Jobs Report Stinks: No Fed Rate Hike in June

The May jobs report was a stinker. The economy added just 38,000 jobs, the fewest since September 2010. Even adding back the 37,000 jobs lost in the telecom sector, which was primarily due to the recent Verizon strike, May was a dismal month for hiring. Adding to the downbeat news, revisions of March and April reduced jobs by 59,000, pushing down average monthly job creation for 2016 to 150,000, well behind the more than 200,000 thousand gains seen over the past few years. Although the year-over-year change in May was an impressive 2.39 million jobs, the recent trend is worrisome: Over the past 3 months, job gains have averaged 116,000 per month. Additionally, the unemployment rate fell to 4.7 percent, the lowest level since November 2007, but that was due to more people dropping out of the workforce, not because a slew of wannabe employees got jobs. Unfortunately, the weakness was widespread. Manufacturing lost 10,000 jobs, construction shed 15,000 jobs and temporary help fell by 21,000.

Despite recent comments by Fed officials extolling the improvement in the economy, the weakness in this report likely means that the central bank will not raise rates when it meets in a week and a half. It also calls into question the health of the overall recovery in the second quarter, which is estimated to accelerate by about 2.1 - 2.3 percent on an annualized basis.

In the first quarter, we could attribute the paltry 0.8 percent GDP to plunging oil prices, a stronger U.S. dollar and weakness in China. But those factors have largely turned around: crude has soared from $27 per barrel to nearly $50; the dollar has stabilized after rising sharply against other major currencies in late 2014 and early 2015; and although Chinese growth remains on the worry list, there has been a simmering down of tensions.

The economic expansion celebrates its seventh birthday this month, making it the fourth longest recovery since World War II. Although the recovery has been sluggish—GDP has averaged just over two percent a year, the labor market has shown more impressive progress, until recently. Whether or not this is the beginning of the end for the robust gains in job creation is unknown at this point. What’s seems knowable is that the Fed is not going to raise rates amid the current environment.

Last week, Fed Chair Janet Yellen said that the central bank would likely to raise interest rates “gradually and cautiously” because raising them too quickly could trigger a downturn to which the Fed may have limited tools to respond. Given this report, it would seem that caution would be appropriate at the June meeting.

MARKETS:

• DJIA: 17,817 down 0.4% on week, up 2.2% YTD
• S&P 500: 2000 flat on week, up 2.7% YTD
• NASDAQ: 4942 up 0.2% on week, down 1.3% YTD
• Russell 2000: 1164, up 2.5% on week, up 2.5% YTD
• 10-Year Treasury yield: 1.7% (from 1.8% a week ago)
• July Crude: $48.62, down 1.4% on week
• August Gold: $ 1,242.90, up 2.2% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.35 (from $2.32 wk ago, $2.76 a year ago)

THE WEEK AHEAD:

Mon 6/6:

Janet Yellen speaks

Tues 6/7:

8:30 Productivity and Costs

3:00 Consumer Credit

Weds 6/8:

10:00 Job Openings and Labor Turnover Survey (JOLTS)

Thursday 6/9:

Friday 6/10:

10:00 Consumer Sentiment

2:00 Treasury Budget

April Jobs Report: The Two-Tiered Recovery

The April jobs report continued the saga of a two-tiered labor market. The economy added 160,000 jobs and the unemployment rate remained at 5 percent. Revisions to the previous two moths amounted to 19,000 fewer jobs than originally reported. But the broad numbers may not paint a true picture of the employment landscape. The biggest complaint is that overall wage growth has been unimpressive. In April, average hourly wages increased by 0.3 percent, nudging up the annual increase to 2.5 percent. Given the impressive number of jobs added, most analysts have been promising that wage growth would soon follow, but annual wage growth has remained between 2 and 2.5 percent for the past few years, below the near-3 percent seen in previous expansions. While 2.5 percent is not a bad number, we have been here before and now need to see consistent readings that are trending higher.

It’s not supposed to work this way. If employers are having a hard time filling positions, and workers are more willing to jump ship, wages should be rising faster. However, according to economist Joel Naroff, “No matter how tight the market may be, companies are still willing to go without new hires and limit pay increases.”

It may be that the labor market is not quite as healthy as the top line measures indicate. In addition to the 2.1 million Americans who have been out of work for more than six months, the number of workers who work part-time but would rather be full-time remains at a still-elevated 6 million. According to research from the Federal Reserve Bank of Chicago, the high numbers of “part-time for economic reasons” is a contributing factor to limiting wage growth.

