A Preview for Tomorrow’s Employment Data

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“America may be a service economy but for the sake of tomorrow’s NFP let’s pretend it isn’t. Because if the employment component of the Non-manufacturing (i.e., Services) ISM, which at least in the pre-centrally planned times correlated with the NFP number with an R² of about 0.9, is indicative of what to expect, one can kiss any hopes of a recovery goodbye. Which, of course, is great news! It means the Fed will never pull out and never realize that it is the Fed’s central planning and market manipulation that is responsible for the every deeper global economic depression which benefits only stock holders (and traders).

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“As the world waits breathless for some Goldilocks print in tomorrow’s non-farm payroll data, Gallup’s most recent survey of employment trends does not paint a pretty picture for the real economy. Though, by the ‘adjustment bureau’ and their Arima-X goal-seeking, nothing is ever clear, not only is the payroll-to-population (the number of people working) worse than a year ago but the unemployment rate is also rising with under-employment – at 18.0% – near 15 month highs. If the NFP print plays out in line with this, the estimate of 165k will be woefully over-optimistic, leaving the question of whether bad-is-good, or have we crossed the Rubicon of belief in moar is better.

Via Gallup:

The U.S. Payroll to Population employment rate (P2P), as measured by Gallup, worsened in May, dropping to 43.9%, from 44.5% in April. P2P is also down from May 2012, when it was 44.4%

The decline in P2P versus 2012 indicates that fewer people worked full-time for an employer this May compared with a year ago. The 43.9% found this May is similar to the 43.7% recorded in 2011 and 44.0% in 2010.

Gallup’s P2P metric is an estimate of the percentage of the U.S. adult population aged 18 and older who are employed full time by an employer for at least 30 hours per week. P2P is not seasonally adjusted.

…

Gallup’s unadjusted unemployment rate for the U.S. workforce was 7.9% for the month of May, a half-point increase over April, and statistically unchanged from May 2012 (8.0%).

Gallup’s seasonally adjusted U.S. unemployment rate for May was 8.2%, up from 7.8% in April…..”

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Indeed, economic news lately has ranged from mediocre to weak, which could reinforce the Fed’s conviction to hold its key rate near zero and to continue to pump $85 billion a month into the economy through asset purchases….”

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“There are rip-your-face-off rallies and then there are the rip-your-face-off retreats—the kind Wall Street experienced Thursday during a brief but vicious yen surge.

At one point, the U.S. dollar lost about 4 percent to the Japanese currency as the pair trade tumbled through its 50-day moving average.

The move sent the Dow industrials plunging 115 points after flirting with positive territory through most of the early session, and delivered a quick but palpable shock through all levels of financial markets.

“Right now this just looks like a bunch of nervous hands,” said Christopher Vecchio, currency analyst at DailyFX. “The dollar was a very extended trade. This is the unwinding of that very crowded trade.” …”

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“Global markets are going wild today. The big bet against the Japanese yen is unwinding, and the dollar is getting crushed against a host of currencies around the world (the dollar index is down a sizable 1.3%).

Many of these currencies come from emerging markets (EM), which have been tanking over the past few weeks against the dollar as U.S. Treasury yields have risen.

And the losses in EM haven’t been limited to currencies – stocks and bonds have taken a hit as part of the EM sell-off as well.

The big sell-off in the dollar today is a reversal of this trade. Now, everyone is looking ahead to tomorrow’s jobs report in the U.S., which could be a crucial release in terms of determining which way the momentum in global markets swings.

Will a better-than-expected jobs number confirm the strengthening dollar story of the past few weeks, or will a worse-than-expected number provide more fuel for the dollar sell-off as fears that the Federal Reserve will have to remain accommodative for longer begin to seep back into the marketplace?

Société Générale Head of Emerging Markets Strategy Benoît Anne asserts that either way, it doesn’t really matter for EM.

In a note to clients today, he writes:

No matter what happens tomorrow, sell GEM assets…”

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“LOS ANGELES (Reuters) – A Republican congressman on Thursday introduced legislation to allow online gambling on a federal level, which he says will give consumers more uniformity than legalizing it on a state-by-state basis.

The move by Representative Peter King of New York follows industry lobbying for federal legislationto provide a larger, more liquid market across state lines, attracting more gamblers.

U.S. casinos operators like MGM Resorts International and Caesars Entertainment Corp plan to launch Internet operations in states like New Jersey, which recently passed online gambling legislation….”

