Week in Review

The collective market view is that we are experiencing a moderate slowing: in China, due to Bk of China braking; in Japan, as expected, due to the tragedy; in the UK, sideways but with the threat of a lift over its head; in the EU, the reality of the periphery disassembling, only Germany and France packing the load; and finally, in the US, with manufacturing slowing, with signs of employment doing the same and with the reality of gasoline and Fed policy (lower $) smacking the consumer where it hurts.

We are not in a sweet spot at the moment; we cannot detect just where there may be a major flaw in consensus, just where resides the next opportunity for our clients. We’ve got a long weekend ahead, so plenty of time for thought.


Robert Craven

April Income and Spending

We did not highlight this release as it carried little potential to move the market.. Wages & salaries were up 0.4%, or 3.3% above their year ago level but gasoline prices were the piano which fell on the shopping crowd so that spending came in just below expectations and the past three months were revised slightly lower.

With lower crude, observers expect some improvement in consumer activity. Just ahead we’ll take a look at this and other key sectors.


Robert Craven

The US Consumer, The Analyst and The Cliff

In today’s Q1 GDP revision, consumer activity was revised lower. We all now know that consumer activity was hit by higher food costs, but especially by higher gasoline prices.

Early Q4 the Street/financial media had the consumer going nowhere. We advised instead (a crowd of one) that the consumer would come alive into 2011. Sure enough. Thus by mid Q1, the Street/ financial media had the consumer at full stream ahead. We advised instead (a crowd of one) that consumer activity would be slowed substantially by higher gasoline prices. We predicted then that most economists would eventually catch on. They did. In a few weeks they cut their GDP estimates by an average of about 1 ½%, having been twice snakebit in five month's time.

Herein lies a lesson in observation. It is this: Market observers, almost without fail, overreact, tearing off in one direction, willfully blind until they go off the cliff. Scratching their way back up, off they go in the other direction, to soon again be converted to crow bait.

And so it was with analysts and the consumer. Missing the turn just ahead in early Q4 and not wanting to be burned again, economists wholly embraced the consumer, jettisoning all caution at the same time. Heedless of the osprey overhead, like trout, they keyed in, failing to account for gasoline just as the frenzied trout fails to account for the osprey. Again analysts were flattened.

This cycle will repeat, always. To understand this dynamic is to be well armed.


Robert Craven

Market Mind

No impact from the Q1 GDP revision (as expected) but a major worry delivered by Claims, the very risk we noted in our prep for this event.

The market crowd will now look for employment to follow manufacturing - south. Whether this is reality or not has nothing to do with it; those who disagree, at least for the short term, will be rolled over.


Robert Craven

Speaking of Releases

Most of us know that certain economic releases are key to market response, indeed, to our own portfolios. Active investors who ignore these do so at their own peril.

Several internet services list these events, both US and offshore. One sample: http://www.fxstreet.com/fundamental/economic-calendar/.

Each lists the event and its description, then assigns a volatility measure (*’s, !’s, etc). We recommend the client consult these sites. They are not competition, but a complement.

The main value is the list, with description of the details of each release. Good. That saves us the print.

The assignment of volatility by these services is sometimes accurate, mostly not, but that’s ok. That’s our job, or the beginning of it. We extract from the list just those events with market-moving muscle (ignoring the rest).

As we refine this part of our service we will eventually predict the odds of result; that is, predict which side of consensus the result will fall and we will do that on the order of 70% of the time.

Our service will then be unique to the industry.


Robert Craven

Releases Tomorrow

We’ll have the second estimate for Q1 GDP. Though this is history, such revisions can deliver market impact. Don’t look for much this time.

