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Tuesday, January 14, 2020

Special Guest Blogger: Tim Kearney

A nice, solid jobs report yet again. Following a blow-out November report of over 250,000, the United States added another 145,000 jobs in December. The unemployment rate remained at a 50-year low. More eye-opening, the U-6 unemployment report (aka the underemployment report) is at a low for this century, which sounds like a lot but that data series hasn’t been around quite as long. Paradoxically, the call on the underemployed may explain why wage growth remains somewhat subdued.

Why “paradoxically”? Because underemployed workers may have lower “reservation wages” — the lowest wage they will accept for a job — than the public as a whole. The long/short of the labor market: the 2019 growth in labor supply averaged 120,000 per month, well below the actual pace of job creation, i.e., demand. With the Federal Reserve set to stay on the sidelines for a while, things look good for the economy.

Thursday, January 9, 2020

The market resilience in the face of the U.S.-Iran geopolitical turmoil is truly astounding. Iran launched missile strikes against two Iraqi military bases housing U.S. troops on Tuesday night, in retaliation for the U.S. ordered airstrike that killed Iranian General Qassem Soleimani. The airstrike triggered a broad market sell-off last Friday, but early this week markets have recovered to post year-to-date new highs.

Are the markets irrational? No. The market response reflects investors’ realization that the shale drilling revolution has made the United States a net energy exporter; while the U.S. still imports oil, it is no longer dependent upon the Middle East. There are also plans in place to dramatically increase the export of liquid natural gas (LNG) to Europe and the rest of the world. The innovation and entrepreneurship of our private energy industry has begun to reduce the political risks that run from the Middle East, though clearly not those from sustained kinetic contact.

Please see our Voya Global Perspectives 2020 Forecast on the strength of America compared the rest of the world.

Tuesday, January 7, 2020

Special Guest Blogger: Tim Kearney

The unusual breach between the Markit and ISM PMI reports continued into December. ISM showed manufacturing dipping again to 47 while Markit held steady at 52. Within the ISM report, orders and employment also slipped, whereas in the Markit report they continued to expand. It’s important to note that (a) Markit has yet to dip below 50 and (b) it has a larger survey base. At this point, it seems likely that the dichotomy can be viewed as a still unsettled sector. We know that manufacturing employment has been soft, and that the manufacturing output data are stabilizing after a long drop. With trade improving, look for improvement here, not another downturn.

Thursday, January 2, 2020

Special Guest Blogger: Tim Kearney

With the trade war seemingly moving in the right direction, there has been a positive reaction to confidence in the economy. The NFIB Small Business Optimism Index outperformed expectations and rose by two percentage points in November. Consumer sentiment reinforced the small business perspective, as the December University of Michigan Sentiment Index remained near 15-year highs. What’s more, the Duke/CFO Outlook: Optimism Index rose in December, with a big increase in “own company” optimism.

This is important because optimism has been trending lower since 2018, as the trade war generated economic uncertainty and negatively affected investment. If CFOs are becoming more optimistic about the economy, and especially about their own companies’ prospects, that could kick off a virtuous cycle of investment leading to greater productivity leading to greater growth, to keep the economy moving strongly.

Tuesday, December 17, 2019
Figure 1. U.S. Trade in Goods with China

The “Phase One” trade deal reached last week reduced U.S. tariffs on $120 billion of Chinese goods and suspended tariffs planned to take effect on December 15 for $160 billion worth of goods. The deal also contains commitments from China to better protect U.S. intellectual property (IP), and increase U.S. agricultural purchases, which is expected to improve the United States’ goods trade deficit (Figure 1). However, enforcement of IP will continue to be challenging and Chinese officials have not confirmed the quantity of planned purchases. While this progress is encouraging, the deal is not comprehensive and the peace is still fragile.

Please follow global trade on page 17 of the Voya Global Perspectives book.