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“WASHINGTON (Reuters) – The Obama administration on Thursday defended its collection of the telephone records of millions of Americans as part of U.S. counterterrorism efforts, re-igniting a fierce debate over privacy even as it called the program critical to warding off an attack.

The admission came after Britain’s Guardian newspaper published on Wednesday a secret court order authorizing the collection of phone records generated by millions of Verizon Communicationscustomers.

Privacy advocates blasted the order as unconstitutional government surveillance and called for a review of the program amid renewed concerns about intelligence-gathering efforts launched after the September 11, 2001, attacks on the United States.

The revelation also put a spotlight on the handling of intelligence and privacy issues by President Barack Obama’s administration, which already is under fire for searching the telephone records of Associated Press journalists and the emails and phone records of a Fox News Channel reporter as part of its inquiries into leaked government information.

“The United States should not be accumulating phone records on tens of millions of innocent Americans. That is not what democracy is about. That is not what freedom is about,” said Senator Bernie Sanders, an independent from Vermont….”

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Not even half the story….

“Agricultural prices will climb in the next decade on a combination of higher energy costs, falling productivity growth and rising demand, the OECD and the UN’s Food & Agriculture Organization forecast.

Extended periods of low prices for farm goods, driven by ever-increasing yields and cheap oil, “seem now a feature of a bygone era,” the Organization for Economic Cooperation & Development and the United Nation’s FAO wrote in a joint report on the outlook for agriculture through 2022.

Farm production will grow less rapidly in the future due to limited availability of suitable land, water constraints and rising costs of inputs such as fertilizer, according to the report. Corn and soybean prices rose to a record last year, and have more than doubled from 10 years ago.

“With energy prices high and rising and production growth declining across the board, strong demand for food, feed, fiber and industrial uses of agricultural production is leading to structurally higher prices and with significant upside risk,” the OECD and FAO wrote.

Agricultural production growth is predicted to slow to an average 1.5 percent a year through 2022 from 2.1 percent annually in the past decade, according to the report. That will still beat population growth, with farm output per person advancing by 0.5 percent per annum over the period.

Investment, Technology…”

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“Ray Lane, former chairman of Hewlett-Packard Co. (HPQ) and partner emeritus at venture-capital firm Kleiner Perkins Caufield & Byers, is in a dispute with the U.S. Internal Revenue Service that has left him with a $100 million tax bill.

In December, the IRS found Lane, 66, participated in a “sham” tax shelter, generating improperly claimed losses of $251 million to offset income, according to appeal papers filed May 6 in U.S. Tax Court in Washington. Lane argued that the IRS was wrong to say that his partnership, Vanadium Partners Fund LLC, lacked “legitimate business purpose.”

The Tax Court wrangling comes amid a series of career setbacks for him. He stepped down as Hewlett-Packard’s chairman in April after less than three years. Investors were dismayed with his oversight of the computer maker’s $10.3 billion purchase of software maker Autonomy Corp. The acquisition later had to be written down.

That same month, he scaled back his role at Kleiner Perkins, becoming a partner emeritus. The following month, he left the board of Fisker Automotive Inc., the struggling electric luxury carmaker he backed while at Kleiner Perkins….”

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“In the last month, the economy gave us some particularly worrisome economic data.

Societe Generale’s Albert Edwards flags two data points: Q1 corporate profit growth, which unexpectedly turned negative, and the May ISM manufacturing report, which is now signaling a contraction in the sector.

“History tells us that this is a warning sign we ignore at our peril,” he wrote.

Edwards notes that the ISM numbers have been on the same path as they were going into the last recession.

But he believes that the ISM’s signal isn’t quite as powerful as the signal being sent by the corporate profits report. From Edwards:

The US just released its Q1 corporate profits update with the GDP data. These give a less timely but more comprehensive snapshot of what is going on with corporate profits than the S&P data. Most commentators agree the BEA data is less subject to ‘manipulation’. The Q1 data showed profits falling a tad on virtually every definition, My preferred measure is pretax economic profits of domestic non-financial companies which history suggests is a good predictor of domestic investment growth (see chart below). Profits for us are a leading indicator for corporate spending. Hence, with profits essentially flat for the last four quarters, history suggests this is not good news for the economy.

Here’s Edwards’ chart:

Societe Generale

Edwards has subscribed to the work of John Hussman and James Montier who have argued extensively that record high profit margins are unsustainable and would inevitably revert to the mean. Profit margin contraction would translate into crumbling profits, which would ultimately take the legs out from under the stock market….”

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NYSE

NASDAQ

AMEX

In Play ,

On the Wires 

“WASHINGTON—Regulators are ramping up scrutiny of an opaque corner of the market where stocks change hands in the dark.