Jobless Claims however packs a potential punch. Market view is now for a slowing in the one-time paladin of recovery - manufacturing. This leaves employment. The entire free world’s taken its fingernails down to the quick monitoring the US labor market. Recall that last week’s Claims release was very encouraging - claimants far below expectations. The same can be said for April Payroll (May/6) - encouraging. Thus, if tomorrow’s release is below expectations, it will be taken as a confirmation. There will be a modest market reaction. If the release if far through expectations - more claimants - it will be seen as a turning point, and greatly worry equities, sparking bonds (lower yields). These are the dynamics as we approach this event.


Robert Craven

The Japan Factor

We noted just a few days after the tsunami that its net impact on US activity would be minimal, perhaps a wash, that supply shortages to US industry, especially vehicle assembly, would be at least partly met by Japanese competitors, and at any rate, this negative would be offset by Japanese demand for concrete and other building materials later in the year. Today’s April Durables release indicated that vehicle production was off considerably, especially - no surprise - by those facilities owned by Japanese, due to component shortages. We may have under-estimated this factor, and it’s too early to judge if we’re right on demand from rebuilding.

Robert Craven

Durables Orders

Today’s April print fell far south of expectations (-3.6% vs -2.2%, consensus) with broad-based weakness. Stock futures at this moment are greatly worried, fearing this indicates trend and an economic lull. One key component is so-called Nondefense Capital Goods Shipments, a proxy for capital spending. This series is only slightly above its Q1 average, indicating that key capital spending has only expanded modestly into Q2.


Robert Craven

Farmers, Commodity Prices and The Fed

We were in the San Joaquin Valley this weekend wanting to hear first hand from the farmers; we ran into an old timer who has witnessed higher prices for his crops and who told us, "I’m not used to making money!" Suddenly, the cotton, cereal and nut farmers have seen prices go through the roof; so have the cattle guys.

We told one cattleman friend that he ought to replace that picture of Charlie Goodnight in his den, with one of Ben Bernanke.

Excesses at the Fed have enabled exporters and commodity producers at the expense of the rest of us. The central bank and the administration now follow the god of mercantilism. China was the last to tread that route; now even she has had enough, taking mercy on her own consumer.


Robert Craven

Problems at the EU - Should You Worry?

Financial media - "EU problems cause Dow to dive." These writers couldn’t find their way out of a wet paper bag.

Are the EU’s problems your concern, a threat to your 401K? No. They simply make great headlines. We have little exposure there. The troubled countries buy few of our goods. There is no linkage of major contagion to the US.

Will the EU fail? Yes, of course, but gradually so all can adjust.


Robert Craven

Stuck in Lodi

But we’re back!

We want to prep for key economic releases, to anticipate the odds of response.

We noted last week that notwithstanding the result, near-term housing releases, whether up or down, would not move the market. This was true for Tuesday’s April New Homes Sales which broached expectations. The market shrugged. Why? Simple. The whole shebang is weak, in the tank, even with this improvement, far below healthy levels.

Tomorrow’s April Durable Orders number has been over the years a key market mover, even though most know that monthly fluctuations can be violent. "Durable" orders means hard goods, something with a life to it - a refrigerator, or Caterpillar D-9. These orders rose 2.5% in March, blowing through estimates.

Market tension is such that a release through expectations will mildly cheer the market but a release south of expectations will greatly worry the market. This is because a suspicion has grown that Manufacturing may now trend lower. Such a result will confirm that suspicion in the mind of the market crowd.


Robert Craven

A Recap - The Week in Review

We saw this week that the US factory sector took a breather in April, from the explosive pace of Feb and March, meaning new orders and shipments grew more slowly. We’re not sure how to explain this yet, or if it is trend.

We saw this week that US housing remains in the tank, and to no one’s surprise.

We saw this week through the Claims release some further improvement in the US employment market.

We saw this week that price pressures are building in the EU and UK and that both central banks are now more likely brake. The EU can handle it (German, French vigor) but the prospect represents a nightmare for the UK.

We saw that the EU continues to experience problems with the periphery, an old story. Today there is speculation of Greece defaulting on their debt. We recall when Russia defaulted on their debt. That was a game changer for markets in the US.  This is not.

