economic data left before they meet is March Median 0.875 1.875 3.0 3.25 Meeting Mar 2016 Mar 2016 Mar 2016 Mar 2016 retail sales on Wednesday, April 13 which is not expected to be gangbusters mostly because car & light truck sales have already been reported down a steep 5.2% to a 16.5 million annual rate in March from 17.4 million in February. And possibly CPI inflation for March is out the next day on April 14. Core CPI inflation is above Fed target at 2.3% YOY and Yellen has said she does not think it will stick. Stay tuned. Story developing. There is not a lot of history to forecast on here when it comes to the path of interest rate normalization: the arguments over whether to stay or go on rates have become more political as the hawks and doves on the FOMC continue to duke it out. 4
Financial Market Weekly | 8 April 2016
29.287 0.000 0.000 62.000 961.7 2.82
CORPORATES:EXELON, TARGET, THERMO FISHER, ENTERPRISE PRODUCTS Corporate bond offerings were $27.5 billion in the April 8 week versus $18.5 billion in the April 1 week. On Monday, Target Corp. sold $2 billion 10s/30s. It priced $1.0 billion 2.5% 10-yrs (m-w +15bp) at 72 bps (A2/A). The retailer will use the proceeds to purchase up to $1.8 billion of its outstanding debt. Corporate bonds (10-yr Industrials rated A2) were 106 bps above 10-yr Treasuries on Friday versus 109 bps last Friday.
Weekly Corporate Issuance USFIIVST ($Bln) 60
BPS SPREAD: BAA-RATED CORPORATES TO 30-YR GOVTS
Spread: A2-Rated 10-Yr Industrials versus 10-Yr Treasuries (BPS) 155 65.9
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Crude oil $101.79
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245 bps in March (5.13% vs 2.68%)
RECENT TREND IN 10-YR GOVERNMENT NOTES (N.Y. CLOSING) 2.50
EXPECTED 10-YR 2-3 WEEK TRADING RANGE 1.50% to 2.0% 10-YR
HIGH 99-15 1.68% Thursday, April 7, Yen rallies, breaking 110Yen, safe haven currency, Dow falls 174 points LOW 98-16+ 1.79% Monday, April 4, may need more rate hikes than market thinks: Rosengren
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2.50 Dec 16 Fed lift off
Dec 29 Dow +192 points
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Dec 12, 2012 Fed QE3 Govts 6.5% unemployment trigger for rate hike 10-yr closes 1.70%
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Mar 10 ECB That's It.
Jul 7 Dow -392 points
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Feb 5 +151K jobs
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Mar 4 +242K jobs
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Jan 20 Dow -565 points Jan 29 intra Japan day negative rates
1.80 Mar 1 ISM 49.5
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Mar 29 Yellen risks ahead
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1.60 4 11 DEC 2015
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Aug08 265 bps
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Financial Market Weekly | 8 April 2016
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Analyst Certification The views expressed in this report accurately reflect the personal views of Christopher S. Rupkey, the primary analyst responsible for this report, about the subject securities or issuers referred to herein, and no part of such analyst's compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed herein.
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Financial Market Weekly | 8 April 2016