What appears to be happening is that workers in the high growth fields can demand higher wages, but the vast majority of workers either don’t feel like they have bargaining power or have made a different kind of adjustment: if the boss can’t pay me more, maybe I will work a little less. This could be part of the reason why worker productivity has dropped off. According to the Labor Department, in the recent 2007-2015 period, annual labor productivity has slowed significantly to 1.2 percent, the worst period since the late-1970s to mid-1980s. Naroff says the downshift is understandable because “until workers have reasons to work harder (i.e., greater compensation), they will find ways not to work harder.”

Of course, with corporate earnings set to drop for a third consecutive quarter, companies are unwilling to take the first step to incentivize their workforces. This strange game of chicken is unlikely to continue for too much longer. Unfortunately, there is probably an equal probability that we see a downshift in the economy, which would spur workers to step it up; and an uptick, which would force companies to pay more.

MARKETS:

• DJIA: 17,740 down 0.2% on week, up 1.8% YTD
• S&P 500: 2057 down 0.4% on week, up 0.6% YTD
• NASDAQ: 4736 down 0.8% on week, down 5.4% YTD
• Russell 2000: 1114, down 1.5% on week, down 1.9% YTD
• 10-Year Treasury yield: 1.78% (from 1.83% a week ago)
• June Crude: $44.66, down 2.7% on week
• June Gold: $1,294.00, down fractionally on week
• AAA Nat'l avg. for gallon of reg. gas: $2.21 (from $2.21 wk ago, $2.65 a year ago)

THE WEEK AHEAD:

Mon 5/9:

China CPI/PPI

Tues 5/10:

Walt Disney

6:00 NFIB Small Business Optimism Index

10:00 JOLTS

Weds 5/11:

Macy’s

2:00 Treasury Budget

Thursday 5/12:

Kohl’s, Ralph Lauren, Nordstrom

8:30 Import/Export Prices

Friday 5/13:

JC Penney

8:30 Retail Sales

8:30 PPI

10:00 Consumer Sentiment

With Economy Stalling, Time to Sell in May and Go Away?

Should you follow the old Wall Street adage to “Sell in May and Go Away”? You might be tempted to do so, especially with economic growth crawling at a measly 0.5 percent annualized pace in the first quarter, consumer spending decelerating for the past nine months and corporate earnings on track for a third consecutive quarter of declines—the longest streak since the financial crisis. 2016 has been a year of investor anxiety, starting with a swift Jan-Feb 10 percent stock market correction. Now that indexes have clawed their way higher, many are worried that something ominous is brewing for the summer. This week’s employment report could either fan the fear flames or tamp them down. Analysts expect that 200,000 jobs were created in April and the unemployment rate will remain at 5 percent.

If those estimates were to come in on target, they would add to the mostly upbeat data on jobs that we have seen over the past few years. According to Calculated Risk, through March, total employment was 5.3 million above the previous peak and up 14 million from the employment recession low. Last week, although the Federal Reserve did not raise interest rates, it acknowledged that since its previous meeting six weeks prior, “Labor market conditions have improved.”

But the broad numbers may not paint a true picture of the employment landscape. Steve Murphy of Capital Economics notes that there has been a surge of low paying jobs in sectors like retail and leisure, while “at the same time, employment in higher-paid sectors such as manufacturing and mining has fallen back sharply. More generally, there has been a sharp deterioration in the quality of jobs created.”

Career coach Connie Thanasoulis-Cerrachio, co-founder of SixFigureStart® says her on-the-ground-interaction with employers and candidates echoes that sentiment: “We see a tale of two [labor] markets – strong candidates have a great market. Mediocre ones are still have a hard time.” What makes a strong candidate? It helps if those seeking jobs are looking in the hot industries that are hiring, like technology, healthcare, accounting, marketing/data analytics as well as the non-profit world, which Thanasoulis-Cerrachio says is “booming”.

Even if many parts of the economy are growing and employees do eventually see an uptick in their paychecks (Capital Economics expects “to see a marked acceleration in hourly wage growth to around 3 percent by year-end”), the stock market may still stumble, due to valuations, exogenous events across the globe or plain old exhaustion, which brings us back to the original question of selling in May. According to Charles Schwab, “since 1950, nearly all of the S&P 500’s gains have occurred between October and April. The mean return during May through October was 1.3 percent; while for November through April it was 7.1 percent.”

Unfortunately, “Sell in May and Go Away” hasn’t been as reliable over the past dozen years. It didn’t work from 2012-2014, or from 2003-2007, so you may want to stick to the tried and true strategy of investing in a diversified portfolio, targeted to your specific goals. Not as catchy as “Sell in May and Go Away”, but probably a smarter way to manage your money.