Finally, we saw today that the Bk of Japan is pleased with the pace of resuscitation and so plans no special support plan. Japan’s Q1 GDP was off 0.9% vs Q4, to no one’s surprise (it captured two weeks of tsunami impact). Days after the crisis we predicted a positive Q3. The Bk of Japan, and now most world observers agree.


Robert Craven

Fun With Economics

See? It’s easy. Economics doesn’t have to be a sedative.

Didn’t we say early this morning that both Jobless Claims and the Philly Fed manufacturing result could provide some good old fashioned excitement? Sure enough, the number of claimants dropped far below expectations (5:30 am), cheering stock holders. Sure enough, the Philly data (7 am), at least the headline, in the tank, worrying the same bunch.

Come on folks! Admit it. How could you not have fun with this stuff? Take it home. Throw it around the dinner table. Pretty quick and with practice you’ll have as good a view of economic reality ahead as the Street "ex-spurts."

You’ll dream of average hourly earnings, mining output, capacity utilization and unfilled orders; you’ll swoon to retail sales; your heart will stop on a weak payroll number.

Stay tuned for the time of your life.


Robert Craven

Surprise Indeed!

This am we listed potential surprises and the Philly Fed manufacturing survey was one. Holy cow! It fell through the floor! (Leading Indicators were also lower today but most of us who have been around a while know these are not as "leading" as their promoters would like you to believe.)

This Philly regional survey is important because past years it has been an accurate gauge of activity ahead for not just this region, but nationwide. Today’s result will birth the view for a major slowing in the engine that led the recovery. And with the reality of central banks offshore (UK, EU, China) keen to pull the trigger in the face of price pressures, exports, a major spark for manufacturing, may slow.


Robert Craven

Jobless Claims

Far fewer applied for unemployment benefits the May/14 week than expected. This is a good thing; it supports our view that employment activity ahead will trend higher.

Some observers noted that higher gasoline prices discouraged the employer. Those prices discouraged spending as we predicted in late February, but had little if any impact on employment decisions.


Robert Craven

Surprise Before The Weekend?

What might move the market crowd before the weekend?

There is a key US Manufacturing release today, a survey conducted by the Philly Fed which over the years, our experience, has correlated well with not just regional but country-wide manufacturing activity ahead; naturally then thus release packs muscle. It will either show a continued booming, or a slight easing in the pace of expansion. This is priced in. Only a very weak number will worry equities and push bond yields lower.

We also have Jobless Claims today. Not just US but world focus is on US job creation - we are the world’s engine (sorry China, you don’t even come close) and everyone wants to know on how may cylinders we’re burning. This release carries plenty of horsepower to either worry or cheer the market crowd. Those dependant on discretionary spending - our nursery pals, our friends who own a picture frame business, our plastic surgeon buddy - none of them are being overrun by clients. Sorry, but it’s simple - good ‘ol trickle down holds the key.

We also have Existing (Used, Pre-Owned) Home Sales today for April. The media makes quite a bit about this and related housing releases. Forget it. They don’t mean a thing in this environment. Housing is sunk and no single release will change that view. That is why (as we predicted) although Housing Starts tanked on Tuesday, the markets not only did not shudder, they did not even blink.


Robert Craven

Today’s FOMC "Minutes"

The Fed’s come a long way since a few of us beat them up in the Halls of Congress.

Now we know policy at the end of each meeting; we don’t have to guess before it is leaked to the WSJ.

After each meeting we wait three weeks for these "minutes," down from six as of Jan/05. What we won’t learn today is who dissented from the official view, and why, which is why these are "minutes" and not minutes.


Robert Craven

US Industrial Production and Japan

This survey measures Manufacturing, Mining and Utilities. For April, Mining and Utilities did just fine but Vehicle manufacturing slumped due to supply chain woes from Japan. This is a one-off event and will not greatly bother the markets. It bothers us though as a few days following the tragedy in Japan, we predicted supply considerations, while a problem, would not be so severe.


