FMX | Connect – www.fmxconnect.com - (Reported 6/04/2010)
Excerpts from MARKET MUSINGS & DATA DECIPHERING
10 REASONS TO LOVE LABOUR (CANADIAN STYLE)
1.The consensus was looking for +15k in terms of Canadian job creation for May; instead, we got +24.7k.
2.This was the fifth increase in a row, totaling 215k or a respectable 3.1% annual rate.
3.Gains were led by transports, tech, health care, and financials. Even manufacturing eked out a small gain; construction fell in a fresh sign that the housing boom is over.
4.The unemployment rate stayed at 8.1% (the market was looking for it to drop to 8.0%) but this was due to a 32.7k rise in the labour force. In fact, the participation rate rose to a nine-month high of 67.3% from 67.2% in April. The broad R-8 unemployment rate (which includes discouraged searchers, waiting groups, and the portion of involuntary part-timers) did manage to dip for the second month in a row, to 11.5% from 11.8%, as involuntary part-timers found a full-time position and discouraged job seekers who are not counted as part of the labour force found work.
5.The employment-to-population ratio (the ‘employment rate’) held onto its year-long high of 61.8%.
6.Full-time jobs jumped 67.3k and this was on top of a 43.8k runup the prior month. Canadian companies ostensibly believe the recovery has legs to making this more permanent commitment to its staffing strategy.
7.Those working part-time because they could not find full-time jobs dropped 17.1k in May; signs that job openings are indeed on the rise.
8.Private sector job gains led the way with 43,400 net additions last month. Unlike the U.S., this is not led by Census hiring.
9.The Bank of Canada does not have an inflation problem with these numbers as average hourly earnings actually dropped 0.4% MoM in May, the steepest decline since last July. The YoY trend did bump up to 2.4% from 2.0% but that was purely a base effect from a plunge in May 2009 — the trend is stagnant on a six-month basis and negative over the past three months.
10.Be that as it may, aggregate income is inching along — average weekly earnings rose by a little less than 0.2% MoM in May and the +2.5% YoY pace is moderately better than the +1.9% trend at the turn of the year.
All in, a solid report that provides enough income to keep retailers rolling along through the summer and totally validates the Bank of Canada’s recent move to nudge rates up. So long as the financial contagion from Europe does not infect the domestic economic scene, the Bank is sure to continue along its path towards “normalizing” short-term rates.
The better income fundamentals are good for domestic consumer trends; however, will work against the rate-sensitive housing market and the flatter yield curve will cap bank earnings potential. The Canadian dollar is seeing a round of profit taking but nothing in this report is bearish for the loonie.
NO MAY FLOWERS HERE
This is probably the first time on record when a 431,000 surge in U.S. nonfarm payrolls was viewed as a terrible employment report. Perhaps this is because 411,000 of those jobs, or 95% of the tally, were in Census hirings, which everyone knows are temporary.
Private payrolls were the real key for the market and the consensus was completely giddy believing that we were going to see a +180,000 print today. Instead, we got a putrid 41,000 increase, which is hardly significant in any statistical sense — for once, the ADP survey looked optimistic. And of course, state and local governments are moving aggressively to get their fiscal position back into black ink and that means massive cost cutting. In May, this belt-tightening translated into a 22,000 retrenchment in employment in this part of the economy, which is 50% larger than the federal government.
Not only that, but a big red flag was clearly waved by the Household Survey, where total employment actually fell 35,000 — the first decline of the year and a splash of cold water on the widespread view that this recovery was gaining steam. Note too that the 41,000 increase in private payrolls marked a huge slowing from +218,000 in April and +158,000 in March, and the diffusion index sank like a stone, to 54.1% last month from 66.7%, so we have a situation where nearly half of the universe of employers were either cutting their payrolls or leaving them stagnant last month. This is not the hallmark of a robust V-shaped expansion deserving of an 80% rally off the lows, which is what we had on our hands little more than a month ago. Look for consensus GDP growth and earnings revisions to start heading down in coming weeks.
The unemployment rate did manage to come down to 9.7% from 9.9% but this was a pure statistical anomaly owing to the 322,000 plunge in the labour force. Absent that decline, the headline jobless rate would have actually climbed back to 10%. The broad U-6 unemployment rate also managed to drop, to 16.6% from 17.1%, again owing to a sharp decline in the total pool of available labour last month. (We have no idea where these 504,000 souls wandered off to — maybe all the students went to camp instead of looking for a job at the gas station). We also had some new record highs being set:
i)The average duration of unemployment (34.4 weeks from 33.0 weeks in April); and,
ii)The share of the unemployed ranks who have been out of work now for at least a half-year (46.0% from 45.9%).
Anytime we have both the employment rate (58.7% from 58.8%) and the participation rate (65.0% from 65.2%) declining the same month, you know you have a very soft labour market on your hands.
But this is a whole report and we have to keep in mind that if this data had come out six or nine months ago, it would have been treated as nirvana. However, expectations had become far too optimistic and had gone beyond reality, which is why bonds are rallying sharply and equities are selling off in the initial response to the release. We were reminded today that in a post-bubble credit collapse, economic recoveries are typically fragile and susceptible to periodic setbacks. That is the lesson.
Be that as it may, there were some details in the report that should provide some solace for the bulls. Hours worked inched up 0.3% and wages did rise 0.3% and with the increase in hours worked helped to generate a 0.6% jump in total employment-based income. This is truly encouraging news, but considering so much of this was driven by temporary Census hiring, the durability is still in question — especially since these are well-paying government jobs even if for a short period of time.
The share of people leaving their job voluntarily rose for the third month in a row, to 6.5% from 6.2% in April, and labour market experts would interpret this as a sign of confidence in terms of better employment opportunities that lay ahead compared to what you are doing today. Then again, maybe it’s a sign that people are quitting and are going to collect unemployment insurance benefits, which are rather substantial — perhaps this explains why it is that the flow of new jobless claims remains around the 450,000 level week-in, week-out. Look Ma, no more job and no more mortgage payment, and I’m doing just fine!
The fact that the nascent improvement in the labour market data has stalled out just as the equity market has rolled over and the risk premia is on the rise yet again, lends enormous credence to the notion that the economy will soon confront either a growth relapse or an outright double-dip. Jobless claims are a leading indicator and are at a level that in the past was consistent with job declines more than half the time. Excluding fleet sales, auto sales appeared to be weak in May and it looks like consumer spending sputtered for the second month in a row if the tepid chain store sales data are any indication — barely more than half of the retailing universe managed to beat their downwardly-revised sales targets last month.
With the government withdrawing its tax-credit support for the housing market, mortgage applications for new purchases plunged at over a 90% annual rate in May to a 13-year low. Yes, the manufacturing data remain at a high level, as we saw with the May ISM index. However, even here, it looks like the inventory cycle of the past year is getting long in the tooth and companies will soon wonder why they feel the need to re-stock when real final sales, in the context of the most gargantuan fiscal and monetary policy stimulus, could only muster up growth of barely more than 1% at an average annual rate since last summer. To add some context, normally coming out of recession, we see economic growth of 4% over and above what we get from the arithmetic contribution from reduced inventory withdrawal.
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
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