MARKETS:

• DJIA: 17,773 down 1.3% on week, up 2% YTD
• S&P 500: 2065 down 1.3% on week, up 1% YTD
• NASDAQ: 4775 down 2.7% on week, down 4.6% YTD
• Russell 2000: 1130, down 1.4% on week, down 0.4% YTD
• 10-Year Treasury yield: 1.83% (from 1.9% a week ago)
• June Crude: $45.92, up 20% on month, up 75% since bottoming out in February at a 13-year low
• June Gold: $1,294.90, highest level in 15 months
• AAA Nat'l avg. for gallon of reg. gas: $2.21 (from $2.13 wk ago, $2.58 a year ago)

THE WEEK AHEAD:

Mon 5/2:

AIG

9:45 PMI Manufacturing Index

10:00 ISM Manufacturing Index

10:00 Construction Spending

Tues 5/3:

CBS, BMY

Motor Vehicle Sales

Weds 5/4:

Tesla, Lending Tree, Priceline

8:15 ADP Private Sector Employment Report

8:30 International Trade

8:30 Productivity and Costs

9:45 PMI Services Index

10:00 Factory Orders

10:00 ISM Non-Manufacturing Index

Thursday 5/5:

Alibaba, Merck, GoPro, Herbalife

Chain Store Sales

Friday 5/6:

8:30 April Employment Report

3:00 Consumer Credit

Is the US Economy at Full Employment?

Full employment is often described as the level of employment at which virtually anyone who wants to work can find employment at the prevailing wage. Given that over the last half century, the unemployment rate in the United States has ranged from a low of nearly 2 percent to a high of nearly 11 percent, what is the specific rate at which the economy has reached the magical level? According to the Federal Reserve, full employment is subjective. It’s “largely determined by nonmonetary factors that affect the structure and dynamics of the job market. These factors may change over time and may not be directly measurable.” In other words, your guess is as good as anyone else’s. In the Fed's March 2016 Summary of Economic Projections, the Committee estimated that the longer-run normal rate had a median value of 4.8 percent, but even if we drop to 4.8 percent when the government releases the March Employment report, that may not cut it.

The Fed also closely watches wage growth and hoping that it picks up from the paltry 2 to 2.5 percent seen during the recovery. Part of the problem is that even though job creation has been robust over the past few years, many of the new positions added have been lower paid ones, which has dragged down the average. As 538 Blog points out, this is perhaps why many American workers without college degrees are so angry. They have gone from working in factories, earning “more than $25 an hour before overtime” to the service sector, where “the typical retail worker makes less than $18 an hour…More than 80 percent of all private jobs are now in the service sector.”

Still, with the pace of average monthly job gains remaining above 200,000 and the labor market tightening, analysts believe that wage growth should accelerate this year. Until it does, most consumers are happy to see low inflation, which allows them to keep more of their paychecks. Indeed, the upward revision of Q4 growth to a still-slow 1.4 percent was due almost entirely from consumers, not from businesses. Consumer spending increased at a 2.4 percent annual pace in the final three months of 2015, up from a prior 2 percent estimate.

On Monday, the government will release data on Personal Income and Spending for March, which could provide a preview of the jobs report. Although wages have been disappointing, the addition of other income, like rental income, non-farm proprietors' income and investment income, the numbers look a little better: Personal income increased 4.4 percent in 2015.

MARKETS: Stock indexes snapped a five-week winning streak and that was before the holiday release of Corporate Profits, which fell 3.2 percent last year, versus increases of 1.7, 1.9 and 9.1 percent in 2014, 2013 and 2012 respectively. It was the first negative reading since 2008, but with energy prices moderating and dollar appreciation slowing, analysts expect that profits should rise this year, which could help the labor market.

• DJIA: 17,516 down 0.5% on week, up 0.5% YTD
• S&P 500: 2036 down 0.7% on week, down 0.4% YTD
• NASDAQ: 4773 down 0.5% on week, down 4.7% YTD
• Russell 2000: 1101, down 1.3% on week, down 3% YTD
• 10-Year Treasury yield: 1.90% (from 1.88% a week ago)
• May Crude: $39.59, down 2.4% on week
• June Gold: $1,218.70, down 2.6% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.04 (from $1.98 wk ago, $2.42 a year ago)

THE WEEK AHEAD:

Mon 3/28:

8:30 Personal Income and Spending

10:00 Pending Home Sales

10:30 Dallas Fed Manufacturing Survey

Tues 3/29:

9:00 S&P Case Shiller Home Price Index

10:00 Consumer Confidence

Weds 3/30:

8:15 ADP Private Jobs Report

Thursday 3/31:

9:45 Chicago PMI

Friday 4/1

Motor Vehicle Sales

8:30 March Employment Report

9:45 PMI Manufacturing Index

10:00 ISM Manufacturing Index

10:00 Consumer Sentiment

Strong Jobs Report Puts Fed in a Quandary

The US economy added a much stronger than expected 242,000 jobs in February and the two previous months were revised higher by 30,000, pushing up year-over-year job creation to a solid 2.67 million. The unemployment rate remained at 4.9 percent, the lowest level since February 2008. The report puts the Federal Reserve in a quandary for its upcoming policy meeting. With job creation averaging 228,000 over the past three months and the labor force increasing by 555,000 in February and by 1.5 million in the last three months, the participation rate rose to a 15-month high of 62.9 percent. According to Capital Economics, the report shows that “remaining labor market slack is getting eaten up very quickly.”