Robert Craven

Poor UK - A Heck of a Fix

UK inflation (CPI) for April blew through expectations, + 4.5% Y / Y, Core + 3.7% (when the official target is 2%). Part was due to Easter distortions, but the trend is higher and worrisome to authorities. This puts pressure on the Bank of England to lift rates, the risk noted in our Layman’s Guide to the Week Ahead. But the UK real sector is going sideways; it can’t afford higher official rates. Poor UK - a heck of a fix.


Robert Craven

Housing Disappoints

Today’s April Housing Starts - far below expectations. This will not greatly bother US markets, equity or otherwise. Housing is in such sad shape that even if the release were far above expectations, in the scheme of things, it would mean very little.

This represents tension in this sector.

Robert Craven

HAVING FUN YET?

Always figured economics was boring? Never thought you would wait breathlessly for Payroll, thrill as Manufacturing flattened estimates, cheer latest Vehicle sales as if you were at the ball game?

We’re here so you can have a good time with this stuff, and maybe learn something in the bargain.

Welcome Aboard.


Robert Craven

Media Warp

Bloomberg headline this pm - "Japanese and Australian stock futures dropped as Greece sought more bailout funds and slower-than- expected manufacturing growth in the NY region fueled concerns about the global economic recovery."

This is kids at the keyboard grasping for straws. But it sells. And, it’s worthless.

In fact, Greece was long ago priced in. And in fact, the NY survey indicated that factory managers were more upbeat about the future than earlier. The headline was down due to New Orders but that didn’t bother the folks in the trenches because employment grew to its fastest pace in 12 months.

Dismiss this stuff. Use this site as an anchor. We've got a track record. They don't.


Robert Craven

US Manufacturing - An Alert

We also highlighted Manufacturing in yesterday’s Week Ahead. The first of this week's three releases pertaining to this sector was this morning's NY State Index. While the pace of expansion was not quite as strong as expected (New Orders slowed) it was still strong. And Key - Factory managers were more upbeat about the future than earlier. Employment grew to its fastest pace since May/04!

Robert Craven

EU April Core CPI - An Alert

EU April Core CPI blew through expectations (+1.8%Y/Y vs +1.5%, consensus, and +1.5%, last), increasing at the fastest pace in over 2 years. The ECB will be obliged to accelerate their planned lift, with the intent of braking activity in this region. This will place upward pressure on the Euro, while the current emergency regarding survival of Greece, and contagion, has pressured it lower recent days.

Robert Craven

Japan

Just four days after the tragedy, in the midst of world panic, we told out clients to relax, that this tragedy would have short-lived economic implications, that for example equity markets would recover quickly. As we wrote these words, world equity markets were swooning, not sure of what to expect. We advised further that the pace of resuscitation would far exceed expectations.

This morning’s (Japan time) release of March Factory Orders blew through expectations, up 2.9% mo/mo from February for goodness sake.

Wonder any longer where the Japanese economy is going over the near term?

Robert Craven

Greece, the EU and the US

We recently reported that the EU put in a strong performance for Q1 GDP. Impressive, yet the Euro continues to nosedive vs the $. Why? Fear of periphery contagion.

One need only return to Karl Marx - "From each according to his ability; to each according to his needs." All of us, school kids on up know this to be a recipe for failure. Just as this applies to relationships between individuals within a government, so it equally applies to relationships between 17 sovereigns.

This then underpins the ultimate demise of the EU. This also explains the implosion of Greece, Portugal and Ireland. At a meeting tomorrow in Brussels, panicked EU leaders will try to hold it all together (thank you Strauss-Kahn for your contribution).

Germany is not about to go along with the "From each," bit no matter how much Greece believes in the "to each."

So what’s it mean for us, for our markets? As it will be death of a thousand cuts, almost nothing. A headline in Tokyo just now (Monday monring) reads, "U.S. stocks fell broadly as worries over Greece's finances ramped up ahead of the weekend." 

