Payroll report surge stuns the street. The U.S. Bureau of Labor Statistics reported today, “Total nonfarm payroll employment increased by 321,000 in November, and the unemployment rate was unchanged at 5.8 percent. Job gains were widespread.” September payroll was revised from +256,000 to +271,000, and the change for October was revised from +214,000 to +243,000. With these revisions, employment gains in September and October combined were 44,000 more than previously reported. The consumer, 70 percent of the economy, seems to be riding a virtuous wave on this employment report; oil has dropped by 40 percent since June; hourly earnings doubled expectations with a 0.4 percent today; and housing news continues to be good as mortgage rates stay low. So, yes I think Santa Clause is coming to town. Please see Employment Payroll report on page 56 of the Global Perspectives book.
In Europe, despite no action at today’s European Central Bank (ECB) meeting, president Draghi sent hints that Quantitative Easing will start next year. The ECB’s macro-economic outlook has turned ugly. The view on growth has declined in the last three months from 1.6 percent for 2015 (in September) to only 1.0 percent today, a huge downward revision. Draghi repeatedly used lower inflation forecasts and falling energy prices as the main reasons for concern. Meanwhile, in the U.S. the good news keeps coming: Business surveys point to robust economic activity, and any labor market weakness is likely to be temporary and possibly due to bad weather. Follow Global Monetary Policy trends on page 45 of the Global Perspectives book.
Manufacturing in the eurozone slowed more sharply than previously estimated in November. This brought the PMI reading down to 51.1, pushing the euro to a 27 month low vs. the dollar and increasing the possibility of QE in the eurozone. The dollar has surged to a 5.5 year high against a basket of major currencies and this strong dollar is helping to keep bond yields low. Low interest rates are good news for the housing market which has been plowing forward but at a slower rate. Mortgage applications fell last week but fixed 30-year mortgage rates averaged 4.08 percent in the week, the lowest level since May 2013. The slower rate of price increases and the strengthening labor market will also keep housing on a steady path forward. Please follow the dollar index on page 51 of the Global Perspectives book.
Black Friday brick and mortar sales were characterized as sluggish but Cyber Monday sales surged highlighting the impact technology has had on the consumer. Bargain hunters decided to forgo long lines and sharp elbows in favor of shopping from the comfort of their own homes. The preliminary numbers show sales of $2.65 billion on Cyber Monday, a 16 percent increase over last year. The savings from falling gas prices is starting to kick in. So far the decline has provided the equivalent of a $75 billion tax cut for U.S. households, according to Goldman Sachs. This could translate to a $1,100 annual benefit for a typical US family. Meanwhile, on the manufacturing front, U.S. manufacturers expanded at a slightly slower but still robust pace in November and the ISM Index registered a 58.7 percent reading last month. Notably new orders expanded again to reach 66 percent and the backlog of orders rose to its highest level since April. This vigorous pace in manufacturing and the strong start to holiday sales bode well for fourth quarter GDP. Please follow retail sales on page 13 of the Global Perspectives book.
What a difference a day makes. Yesterday GDP surprised big on the upside. Lots of data was released today and not all of it was good. Durable goods orders were up only 0.4 percent in October, a weak start to the quarter. In particular, orders for commercial products and business investment dropped which may prove to be a drag on 4Q GDP. The consumer also started the quarter weaker than expected. Consumer spending climbed 0.2 percent in October, as did personal income; not the strong consumer rebound that was anticipated. Additionally, weekly new jobless claims spiked to 313K. This is the first time the number of newly unemployed exceeded 300K since the beginning of September. It is no wonder the Conference Board's index of consumer confidence plunged to 88.7 in November from 94.1 the prior month. On the home front pending home sales were down 1.1 percent from last month and new home sales increased by 0.7 percent, a softer increase than expected. Despite all of the weak data today one day does not make a trend. Please follow durable goods on page 61 of the Global Perspectives Book.