If the central bankers are in fact “data dependent,” then the strong jobs report, along with rising core inflation (the Fed’s favorite inflation measure, the core PCE price index, was up 1.7 percent in January from the prior year), would add to the rationale for increasing the fed funds rate by another quarter of a percent in March.

But by now we know that the Fed likes to err on the side of caution. Officials are likely to cite some negatives from the February jobs report as a rationale for doing nothing in March. Chief among the concerns would be the drop in average earnings in February, which translated into a 2.2 percent annualized increase—that’s down from 2.5 percent in the previous month — and average weekly hours worked, which fell sharply to 34.4, from 34.6.

Part of the issue on wages may be the quality of jobs created in February. Big gains in retail and food and drinking establishments contributed to the weakness. Additionally, although the broader unemployment rate (U-6), fell to 9.7 percent, that is still about 1.5 percent ABOVE the precession level.

Bond investors put the likelihood of a March rate hike at essentially zero, believing that the slowdown in global growth will prompt the central bank to do nothing in a week and a half. But if there is continued improvement in the labor market and inflation marches towards the Fed’s desired 2 percent pace, the central bank may by eyeing April or June for the next increase.

MARKETS: HAPPY ANNIVERSARY! I hate to bring you back to a scary time, but seven years ago this week; US stock markets plunged to their worst levels of the entire bear market of 2008-2009. Although the entire financial system almost went over the cliff in September and October of 2008, it wasn’t until March 9, 2009 that stocks hit rock bottom. On that day, the Dow closed at 6547; the S&P 500 fell to 676; and the NASDAQ was at 1268. Time may not heal all wounds, but it certainly has helped investors...

• DJIA: 17,006 up 2.2% on week, down 2.4% YTD
• S&P 500: 2000 up 2.7% on week, down 2.2% YTD
• NASDAQ: 4717 up 2.8% on week, down 5.8 % YTD
• Russell 2000: 1081, up 4.3% on week, down 4.8% YTD
• 10-Year Treasury yield: 1.88% (from 1.77% a week ago)
• Apr Crude: $35.92, up 9.6% on week, up 37% from the 13-year low in Feb
• Apr Gold: $1,270.70, one-year high
• AAA Nat'l avg. for gallon of reg. gas: $1.81 (from $1.74 wk ago, $2.46 a year ago)

THE WEEK AHEAD: A few key speeches by Fed officials could provide the last clues before the central bank’s March policy meeting. All eyes will be on the ECB—it is expected that Draghi & Co will provide more stimulus to the ailing European economy.

Mon 3/7:

3:00 Consumer Credit

Fed Governor Lael Brainard and Fed Vice Chair Stanley Fischer speak

Tues 3/8:

6:00 NFIB Small Business Optimism

Weds 3/9:

10:30 EIA Petroleum Status Report

Thursday 3/10:

ECB Policy Meeting

Friday 3/11:

8:30 Import and Export Prices

Do Rotten Stock Markets Indicate Economic Trouble Ahead?

January was a rotten month for stock markets, but what is the action is telling us? Is the economy about to careen into a recession or did stocks get ahead of the broader economy and are now resetting lower, to a more reasonable level? My guess is that it's the later, but the answer will only be evident in hindsight. Here’s what we know: the economy slowed to a measly 0.7 percent annualized pace in the fourth quarter, dragged down by business investment (-1.8 percent) and net exports (-0.5 percent). Plunging energy prices was the culprit for the weak reading on business investment. Within the category, there was a 5.3 percent drop in structures investment, which was mainly due to the collapse in drilling activity. According to Capital Economics, “mining structures investment fell by 51 percent in 2015, subtracting 0.4 percentage points from overall GDP.”

Exports and inventories were down primarily due to a strong dollar. Although growth was only 2.4 percent for all of last year, essentially matching the slower than normal pace of the previous three years, U.S. GDP is better than other developed nations, like Europe and Japan. That’s why the dollar Index is up by more than 20 percent over the past two years. A strengthening greenback is great for consumers who are purchasing French cheese or Italian olive oil, but it also makes U.S. goods costlier overseas, which has put the manufacturing sector into a deep funk.

One bright spot in the GDP was consumer spending. Although consumption slowed to 2.2 percent in the fourth quarter, from 3 percent in the third, for all of 2015, consumption grew at the fastest pace in a decade, according to Joel Naroff of Naroff Economic Advisors. He notes, “given that the warm December meant a lot lower heating bills and very little reason to buy winter-related products such as sweaters or shovels, it [the 2.2 percent reading] was actually quite good.”