The truth is we have very little exposure in that region. And a stronger $ vs the Euro (as long as the Euro exists) is not a big deal as these folk don’t buy so much from us anyway.


Robert Craven

A Layman’s Guide - The Week Ahead

(Bear with us folks, we’re a tad wordy with this installment, joining the rest of the media. My son tells me - keep it brief Dad. OK, OK, just this once!)

Background: The financial media delivers mostly filler and fluff; it’s good business for them apparently but serves no other purpose, leaving a void. This provides opportunity for a service like ours.

Most of us are not wired to screens all day long; most of us have other jobs but still don’t enjoy being ambushed by economic events. This includes small business owners who wonder just when to hire or fire, just when, if ever, that parking lot will fill; it includes active investors, those with a job but who manage their own funds. Our exercise at this firm is providing to these individuals by distilling the impact of economic events just ahead. Past years, through other vehicles, we’ve done a good job at that.


The Week Ahead

Every week we face a stream of US economic releases; they’re all featured in the media but they’re not all important. Some carry market-moving horsepower, some do not. That role changes with time, some shedding power, others acquiring it. It’s better to have a leg up, better to anticipate reaction, than react.

This week’s releases are focused on Manufacturing and Housing. We know manufacturing led the recovery; and we know with a weaker dollar and booming exports this sector continues to show vigor. Of the three releases dedicated to manufacturing we do not anticipate a surprise; they will cooperate. The two dedicated to housing will show some improvement, but this sector is in such sad shape, the markets will not be impressed.

With the world as tightly wound as it is, we also must monitor key offshore releases when we feel they will have an impact on our markets. The EU April CPI to be released May/16 is key. A print much through consensus will spark the view for an ECB lift, and sooner rather than later as especially Germany and France are booming. This will worry the US equity markets. The UK April CPI is to be released Tuesday, May/17. The UK will have a real problem with a print through expectations as the Bk of England will be more likely to lift, but this in the face of a struggling real sector (not the case with Germany or France). Won’t be pretty. With both these banks inclined to lift official rates, the Fed will be cornered, blamed even further with reckless policy at home.

Finally - the US debt ceiling. Most, including the Fed and Treasury are in hysterics and predict an end of the world if we don’t raise the ceiling. This is nonsense. Geithner prediction of a "double-dip recession" is simply dishonest. He knows better. Some clear thinkers, including the famed money manager Stanley Druckenmiller, hope for the benefit of all that we leave the ceiling well enough alone. From the WSJ report on an interview with Druckenmiller, "...he's willing to accept a temporary delay in the interest payments he's owed on his U.S. Treasury bonds—if the result is a Washington deal to restrain runaway entitlement costs." And this is the way institutional markets will view such an event, past the first 10 minutes of panic.

Robert Craven

Violence - The Week In Review

It was more world focus this week than US focus. That is, US debt and equity prices were to a large extent driven by offshore events.

S&P was unkind to Greece on Monday, but then nobody cares about the periphery, except the periphery (and of course California).

Not a problem; later in the week here comes the EU with its Q1 GDP print far through expectations, due to strength in Germany and France (the rest in the trough). It’s ancient history but everybody got excited anyway; until that is they all recalled that central banks are just no fun.

China worried world markets when its Industrial Output, although vigorous, was just less vigorous than expected. That didn’t stop the Bank of China from lifting reserve requirements another 50 basis points a day later. This really worried the world’s markets, those of the US especially.

Commodity prices gyrated wildly but ending lower, partly on some corny view of a world slowing. So much for our February prediction that WTI would print 120 tagged to Middle Eastern violence. Of course in the time-tested way of economists, once our prediction comes true, even if a decade later, we’ll be sure to brag about it.