The Financial Industry Regulatory Authority, Wall Street’s self-regulatory body, last month sent 15 examination letters to operators of “dark pools”—lightly regulated, off-exchange trading venues that have been a rising concern for regulators and some investors as more activity shifts away from exchanges.

Finra is seeking details about how the increasingly popular venues operate, what they disclose to clients and whether they adequately police trades. It could bring enforcement action against dark-pool operators or issue recommendations for tighter oversight, depending on the answers it receives and additional examinations, said John Malitzis, executive vice president of market regulation at Finra. The letters are a follow-up to an initial round of questions the regulator circulated last fall.

“We want to understand whether [dark pools] are disclosing to their customers how their orders work [and] whether customers are informed who their orders will interact with,” Mr. Malitzis said in an interview. “A big part of this is to get an understanding of practices that may or may not be problematic.”

Credit Suisse Group AG, CSGN.VX -1.56% Goldman Sachs Group Inc. GS -2.14%and Barclays BARC.LN -2.31% PLC, which operate three of the largest U.S. dark pools, were among the firms that received a letter, according to people familiar with the matter. Representatives for the three banks declined to comment.

Dark pools don’t disclose traders’ buy or sell orders and only publish trade data after transactions occur. About 13% of all stock-market action takes place on dark pools, up from about 4% five years ago, according to Tabb Group, a market-research firm. Most dark pools are run by broker-dealers—firms overseen by Finra that buy and sell assets on behalf of customers as well as trade for their own accounts.

While dark pools command an expanding slice of trading volume, regulators still have little idea about how they operate since, unlike exchanges, they aren’t required to regularly disclose detailed information about their trading systems. Finra is weighing whether to submit a plan to the Securities and Exchange Commission this summer that would allow it to more closely track dark-pool trading volumes…..”

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“The stock market has risen steadily since November without any sort of significant pullback.

Since May 22, however, there’s been an exciting twist: stocks have been going down.

At yesterday’s closing level of 1609, the S&P 500 is now down 4.6% from the 1687 high on May 22.

Miller Tabak’s Chief Technical Market Strategist Jonathan Krinsky says now, “all eyes are on the [S&P 500’s 50-day moving average],” and asks, “Will it hold?”

In a note to clients this morning, Krinsky writes:

We have been looking for the SPX to test its 50 DMA, which currently sits at 1604. Specifically, on Monday we wrote:

“…as we look ahead into June, we think the odds of an 8th consecutive monthly gain become slim. That is not to say we are expecting a major downturn, but we think a test of the still rising 50 DMA around 1600 should not be surprising. 1597-1600 also represents the April highs. Below that, the 1576 area will likely be defended as it was prior resistance from October 2007, and represents a major multi-year breakout level.” …”

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“…In his opening statement, Draghi reiterates previous comments about how he sees a gradual economic recovery in the eurozone later this year, and that the ECB will keep policy accommodative as long as needed.

Draghi says the ECB has downgraded its 2013 euro area GDP growth forecast to -0.6%, but upgrades its 2014 forecast to 1.0%. Risks to growth remain on the downside.

On the inflation front, the ECB’s 2013 forecast has been downgraded to 1.4%, while the 2014 inflation forecast is unchanged at 1.3%. Upside and downside risks to inflation remain broadly balanced….”

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“Companies flush with cash remain reluctant to hire or make capital purchases, choosing to reward investors rather than expand their businesses.

Recent economic data exemplify the trend: Private payrolls grew by just 135,000 during May, according to ADP, while employment components both for the Institute of Supply Management’s manufacturing and nonmanufacturing indexes show a flat jobs outlook.

The grim hiring prospects come as nonfinancial firms hold nearly $1.8 trillion in cash on their balance sheets.

Rather than look to expand, though, they’ve chosen to participate in aggressive share buybacks and dividend increases to reward investors.

According to TrimTabs, companies have spent $290.7 billion this year on buybacks, which are aimed at decreasing the amount of available shares—or float—thus driving up stock prices.

That effort, at least, has been a success.

The Standard & Poor’s 500 has gained more than 13 percent in 2013, led by big gains in financials and health care stocks.

Worried about growth prospects, S&P 500 companies have been passing out dividend payments with a free hand as well, rewarding shareholders with a record $37.5 billion thus far, rather than hiring….”

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“DETROIT (AP) — Just two days after refusing a government request to recall 2.7 million older-modelJeeps, Chrysler has decided to do two other recalls totaling 630,000 vehicles worldwide.