Americans may be spending, but they are not going crazy. Overall after-tax income increased by 3.2 percent at an annualized inflation-adjusted basis, but instead of blowing it, more people chose to bank those extra shekels. The personal savings rate jumped to 5.4 percent, the highest level since 2012 and a far cry from the negative rate seen in mid 2005.

Fed/Jobs Watch: The drop off in US growth kept the Fed on hold in January and investors think that the current economic uncertainty will clear up by the time of the next FOMC meeting in March. Futures markets anticipate only one additional quarter-point rate hike by the end of this year. It is important to underscore the US monetary policy remains accommodative—after all, the inflation-adjusted fed funds rate is still well below zero.

To determine whether or not to raise in March, the Fed will keep a close eye on economic data and the labor market. The January employment report, which is due on Friday, is expected to show that 200,000 jobs were created and the unemployment rate will remain at 5 percent. There may even be an upside surprise, as companies have recently been reporting that they are finding those job vacancies harder to fill and households say that jobs are plentiful.

Oil, Oil Everywhere: And finally, a word about oil…an old commodities trader once told me: “Honey (it was 1987), there are only two things to analyze with commodities: supply and demand.” The 2015/early 2016 oil selloff has been attributed to weak demand, reflecting fears of a slowdown in China’s economic growth and, consequently, its demand for oil.

But Capital Economics points out that the Energy Information Administration’ short- term outlook “shows that Chinese petroleum consumption has continued to rise at roughly the same pace as before. Instead, the slump in global oil prices appears to be predominantly due to the surge in supply that began in 2014 (a lot of it due to higher US shale output) rather than weaker world demand.”

MARKETS: Negative is a Positive for markets. Persistently weak growth in Japan and the rest of the world prompted the Japanese central bank to join other central banks (ECB, Sweden, Denmark, Switzerland) to push deposit interest rates for new reserves into negative territory. That means that a Japanese commercial bank will have to pay for the privilege of sitting on cash. The government hopes that the move will encourage banks to lend more, which would in turn create more spending. Investors saw the action as evidence that both Japan and Europe would like have to resort to more stimuluative measures in the future, which pushed stocks higher on Friday. It was not enough to save the dreadful month, but it coulda’ been worse!

• DJIA: 16,466 up 2.3% on week, down 5.5% MTD/YTD
• S&P 500: 1940 up 1.8% on week, down 5.1% YTD
• NASDAQ: 4613 up 0.5% on week, down 7.9% YTD
• Russell 2000: 1035, up 1.3% on week, down 8.8% YTD
• Shanghai Composite: down 23% in Jan, the largest monthly drop since 2008. The index has fallen by nearly 50% since its peak in June 2015, but remains 33% above its level in mid-2014, before the bubble began
• 10-Year Treasury yield: 1.93% (from 2.06% a week ago)
• Mar Crude: $33.62, up 4.4% on week, down 9.2% MTD/YTD and up 27% from Jan 20 low)
• Apr Gold: $1,116.40, up 1.8% on week, +5.3% MTD/YTD
• AAA Nat'l avg. for gallon of reg. gas: $1.80 (from $1.84 wk ago, $2.05 a year ago)

THE WEEK AHEAD:

Mon 2/1:

Aetna, Alphabet (formerly known as Google)

8:30 Personal Income and Spending

9:45 PMI Manufacturing Index

10:00 ISM Manufacturing Index

10:00 Construction Spending

Tues 2/2:

Exxon Mobil, Dow Chemical, UPS, Yahoo

Motor Vehicle Sales

Weds 2/3:

GM, Merck, MetLife, Yum! Brands

8:15 ADP Private Employment Report

9:45 PMI Service Index

Thursday 2/4:

8:30 Productivity Costs

10:00 Factory Orders

Friday 2/5:

8:30 Jan Employment Report

3:00 Consumer Credit

Solid Jobs Report = Fed Rate Hike

The government said that the U.S. economy added 211,000 jobs in November, which was the high-end of the predicted range of 160,000-220,000. There is now little doubt that the Federal Reserve will raise short-term interest rates when it meets in a week and a half. The three-month average of job creation stands at a solid 218,000 and year-over-year, 2.64 million jobs were added. Although 2015 average monthly job creation of 210,000 is less than last year’s strong pace of 260,000, it has certainly been strong enough to push down the unemployment rate from 5.8 percent a year ago, to a seven-year low of 5 percent. The broader measure of unemployment, which includes those who have stopped looking as well as those working part-time for economic reasons, edged up slightly to 9.9 percent, though remained under the key 10 percent level for a second consecutive month.