Robert Craven

The World Beast

We had a bit of a mortgage problem here in the States back in ‘08. As a result, Iceland imploded. What? This week we witness China’s output slowing to just a mini explosion from a full-blown explosion, and crude drops off the screens. Last Thursday US Claims blew through expectations (more claimants) and next day a dozen currency traders in Japan go out the window.

Holy cow!

The world markets - one big, throbbing organism, connected by nerve, muscle and fiber, a colossal beast which quivers, jumps, turns summer salts and mashes anything in its way.

And what insight can we fetch from all of this? Easy. Never take the markets or yourself too seriously; remember that a little levity goes a long way.

And always - our motto - Keep It Simple.


Robert Craven

China

The US and China just finished the so-called US-China Strategic and Economic Dialogue. There was progress - less protectionism from China was key among these.

China of course has been booming but we saw this morning that China’s industrial output increased less than expected (13.4% yr / yr) for April. So it looks as if the Bank of China’s tighter monetary policy is working (Apr/5 was the last rate hike). We also see that consumer inflation came off a bit in April from the 32-month March high (5.4% annualized).

These are good things and prevent a government panic. A controlled slowdown is what we all want. And US interests have improved as China appears more willing to allow the Yuan to strengthen, and the recent talks should further the process. Also, China has allowed the Yuan to strengthen to fight inflation. So this is good news for US exporters.

China is not a "wild card" in the economic sense. They are well managed. From Reuters: "The Chinese government knows it’s time for a change. The old economic model based on cheap exports and eye-popping investment can’t be sustained. The latest five-year plan, covering 2011-2015, aims to boost internal consumer demand as the main engine of growth. It envisages a bigger share in the economy for services, which are currently only 43 percent of GDP — barely half America’s level. The plan calls for more high-tech industry and for greener, less carbon-intensive growth. There’s also to be a big push into social housing, so the poor can afford somewhere to live."

Robert Craven

Offshore

Japan? What problem? China? A tad less prone to protectionism and wary of inflation, this a positive for US exporters (stronger Yuan). The EU - from each according to his ability, to each according to his needs. It can’t work. It will unravel gradually however, nothing sudden. Little impact as we have limited exposure, that region. Germany - a buoyant consumer. Best economic expansion in two decades, tied to exports. UK - a modest recovery yet a trigger-happy Bk of England caps anything more.


Robert Craven

Spending Ahead

Observers speak of a two-tiered or "barbell" recovery. What does this mean and how may it impact business planning?

We all know of vigor in low-end jobs - the Big Mac phenomena. And most of us know of the top 10% of Americans, the invested and creative class, incomes soaring.

And the middle? What middle?

The middle lags because of changes forced on major employers by an activist administration. This is not our opinion. We have it from the CEO’s themselves. Thus, a few jobs have gone overseas. Not as many as the left would like us to believe, but enough. And more than a few have disappeared entirely, never to return.
This then entails retraining and relocation.

This is why this recovery lags that of the last major recession. And it explains just why discretionary spending, especially for mid-range items, disappoints.

The trajectory or grade for spending is upwardly slopped, perhaps 25 degrees, just not the 45 degrees of that following the last major recession.

Government interference is always and everywhere a bad thing.

Keep it simple.


Robert Craven

Preparation for the Big One.

In The Week Ahead we gave Thursday’s April Retail Sales a ****, four out of five in market-moving muscle. If the release falls south of expectations it will tagged to higher gasoline prices; there will be little movement because the market crowd looks for lower gasoline prices past the flood. If the release exceeds or blows through expectations (+0.6%) the markets will be greatly cheered - even higher gasoline didn’t stop the consumer!

Keep it simple.


Robert Craven

Bad Timing for the Chinese

We see today that China’s April trade surplus with the US exploded 16%. Bad timing. Right now (5/9 the first day of talks) US officials are beating on our Chinese friends to allow their currency to adjust, to drop the claim they’re crippled. This result helps shred their argument and thus may be good news for US exporters ahead (stronger yuan).

