June 3, 2016

Stocks gapped down at the open (Dow -52pts; SPX -.4%) in the wake of a disappointing jobs report. The reaction is classic risk-off: defensive sectors are rising and cyclical sectors are falling. Financials (esp. banks) are down the most in early trading. The dollar is weaker (-1.4%) and commodities are mostly higher. Gold is up over 2%. But WTI crude oil is trading down to $48.70/barrel. By the way, US oil production has been falling for 12 straight weeks, and that’s helping prop up oil prices. Bonds are surging ahead because the weak jobs figure makes it less likely the Fed will raise interest rates later this month. The 2-year Treasury yield fell to .78% (from .89%) this morning. The 5- and 10-year Treasury yields fell to 1.23% and 1.71%, respectively. We see technical support for the 10-year at 1.69 – 1.70%. 

According to the Bureau of Labor Statistics, the US economy generated 38,000 new jobs in May, falling far short of economists’ consensus forecast for about 160,000. In addition, April’s payroll tally was revised down to 123,000 from the initial report of 160,000. Private payrolls (non-government) rose only 25,000! We lost 34k due to the Verizon strike, which should have been expected. But there was also significant job loss in mining, construction and manufacturing. And hiring slowed down in the service sector. This is a huge surprise and disappointment, not at all correlated to yesterday’s ADP payroll report. This report has left a huge question mark in investors’ minds, and I’m not sure why the stock market isn’t much lower this morning. 

Meanwhile the unemployment rate (“U-3”) fell to 4.7%, the lowest since late 2007. That’s usually good news, except that the under-employment rate (“U-6”) was unchanged at 9.7%. Ideally, we’d like to see that continue lower. The labor force participation rate fell to 62.6% from 62.8%. This suggests some discouraged workers simply left the workforce. Finally, average hourly earnings held steady at 2.5% y/y growth. That’s fairly healthy for this economy. I’d say there are two takeaways here: 1) overall the job market remains pretty tight but the rate of improvement is slowing down; 2) the Federal Reserve will likely not raise short-term interest rates later this month, as it has threatened to do. 

Unfortunately, we also got a disappointing ISM Non-Manufacturing report this morning. The index, which gauges business activity in the service sector, fell to 52.9 in May from 55.7 in the prior month. Economists were expecting a stronger reading. In fact, this is the lowest reading since February 2014. The employment component of the index fell into contractionary territory (49.7), and that corroborates to the jobs report discussed above. According to Bloomberg, recent weakness in this index suggests second quarter GDP will be a meager 1.8% to 2.0%. 

JP Morgan CEO Jamie Dimon spoke at Bernstein’s Strategic Decisions Conference in NYC, and he called out auto loans as a problem. He characterized auto lending in US as “stretched,” and predicted that “someone is going to get hurt.” By that, he means banks that have been aggressive with auto lending. We know that auto sales are at record levels (about 18 million units/yr) and the size and payment of the average loan are increasing. Car sales for Ford fell 25% y/y last month. 


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