The Fed is also likely to be encouraged by the breadth of job gains, including the domestic-focused construction, retail and health care sectors. That said, two areas that continue to be under pressure are mining and manufacturing, both of which have been struggling under the triple whammy of lower oil prices, weak demand overseas and a stronger U.S. dollar. Another area of weakness is the still low level of working-age Americans who have jobs or are actively looking for work. The participation rate edged up to 62.5 percent, due to a 273,000 increase in the labor force, but because of demographics and the large number of would-be workers giving up their job searches, participation remains near 40-year lows.

Back to the good news...after a swift 2.5 percent annual increase in October, wages in November were up a still-respectable 2.3 percent from a year ago. In a separate report released by the government earlier last week, Q3 hourly compensation jumped by 4 percent in the third quarter, on an annualized basis and was up 3.6 percent compared to the same quarter a year ago. If that trend holds, hourly compensation is on track to rise by the largest amount since 2007 and when adjusted for inflation, the increase would be the fastest since 2000.

Overall, the results confirm that the economy continues to expand; the labor market is improving and workers are gaining leverage; and the Fed will soon hike interest rates for the first time in over nine years.

MARKETS: The US jobs report, along with promises of “no limit” on additional ECB stimulus measures, was enough to save what was shaping up to be a losing week.

• DJIA: 17,847 up 0.3% on week, up 0.1% YTD
• S&P 500: 2,091 up 0.01% on week, up 1.6% YTD
• NASDAQ: 5,142 up 0.3% on week, up 8.6% YTD
• Russell 2000: 1183, down 1.6% on week, down 1.8% YTD
• 10-Year Treasury yield: 2.28% (from 2.22% a week ago)
• Jan Crude: $39.97, down 4.2% on week
• Feb Gold: $1,084.10, up 2.6% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.05 (from $2.09 wk ago, $2.79 a year ago)

THE WEEK AHEAD: December 9^th marks the 50^th anniversary of the debut of “A Charlie Brown Christmas”. The image of the sad little Christmas tree that Charlie and Linus selected may be a good symbol of the U.S. economy. At first glance, it seems a little thin and wobbly, but upon further reflection, it’s not “such a bad little tree. It's not bad at all, really. Maybe it just needs a little love.”

Mon 12/7:

Tues 12/8:

6:00 NFIB Small Business Optimism

10:00 Job Openings and Labor Turnover (JOLTS)

Weds 12/9:

Thursday 12/10:

8:30 Import/Export Prices

Friday 12/11:

8:30 Retail Sales

8:30 PPI

10:00 Business Inventories

10:00 Consumer Sentiment

Job Creation Surges; Rate Hike Back on Table

It’s never as good or as bad as you think. For the past few months, there has been a chorus of downbeat chants that the U.S. economy is headed for a downturn and that the job market was the leading indicator of the coming storm. The Cassandra’s cited the weak job creation numbers in August (+153,000) and September (+137,000), a sizable pullback in manufacturing and the much-feared hard landing in China. These doubters said that the Fed would have to wait at least until March 2016 to raise rates, in order to determine whether the slowdown was temporary or longer lasting. All of that changed when the government released the October employment report. The labor market bounced back in October, adding 271,000 jobs. It was the best pace of hiring this year and well ahead of the consensus estimate for 180,000. With this report, the three-month average increased by 20,000 a month to 187,000 and the 12-month average stands at 230,000.

The unemployment rate edged down to 5 percent, the lowest level since April 2008 and the broader measure of unemployment, which includes those who have stopped looking as well as those working part-time for economic reasons, edged down to 9.8 percent. While that’s still a hefty number, it is the first time that it's been below 10 percent since May 2008. And average hourly earnings increased by 2.5 percent from a year ago, the fastest year-over-year pace since 2009. If maintained, the extra money could potentially help consumers feel more economically secure and spend more freely.

Before you start the celebration, there is no doubt that the jobs market is not a-ok for everyone. Manufacturing has slowed down, due to plunging energy prices, weakness in China and the emerging markets and a strengthening U.S. dollar. One manufacturing executive based in MN, told me that the sector was in “a second recession.” Indeed, various indicators show that output, although still barely positive, is at the weakest pace since 2009. But there are signs of improvement on the horizon: there has been evidence of a near-term bottoming of Chinese (the Shanghai Composite has gained more than 20 percent since its low in late August) and other emerging economies and commodity prices have stabilized.

In fact, the firming global situation, along with the stronger than expected jobs report, now puts a December Fed rate hike back on the table. Just two weeks ago, the futures markets saw only a 30 percent chance of a December lift-off. A day before the jobs report, that number was over 50 percent and moments after the BLS release, it jumped to over 70 percent.

But as a reminder, the month-to-month numbers can change on a dime and it is really never as bad or good as you think…although the economy appears to be firming, sentiment could quickly sour again. For now, enjoy the good news.

