Background: There are two reports, both released by the Bureau of Labor Statistics (BLS). One is the “establishment survey” covering over 400,000 businesses from 500 industries (it is “non-farm” now as too many BLS samplers were run down by bulls or shot as trespassers). This is the most comprehensive labor report available and covers about 1/3 of all non-farm, non-self-employed workers. From this beauty we get jobs by industry, then hours worked and earnings, weekly earnings being a reliable leading indicator.
The second survey, the “household survey” measures results from roughly 60,000 households. From this little dandy we get a figure representing the total number of individuals out of work, thus the unemployment rate. It goes without saying that this is a lagging indicator.
The “establishment” measure is larger than the “household” but excludes agriculture and the self-employed. The “household” report runs a smaller sample but since the self-employed are included, it can be more useful during times of a recovery, as these jobs are the litmus paper for such an event. This survey is a type of census really, which is why for example the unemployment rate may lift while at the same time the headline can show an increase in jobs.
All in, the report is closely followed and for a good reason - it has a respectable track record of predicting cycles.
Result: Job creation in Feb was strong and the prior two months were revised higher. And private sector employment increased nicely. It will become more difficult for the willfully blind to miss what is obviously an acceleration in job creation. We also see that hourly and weekly earnings increased in Feb, but at a modest pace. We would have preferred to see something more, and no doubt will over the intermediate term. In the meantime US consumers won’t let this modest inconvenience get in the way of shopping – they’ll borrow the difference.
Strategy: It is very easy to cherry pick to fit one’s bias but it means death in this business to do so. We identified US Q1 2012 strength in Q4 when the rest were looking for weakness, and some famous names, a double dip. So at some point we need to acknowledge that our view is priced in, that economists have finally come to understand what we understood months back.
Yet most now predict a slowing, a loss of momentum because that is the easiest mental exercise; it is based on precedence, recalling early 2011. These individuals are mistaken. Thus we can look for continued surprising vigor in job creation ahead.
From time to time we apply a trade to translate our insight to the bottom line. For example, from Feb/16 we have looked for Eurodollar prices to erode the further out the strip and recommended owning the (L) Sep/12 – (S) Sep/13 spread, then -13. Our target was -25. Last -20.
We have also predicted for weeks that the course of least resistance in the term structure was wider. It hasn’t gone much of anywhere given events in the E-Z and flt to sanctuary. But we are right re direction so do not under any circumstances look for the reverse. If interested in this exercise, look to own both (L)5 – (S)10 or 2 – 30. Both will move along at a modest rate, nothing spectacular.
Robert Craven
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