The automaker will recall more than 409,000 Jeep Patriot and Compass small SUVs across the globe from the 2010 and 2012 model years to fix air bag and seat-belt problems. It’s also recalling 221,000Jeep Wranglers worldwide from 2012 and 2013 to fix transmission fluid leaks, according to documents posted Thursday on the National Highway Traffic Safety Administration website.

In the Patriots and Compasses, a software error could cause late deployment of the side air bags and seat-belt tightening mechanisms, and that could cause injuries in rollover crashes. Dealers will repair the software for free starting in July.

For Wranglers with 3.6-liter V-6 engines, Chrysler says a power steering fluid line can wear a hole in the transmission oil cooler line. The SUVs can leak fluid, damaging automatic transmissions. Dealers will inspect the lines for free and replace them or install a protective sleeve. The recall begins in July.

No crashes or injuries have been reported in either case, Chrysler spokesman Eric Mayne said Thursday.

The Compass and Patriot recall includes 254,400 vehicles in the U.S., 45,400 in Canada and another 109,400 outside North America, according to Chrysler.

The Wrangler recall includes 181,000 vehicles in the U.S. as well as 18,400 in Canada, 3,300 in Mexico and another 18,400 outside North America.

Concerned customers in either case can call Chrysler at (800) 853-1403….”

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“West Texas Intermediate crude rose for a second day in New York, trading near its highest level in a week after U.S. stockpiles dropped the most this year.

Futures climbed as much as 0.8 percent after gaining 0.5 percent yesterday. U.S. crude supplies slid by 6.3 million barrels last week, the most since December, data from the Energy Information Administration showed yesterday. They were projected to decline by 800,000 barrels, according to a Bloomberg News survey. Monthly U.S. jobs data will be released tomorrow. The European Central Bank and Bank of England kept their benchmark interest ratesunchanged.

“The weekly inventory data yesterday surprised quite a bit,” Ole Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen, said by phone today. “We have the U.S. monthly job report tomorrow and central bank meetings today, so there’s potential for a bit of position squaring.”

WTI for July delivery advanced as much as 72 cents to $94.46 a barrel, and was at $94.27 a barrel, up 53 cents, in electronic trading on the New York Mercantile Exchange at 1:01 p.m. London time. The volume of all futures traded was 14 percent above the 100-day average. The contract rose 43 cents yesterday to $93.74, the highest close since May 28.

Brent for July settlement increased 16 cents to $103.20 a barrel on the London-based ICE Futures Europe exchange. The European benchmark grade was at a premium of $8.90 to WTI futures, down from $9.30 yesterday.

BFOE Loadings…”

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“Commodities are trailing equities for the longest stretch in almost 15 years as Goldman Sachs Group Inc. and Citigroup Inc. predict the end of the decade-long bull market even as the global economy expands.

The Standard & Poor’s GSCI Spot Index of 24 commodities lagged behind the MSCI All-Country World Index for six months, the longest stretch since 1998. Hedge funds cut combined bullishbets across 18 U.S. raw-material futures by 51 percent from a 16-month high in September and are bearish on six of them. Commodities will return 1.6 percent in a year as losses in agriculture and precious metals diminish gains from energy and industrial metals, Goldman said last month.

Investors pulled a record $23.3 billion from commodity funds this year as global equities attracted $182 billion, according to EPFR Global, which tracks money flows. Prices that more than doubled in 10 years spurred expansions at mines, farms and oil fields. Gluts are emerging as the International Monetary Fund predicts global growth of 3.3 percent this year, from 3.2 percent in 2012. The group cut last week its estimates for China, the top consumer of metals, grains and energy.

“There are times when you probably should be avoiding commodities, and I think this is one of them,” said John Stephenson, who helps oversee about C$2.7 billion ($2.61 billion) at First Asset Investment Management Inc. in Toronto. “Anytime you have a whole lot of inventory and visible supply, prices are going to be under pressure. The real issue for commodities is the source of demand, China, is weak.”

Natural Gas…”

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“Bank of England policy makers maintained stimulus for the economy after Governor Mervyn King concluded his last policy meeting surveying a recovery that’s not yet strong enough to warrant the “escape velocity” sought by his successor, Mark Carney.

The nine-member Monetary Policy Committee held its target for bond purchases at 375 billion pounds ($580 billion), in line with the median estimate in a Bloomberg News survey of 43 economists. The meeting was King’s 194th, and he will hand Carney on July 1 an economy thatresumed growth in the first quarter and may have picked up in the current period….”

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