Robert Craven

The Week Ahead

Scheduled releases often trigger market movement. The financial media highlights all of them as if all of them carry such potential. This is nonsense; worse, it is dishonest, simply commercialism, playing to the weakness of the uninformed.

What is true is that releases change in their ability to move markets. They come in and out of favor, in and out of fashion with the market crowd.

There is little with much muscle on the US schedule this week until April Retail Sales on Thursday, 5/12. We give this release a **** rating, that is, **** out of a possible *****.

Friday’s April CPI gets a ***.

Germany’s April CPI, 5/11, merits a **** in Germany and a ** here. A number well through expectations will feed the view for a ECB lift (tightening).


Robert Craven

Sweetheart On Parade - The Week In Review

My goodness! Aside from Osama’s departure we had a routine week, then - a weak Jobless Claims release on Thursday (more claimants than expected) and all hell breaks loose! Equity prices dive; crude, other commodity prices head to the sewer; bond yields plummet. Offshore markets shudder.

One number, and all that?

Market tension was at the tipping point. Sometimes it takes just a speck of information to trigger the mad rush; emotion is, as always, taken to the extreme.

We’re constructive for Q3 but told our clients that both this Claims release and April Payroll carried the potential to worry the market. Claims, fine, that worked but we were wrong on Payroll.

That grand old work horse, that US engine, she’s still pulling the wagon. She’s thrown off a few more government types while she’s taken on the private sector as she fights her way past everything the administration can throw at her.

She’s the grandest horse that God ever made. And she’s never looked finer than before!

That ‘ol campaigner, Sweetheart-On-Parade.


Robert Craven

Where Are We Now?

In our Briefing of May/4 we stated that the less interference from the Fed and Congress, the more constructive we can become. We have demonstrated that 1) the Bernanke’s policy of generosity has only hurt the average consumer and 2) that government spending is at best a wash, sucking energy from the private sector.

As we predicted mid Q1, gasoline prices provided a big hit to consumer activity. That impact will linger through Q2. We don’t know the direction of crude over the near term so cannot judge what extend this will provide a retardant, H2.
　
The US economic engine wants very badly to burn on 7 of 8. It can do so if left alone by those who simply cannot sit still, cannot refrain from interference, jabbering yet providing nothing of substance. We all know this kind from our daily lives. It’s that simple.


Robert Craven

Today’s April Employment release - a world focus.

We’re constructive on the US economy into Q3 but we expected today’s particular release to be a worry. We were wrong.

Average earnings didn’t change much, up only 0.1% but private sector jobs gained 268M, the largest increase since Feb/06 and a nice number. And government jobs shed 24M which can’t be a bad thing.

Robert Craven

Timing

We warned late March that gasoline prices would cut considerably into consumer activity, would cut considerably into GDP. Wall Street, resorting to all sorts of fancy formulas, disagreed. A growing chorus has now come to understand. It is too late.

Next, we predicted that the high risk of further violence in the Middle East put a floor under crude, yet that commodity plummeted today on the threat of a slowing economy. We’re not oil analysts but we understand the Middle East pretty well.

Finally, we noted Monday that tomorrow’s Payroll release carries great potential to worry the market, a little to cheer it. It’s not going to be awful, but likely south of expectations (+190M).

Robert Craven

Employment Worries

We warned clients that today’s Jobless Claims result but especially tomorrow’s April Employment result carried far more potential to harm the market than to cheer it. Sure enough, today’s Claims blew through estimates, printing 474M, the highest last August. There were special factors involved but these weren’t a secret to any forecaster.

Robert Craven

Briefing For The Business Planner

Encouraged by the results of Nov/2 and Congressional follow through, employers came alive. Encouraged by the same event, including extended tax relief, consumers came alive. This brings us to Q1.

Momentum has now slowed. This is due to 1) permanent elimination of job positions by employers frightened to death by Obama’s statist agenda (Obamacare and other unpredictable costs) 2) billowing commodity costs related to a) Fed policy and b) Middle Eastern upheaval and 3) wage gains which have lagged #2.