The U.S. economy was even better than we thought in the third quarter, growing 3.9 percent, revised up from an initial estimate of 3.5 percent. The upward revision was primarily due to consumer spending, which was revised up to 2.2 percent from 1.8 percent, and a robust increase of business investment in equipment, which surged to 10.7 percent from 7.2 percent. The latest six month growth is the strongest stretch since 2003 and underscores the positive momentum in the U.S. despite the low growth and deflationary issues in the Eurozone and Japan. Meanwhile, U.S. home prices were up again but at a slower rate. The S&P Case Shiller home price index reported that home prices increased 4.9 percent at a year-over-year rate, the slowest increase in two years. Please follow GDP on page 62 of the Global Perspectives Book.
Central banks around the world have been making news and moving markets. Today it's China's turn. China's central bank cut its one year lending rate by 0.4 percent and its deposit rate by 0.25 percent in an effort to spur growth which has fallen to 7.3 percent. This surprise cut was the first in two years. Not to be outdone, the ECB's Mario Draghi announced the Eurozone would broaden asset purchases to combat deflationary pressures. Everyone loves a punch bowl. Global markets are surging. Please follow global market returns on page 48 of the Global Perspectives book.
Investors are concerned that the economic struggles in the world’s largest economies, namely Japan and the Eurozone, cannot help but to spill over into the U.S. However, so far the U.S. economy has been virtually bullet proof. The most recent round of economic data portrays an economy that is strengthening not weakening. The latest leading economic indicators jumped 0.9 percent in October. Sales of existing homes rose 1.5 percent in October to 5.26 million, the highest level since September 2013; and for the 10th straight week the number of initial unemployment claims came in under 300K as fewer workers are facing layoffs. Lastly, the Philly Fed manufacturing index jumped 20 points to the highest level since December 1993. A robust U.S. economy will help support continued corporate profit growth. The market for now is shrugging off the malaise overseas and letting the domestic economic outlook and the strong corporate profits do the talking. Please follow of the Global Perspectives book.
The consumer is poised to spend robustly this holiday season based on falling gas prices. But housing is also an important part of the consumer DNA since it is usually the consumers’ biggest asset. Although the rate of advance is slower than it was a year ago, the housing sector continues to improve. The latest home builders confidence numbers released yesterday rose four points reaching its highest level in nearly nine years. Additionally, the housing starts for September rose 7.8 percent year-over-year and remained above the 1 million mark. The monthly change was not as good, declining 2.8 percent, but that was mainly due to the apartment sector which is often volatile. The more stable indicator, single family construction, was up 4.2 percent for the month. New permits, a forward indicator of housing construction rose 4.8 percent, the highest level since 2008.The bottom line is that housing remains a net positive for the U.S. economy. Please follow housing trends on page 59 of the Voya Global Perspectives book
Japan, the world’s third largest economy, has officially fallen into recession for the fourth time since 2008. Japan contracted 1.6 percent in the third quarter surprising analysts expecting a 2 percent plus increase. As a result the 2015 additional increase of the consumption tax designed to tackle Japan’s mammoth debt is on hold. Japan is seeking to stimulate growth as well as pay down debt. Just two weeks ago the bank of Japan announced a huge round of QE – the BOJ will pile on more debt - increasing asset purchases at an annual pace of around 80 trillion yen, an increase from the previous 60 to 70 trillion yen target range, in order to kick start the economy. But Japan’s taxes are a killer with the highest corporate tax rate next to the U.S. Additionally, Japan’s payroll tax is incredibly steep with a combined employer/employee rate of almost 30 percent and in April the sales tax was raised from 5 percent to 8 percent. Government stimulus without any structural change (i.e.: tax cuts, free trade agreements) does not seem to be working. Meanwhile, U.S. markets are notching new highs based on solid Q3 corporate earnings, but the struggles for growth throughout the world can’t be ignored. Please follow international economies on page 52 of the Global Perspectives book.