MARKETS:

• DJIA: 17,910 up 1.4% on week, up 0.5% YTD (6th consecutive weekly gain, up nearly 10% during that period…largest six-week gain since 2012)
• S&P 500: 2,099 up 1% on week, up 2% YTD
• NASDAQ: 5,147 up 1.9% on week, up 8.7% YTD
• Russell 2000: 1200, up 3.2% on week, down 0.4% YTD
• 10-Year Treasury yield: 2.32% (from 2.09%)
• December Crude: $44.29, down 5% on week
• December Gold: $1,087.70, down 4.7% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.22 (from $2.18 wk ago, $2.95 a year ago)

THE WEEK AHEAD:

Mon 11/9:

Tues 11/10:

6:00 NFIB Small Business Optimism

Weds 11/11:

Thurs 11/12:

10:00 Job Openings and Labor Turnover Survey (JOLTS)

Fri 11/13:

8:30 PPI

8:30 Retail Sales

10:00 Consumer Sentiment

Janet Yellen Pulls an Emily Litella

There are just three more jobs reports before the December Federal Reserve policy meeting and each one is carries even more weight than usual. The September data are out this Friday and the consensus is for the economy to add 200,000 jobs and for the unemployment rate to remain at 5.1 percent. While the pace of job creation has slowed from last year (it was hard to imagine that we could sustain 300,000 per month), even the Fed had to admit that gains in the labor market have been “solid”. So what are the central bankers looking for to convince them that labor market slack is diminishing? My guess is that high on the list would be to see annual wage growth pick up from the sub-par 2 percent level and move towards 2.5 percent; an increase in the participation rate (the number of people employed or actively looking for a job); a continued drop in part time workers who are seeking full time positions; and a decrease in the number of long-term unemployed.

Although the jobs report is the main focus the week, the Fed is also likely to examine data on manufacturing. And spillover from the slowdown in China and other emerging markets is likely to be seen in that sector. If manufacturing indexes hold steady, it would likely provide some solace to Fed officials concerned about a global economic deceleration.

Meanwhile, last week, Yellen seemed to brush aside the China worrywarts, when she said “we do not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy.” In that same speech, Yellen also said that she expects “inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane”.

So if the labor market is solid, global slowdown worries are overblown and inflation is likely to gradually increase, why didn’t the Fed raise rates at the last meeting? As Weekend Update’s Emily Litella (Gilda Radner) would say “Never Mind”.

But wait; maybe Congress will trump the Fed’s rate increase mission. Even if lawmakers pass a continuing spending resolution to keep the Federal government open through December 11^th, that’s just FIVE days before the last Fed meeting of the year. It could be déjà vu all over again (RIP Yogi), as we hurtle to the end of the year, talking about the raising the debt ceiling and defaulting on our obligations. Isn’t this fun?

MARKETS: The biotech sector is under siege again, as it has been at various times over the past couple of years. The biotech index tumbled 13 percent on the week and is now in bear market territory, off 22 percent from its recent high in July.

• DJIA: 16,314 down 0.4% on week, down 8.5% YTD
• S&P 500: 1,931 down 1.4% on week, down 6.2% YTD
• NASDAQ: 4,686 down 2.9% on week, down 1% YTD
• Russell 2000: 1122, up 3.5% on week, down 6.8% YTD
• 10-Year Treasury yield: 2.17% (from 2.19% a week ago)
• November Crude: $45.70, up 1.5% on week
• December Gold: $1,145.60, up 0.6% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.29 (from $2.30 wk ago, $3.34 a year ago)

THE WEEK AHEAD:

Mon 9/28:

8:30 Personal Income & Spending

10:00 Pending Home Sales

Tues 9/29:

9:00 Case Shiller Home Price Index

10:00 Consumer Confidence

Weds 9/30:

8:15 ADP Private Payrolls

9:45 Chicago PMI

3:00 Fed Chair Janet Yellen speaks at Conf of State Bank Supervisors

Thurs 10/1: 9:45 PMI Manufacturing Index

10:00 ISM Manufacturing Index

10:00 Construction Spending

Fri 10/2:

8:30 September Employment Report

10:00 Factory Orders

Greek Referendum: Oxi or Nai?

In the “Beware what you wish for” category, Greek Prime Minister Alexis Tsipiris’ hastily called referendum on whether or not (“Oxi” is "No", “Nai” is "Yes") the country would be willing to accept European demands of more pension cuts, a reduction in government jobs and higher taxes, had clear results: a hefty 60 percent of Greek citizens -- especially younger ones -- voted no, meaning that they simply could not abide more austerity. (Greece's youth unemployment rate has remained at about 50 percent.) [If you need a primer on Greece, check out this 60 second video!] If the referendum was meant to show that Greece was serious and as a result, the European officials would ease up on their demands, Tsipiras was thwarted. If anything, the vote seemed to steel Europeans, who were undeterred by the closure of Greek banks; the imposition of capital controls; a missed IMF payment; and the expiration of the existing bailout.