Those businesses dependent on discretionary spending were encouraged late Q4 concerning economic reality ahead; those same businesses are now less buoyant, feeling let down.

Next Six months:

Fed policy is not a boon but a bust to the average consumer. Liquidity is not the problem; it is not needed. QE II has thus 1) inflated equity prices and 2) inflated commodity prices. Stock holders have done well. That’s not enough. The rest have been hurt.

Spending cuts ahead? Fine. The more the better. Don’t believe the nonsense that severe cuts will provide a stall. This will instead provide a spark. There is zero evidence that government spending ever provided anything but a wash (except to unions) and plenty that it threw a wrench in the works.

To the extent Fed and Congressional interference subsides we can grow increasingly constructive; the recovery will kick into 4^th gear.

Just crude prices will remain the piano overhead. That is, the odds are very high for further violence in the Middle East as the adjustment (Arab Spring) continues.


Robert Craven

Manufacturing Roars Ahead

Today’s Manufacturing print - 60.4 - the result of a diffusion index; any level north of 50 signifies expansion.

The Institute for Supply Management surveys some 300 firms, regarding production, new orders, inventories, deliveries and employment. The March read was 61.2.

We all know that Manufacturing has been the paladin of the recovery, expanding robustly the last 21 months, employment included. April the pace slowed a tad, but it’s still healthy.

Robert Craven

Osama The Has Been

Mom called with the news but we failed to hear the phone, explaining this tardy response.

We can look for little change past the celebration. The leadership vacuum to be short lived. Course-of-least-resistance for crude to remain higher into Q3.


Robert Craven

World Manufacturing

A key Chinese manufacturing index just released has fallen south of expectations, partly or maybe wholly as a result of Bk of China tightening. Not a problem. Given the Bank of China brake, the yuan is a tad stronger vs the $, good news for US exporters (and good news for Chinese consumers). Tomorrow’s market crowd will digest that development, then an April survey for German manufacturing, finally, our own Manufacturing survey. Manufacturing can only carry the ball so long.

The Week Ahead

There are plenty of economic releases this week. We have Manufacturing and Construction data on Monday, Factory Orders and Vehicle sales on Tuesday, and April Non-Manufacturing data on Wednesday; then we have Q1 Productivity on Thursday. It is know that manufacturing is vigorous, that anything to do with housing (construction) is not. Vehicle sales are important given gasoline prices. But it is Friday’s April Employment Report that is the key release by the way of market-moving horsepower.

It’s easy in this business to get lost in the details, and the noise provided by the media.


Background: On Mar/10 the Jobless Claims result exceeded expectations - more claimants, bad news - and worried the markets considerably. We told our clients that this was not trend and to adhere to that anchor. The following three Claims numbers cooperated (lower) as did the March Payroll result of Apr/1 - better than expected. On April/7 the Claims result again came in a tad south of expectations. With that, we closed this exercise, meaning we could no longer assign a risk to the jobs numbers; we had lost the "sweet spot."

That brings us to this Thursday’s Claims result and Friday’s Employment report. We cannot assign a risk of result to either (result vs expectations) but can say that the Payroll number especially carries far more potential to harm the market than to cheer it. This is because the market crowd expects an economic rebound from the reduced pace of Q1. A Payroll result at or a tad better than expectations will merely fit that view. A result inside of expectations, especially for private sector jobs, will be taken as a new trend, providing a worry to equities and a boost to bond prices.


We know that employers were cheered by results of Nov/2, further cheered as a new Congress quickly set about to make repairs. We know this, not from our own prediction, but from the words of key business leaders themselves, a chorus actually.

That change, and extended tax cuts together sparked US consumer spending, employment and spending then moving in tandem. We know spending will be slowed, near term, tagged to gasoline prices. We’re not sure regarding employment.

The exercise now is to come to understand reality ahead for both of these sectors.


Robert Craven