We learned this week that relative dynamics remain pretty much in place, US / UK / E-Z. First to the US:
The Q1 GDP headline print came in a tad less than expected. Fine. Q1 is also history. Key is jobs-related activity ahead.
We had set employment as a chief anchor for clients; that is, they knew the odds were very good that results would flatten estimates. That worked well, until that is the Mar NFP result on Apr/6, and, recent Claims prints.
Job creation in Mar was much weaker than expected, partially due to weather variations. Still, hiring began to accelerate late 2011 and key - it will continue to do so. Over the past 3 months, job creation has averaged 212M per month vs 164M in the prior three months, and 128M in the 3 before. That sounds like acceleration to us. We have momentum. And private-sector employment increased for the 25th straight month. Not a barn burner, but pretty impressive given the obstacles the Obama administration has thrown up.
What we have witnessed past few weeks is pause, not trend (and a bit of seasonals too). And the better the odds the present administration will be thrown out, the more likely regulations which have smothered payroll activity will be thrown out also. Just as employers were cheered by the Nov/10 election results (we had it from several, first hand) so they will be similarly cheered on this occasion.
Consumer activity (our other primary anchor, Q1) will not wilt Q2 as most expect. It is easy to come to this conclusion as real earnings have lagged. But attitude is key and attitude is not captured by economists’ models, the chief reason that results flattened estimates in Q1. The consumer is not on a roar of course; the Q1 averages for both overall and core spending are only moderately above their Q4 levels. But this is a lot more than anyone expected given reported earnings. The answer is that the consumer is content to borrow the difference and or dip into savings, at least over the intermediate term until jobs catch up.
Next, to the E-Z:
We’ve found that things are generally a whole lot simpler than “the experts” would have you believe. But that is understandable, as otherwise there would be no need for the experts.
For example, the moment the EU elitists told banks to raise their core Tier 1 capital ratios to 9% by July, or be nationalized, in a flash those with even a passing interest in economics were handed the landscape ahead for the E-Z for H1. It was easy to predict then that results would fall far short of economists’ estimates and this, notwithstanding any EU fix for Greece or other sufferers. Sure enough, the IMF noted last week that the E-Z banks would cut their balance sheets by 7% by next year. And this estimate is conservative.
The alternative for banks is to raise capital but no way banks will do that given depleted share prices.
ECB generosity is at best a carry trade for the banks (as they acquire their own sovereign debt). Certainly it can no longer be a secret that none of the money gets to real business. And there wasn’t a heck of a lot of business demand to begin with; there is less now.
A sorry state of affairs.
The US will continue to speed away from this region, if for no other reason than we have yet to fully embrace the E-Z version of social democracy, the stamp of entitlement.
Set trades with that in mind.
Finally, to the UK: We refer readers to our earlier sketch. Any major economic surprises for this credit are to be to the side of more, not less.
Robert Craven
The Q1 GDP headline print came in a tad less than expected. Fine. Q1 is also history. Key is jobs-related activity ahead.
We had set employment as a chief anchor for clients; that is, they knew the odds were very good that results would flatten estimates. That worked well, until that is the Mar NFP result on Apr/6, and, recent Claims prints.
Job creation in Mar was much weaker than expected, partially due to weather variations. Still, hiring began to accelerate late 2011 and key - it will continue to do so. Over the past 3 months, job creation has averaged 212M per month vs 164M in the prior three months, and 128M in the 3 before. That sounds like acceleration to us. We have momentum. And private-sector employment increased for the 25th straight month. Not a barn burner, but pretty impressive given the obstacles the Obama administration has thrown up.
What we have witnessed past few weeks is pause, not trend (and a bit of seasonals too). And the better the odds the present administration will be thrown out, the more likely regulations which have smothered payroll activity will be thrown out also. Just as employers were cheered by the Nov/10 election results (we had it from several, first hand) so they will be similarly cheered on this occasion.
Consumer activity (our other primary anchor, Q1) will not wilt Q2 as most expect. It is easy to come to this conclusion as real earnings have lagged. But attitude is key and attitude is not captured by economists’ models, the chief reason that results flattened estimates in Q1. The consumer is not on a roar of course; the Q1 averages for both overall and core spending are only moderately above their Q4 levels. But this is a lot more than anyone expected given reported earnings. The answer is that the consumer is content to borrow the difference and or dip into savings, at least over the intermediate term until jobs catch up.
Next, to the E-Z:
We’ve found that things are generally a whole lot simpler than “the experts” would have you believe. But that is understandable, as otherwise there would be no need for the experts.
For example, the moment the EU elitists told banks to raise their core Tier 1 capital ratios to 9% by July, or be nationalized, in a flash those with even a passing interest in economics were handed the landscape ahead for the E-Z for H1. It was easy to predict then that results would fall far short of economists’ estimates and this, notwithstanding any EU fix for Greece or other sufferers. Sure enough, the IMF noted last week that the E-Z banks would cut their balance sheets by 7% by next year. And this estimate is conservative.
The alternative for banks is to raise capital but no way banks will do that given depleted share prices.
ECB generosity is at best a carry trade for the banks (as they acquire their own sovereign debt). Certainly it can no longer be a secret that none of the money gets to real business. And there wasn’t a heck of a lot of business demand to begin with; there is less now.
A sorry state of affairs.
The US will continue to speed away from this region, if for no other reason than we have yet to fully embrace the E-Z version of social democracy, the stamp of entitlement.
Set trades with that in mind.
Finally, to the UK: We refer readers to our earlier sketch. Any major economic surprises for this credit are to be to the side of more, not less.
Robert Craven
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