With the results in, Greece's Finance Minister Yanis Varoufakis said that officials would be heading to Brussels ASAP to restart negotiations, but there's one wrinkly: Eurozone finance ministers are not planning on an emergency meeting tomorrow. German Chancellor Angela Merkel will travel to Paris for talks with France's President Francois Hollande on Monday evening, presumably so that the two largest economies of the euro zone can hash out a game plan.

If/when they do talk, the big question is: Will the Euro group be willing to cede ground and agree to the last deal that Tsipras offered on June 30th? Chances are looking dim for a quick resolution. The BBC reported that German Chancellor Angela Merkel privately told MPs that, as far as she is concerned, Alexis Tsipras has simply driven his country into the wall. Additionally, Senior German Conservative MP Hans Michelbach said "now one has to question whether Greece would not be better off outside the euro-zone." That doesn't sound like the parties will be strumming Kumbaya any time soon.

Yet with little cash on hand, the Greek government is running out of options. Varoufakis told The Telegraph, "Luckily we have six months stocks of oil and four months stocks of pharmaceuticals," but the country still need the European's cash and time is crucial, because Greece must make a $3.9 billion bond payment to the ECB on July 20^th.

If not, the country would no longer be in technical default, it would be in full-fledged default. At that point, the ECB would be hamstrung by its own rules: it can only lend to banks that are solvent and it's hard to say that Greek banks are solvent if the government is not paying its bills. If the NO vote starts a downward spiral towards leaving the Euro zone, Greece will have to create a new currency, which would mean a widespread devaluation of whatever money is left in the Greek banking system and a lot more suffering for the Greek people.

EXPECT A ROCKY START TO TRADING ON MONDAY!!! Almost every large investor that I spoke to over the past week, assured me that a NO vote was "not gonna' happen" and sure it was a risk, "but a very, very long shot risk," against which they would not be trading...

Besides action in Greece and the euro zone, investors return from a long holiday weekend, looking to the release of minutes from the Fed’s last policy meeting. Will the Fed take into account events across the pond? Are they seeing broad-based signs of economic advancement in the U.S.? The last FOMC meeting occurred before the June employment report, which provided a mixed view on the labor market’s progress.

The economy added 223,000 new jobs, making June the 15^th month of the last 16 when the economy has added more than 200,000 jobs. The unemployment rate edged down by two tenths of a percent to 5.3 percent, the lowest level in seven years (April 2008). Unfortunately, the rate dropped for the wrong reason: 432,000 people dropped out of the labor force, which pushed down the labor-force participation rate to 62.6 percent, the lowest reading since October 1977.

It seems that every time there is a good employment report, it is followed by a so-so one. Maybe these kinds of inconsistent results occur when the economy only grows by 2.2 to 2.4 percent for three consecutive years (2012, 2013 and 2014) and is on track for a fourth year of the same. For investors, the negative parts of the labor report might be seen as good news: with a shrinking labor force and wages rising by just 2 percent from a year ago, the Fed may rethink a September rate increase and instead opt for December or even early 2016.

MARKETS: Global markets slid last week, but given events in Greece, there were no apparent signs of contagion—US stocks had one bad day and European stocks are still up 15 percent on the year. Lost in all of the hoopla surrounding Greece was the second-quarter results: The S&P 500 fell 4.8 percent, snapping a nine-quarter winning streak, though that doesn't seem too bad compared to Chinese stock indexes, which have plunged a whopping 30 percent in the past three weeks.

• DJIA: 17,730 down 1.2% on week, down 0.5% YTD
• S&P 500: 2076, down 1.2% on week, up 0.9% YTD
• NASDAQ: 5,009 down 1.4% on week, up 5.8% YTD
• Russell 2000: 1248, down 2.9% on week, up 3.6% YTD
• 10-Year Treasury yield: 2.38% (from 2.47% a week ago)
• August Crude: $56.58, down 4.5% on week
• August Gold: $1,167.60, down 0.8% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.77 (from $2.78 wk ago, $3.66 a year ago)

THE WEEK AHEAD:

Sun 7/5 Greece Referendum

Mon 7/6:

9:45 PMI Services Index

10:00 ISM Non-Mfg Index

Tues 7/7:

8:30 S&P International Trade

10:00 Job Openings and Labor Turnover Survey (JOLTS)

3:00 Consumer Credit

Weds 7/8:

2:00 Federal Reserve Minutes

Thurs 7/9:

Fri 7/10:

12:00 Janet Yellen speaks in Cleveland