Source: U.S. Census Bureau, as of 10/31/2019

Thursday, December 12, 2019
Source: Bloomberg, Voya Investment Management, as of 12/11/19

In Britain, the Conservative Party’s Boris Johnson is favored to win today's election. While the expectation is for a Conservative victory, no clear winner would result in a hung parliament and have a negative impact for markets. It would also have a currency effect on the British pound and the Euro. More big news for Europe, and Germany in particular, is the prospect of a first phase China-U.S. trade deal, or at least an avoidance of tariff increases at the December 15th deadline. Meanwhile the British pound has had a massive rally, indicating not only a win for Boris Johnson but that Brexit is viewed as good for Britain.

Source: Bloomberg, Voya Investment Management, as of 12/11/19

Tuesday, December 10, 2019

Special Guest Blogger: Tim Kearney

Though the November payroll data have been read and re-read, they bear one more long look. The 266,000 headline was bolstered by a net 41,000 upward revision for September/October. Yes, GM came back on line and yes, there were quite a few retail-oriented new hires. But with the revisions, the actual data amounted to 120,000 more jobs than expected. The three-month average is higher than the twelve-month average, a positive sign for growth and demand.

Wages are moving up, with the six-month change in average hourly earnings up to 3.4%. And initial claims — the strongest leading indicator of the labor market — are at 50-year lows and sticking there. The cherry on top is that the JPMorgan Global Manufacturing PMI is up for four straight months and has topped 50 for the first time since April. It appears the global economy is starting to mend, and that is good for risk assets.

Please follow the unemployment rate on page 20 of the Voya Global Perspectives book.

Thursday, December 5, 2019

The U.S. trade deficit narrowed in October to -$47.2 billion, but on less than stellar news: imports dropped more than exports in percentage terms as both declined. The trade deficit with China is -$32 billion compared to -$8.8 billion with Mexico and -$3.4 billion with Canada. The good news remains among consumers, with initial unemployment claims dropping to 203,000 in the final week of November. This bodes well for tomorrow’s employment report, which a number of analysts believes could be as high as 200,000.

Please see the trade report on page 17 of the Voya Global Perspectives book.

Tuesday, December 3, 2019

Special Guest Blogger: Tim Kearney

Just a week ago, this blog noted that “the global manufacturing sector is seemingly finding a bottom,” with the October Global PMI from JP Morgan showing a move upward from the lows recorded in July to just about 50. So the U.S. ISM Manufacturing PMI slip to 48.1 from 48.3 is somewhat of a puzzle. The report had a couple of major weak points, namely employment and new orders, each of which slipped for the fourth consecutive month. What’s most puzzling is that the Markit PMI in November hit its highest reading since April, with new orders the highest since January, and is up each of the past three months at 52.6.

The ISM report notes that “Global trade remains the most significant cross-industry issue.” Taking the two reports together, it appears that this sector is trying to stabilize. The question is how much manufacturing weakness will affect the Federal Reserve at its January FOMC meeting. Stay tuned…

Please follow U.S. manufacturing on page 9 of the Voya Global Perspectives book.

Tuesday, November 26, 2019
Source: JP Morgan and HIS Markit (U.S. data), analysis by Voya Investment Management

Recent data suggest a bit of a respite as the global manufacturing sector is seemingly finding a bottom. The October Global Manufacturing PMI data from JPMorgan show that since the lows recorded in July there has been an uptick — for three consecutive months to the better and right around 50 now. Modest progress that can be reversed, but progress nonetheless. The early data from developed countries on both manufacturing PMI as well as composite PMIs, i.e., including services, point to a broadening bottom. This is potentially an important development from a risk-asset viewpoint.

If the world is finding a bottom — and many countries registered lows on their PMIs over the past three-four months — then growth has room to pick up. Importantly, there appears to be some progress in resolving the trade wars — though the peace is still fragile. Brexit is at least being dealt with, as the Tories lead Labour in the polls. No matter how it breaks, markets would benefit from a lessening of this sort of electoral uncertainty. The U.S. political scene appears to be status quo ante, perhaps stable at this low level until 2Q20, when the primaries will be well underway. It’s too early to sound the “all clear,” but time to consider that possibility.

Please follow U.S. manufacturing on page 9 of the Voya Global Perspectives book. Happy Thanksgiving to VFA and our many readers!

Source: JP Morgan and HIS Markit (U.S. data), analysis by Voya Investment Management


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