Nonfarm payrolls plunged unexpectedly on Friday causing S&P futures to drop -20 points.
Nonfarm payrolls for March came in at +120,000 and much lower than the +205,000 consensus estimate. That was the lowest job gain since October's +112,000. Recent revisions have been strongly higher but that was not the case in March. The February gains were revised higher by +13,000 but January was revised lower by -9,000 for a trivial net change.
If those numbers were the entire story the market would not have been so disappointed. However, the corresponding Household Survey, which posted a gain of +428,000 jobs in February saw an actual LOSS of -31,000 jobs in March. This is not a sign the economic recovery is accelerating but suggests it has stalled. Has the market reached an inflection point on the economy?
If the number of employed persons actually declined by -31,000 in the Household Survey why did the unemployment rate go down? The unemployment rate declined from 8.3% to 8.2% solely because another 164,000 people gave up looking for work and left the work force.
Analysts claimed the fourth warmest winter on record accelerated hiring into January and February and played havoc with the seasonal adjustments making employment seem higher in the early months and leaving March with a weak number. If analysts are so sure this is what happened then why didn't they report this before the payroll number? Why were the various estimates over 200,000, several over 250,000 and one at 290,000? I think some of them need to find a new line of work.
However, in their defense the employment components of the various regional reports plus the national ISM showed employment improving. That suggests there could be some noise in the BLS data but since the Nonfarm Survey and the Household Survey, each with significant differences in the survey method, that does not seem to be the case.
When the payroll numbers were announced the S&P futures fell more than -20 points to 1372 and rebounded only slightly to close at 1375. If this sentiment holds over the weekend we could see the major averages open below initial support on Monday. The Dow futures dipped to 12,831 and the Nasdaq futures -40 points to 2720 before very minor rebounds.
Nonfarm Payroll Chart
The bright side of the payroll numbers is that the Fed is not likely to tighten its easy money policy at the April meeting. I think the payroll report increases the chances for the continuation of Operation Twist and should April payrolls also come in weak the odds for QE3 would rocket significantly. The Fed has been careful to qualify all of its statements of late with concerns about a jobs slump. It looks like they got it right.
Not all Fed Presidents are economic lightweights. NY Fed President William Dudley, March 19th. "While these developments are certainly encouraging, it is far too soon to conclude that we are out of the woods. To begin with, the economic data looked brighter at this point in 2010 and again in 2011, only to fade as we got into the second and third quarters of those years." He went on to say that warm weather increased construction and temporarily increased hiring and we should not expect it to continue.
Bernanke also warned the prior week with "the better jobs numbers seem somewhat out of sync with the overall pace of economic expansion." The chairman went on to suggest that achieving further declines in the unemployment rate is likely to require a more rapid pace of economic growth going forward. This stance by Bernanke ahead of a decline in jobs suggests further policy stimulation in the near future.
The odds of a cooperative Fed could ease the damage at Monday's open. However, our payroll numbers are sure to depress the European and Asian markets so we may be in reaction mode to their declines.
In a note Goldman Sachs posted on Friday they said another easing action at the April meeting seemed unlikely but an easing at the June meeting seemed almost certain. They expect an extension of Operation Twist to the tune of $200 billion.
Bill Gross penned another article on Thursday saying the stock market has Bernanke in a box and QE3 is still on the way. The markets declined sharply when QE1 and QE2 ended and they are likely to do that when Twist ends. Until the recovery is firmly rooted, Bernanke is trapped in a permanent cycle of QE to keep the market wealth effect in place.
All the various futures contracts imploded on the payroll news but it was a thin market. With the equity markets closed for the holiday the only securities available to trade were the futures. Investors trying to protect their long positions for the open on Monday were forced to short futures. Volume in the S&P futures was 1.54 million contracts and 160,000 came in the 30 minutes following the payroll report with trading halting at 9:AM.
I always say when the market wants to go down it will find an excuse. Last week we saw a weak market looking for a real excuse to either rally or take profits. This could be that excuse that starts the ball rolling downhill.
S&P Futures Chart
A couple of numbers not widely reported in discussing payrolls are worth a mention. In the last year the adult civilian population rose by 3,604,000. However, the labor force only rose by 1,315,000. Those not in the labor force rose by 2,289,000. Nearly twice as many people joined the "not in the labor force" group than those joining the labor force.
Those "not in the labor force" hit a new record high of 87,897,000. The number of people dropping out of the labor force is accelerating at an unbelievable rate. Were it not for those who "dropped out" over the last year the unemployment rate today would be 11%. There are 142,034,000 people employed and 12,673,000 officially unemployed according to the BLS. There are 7,672,000 people working part time because they can't find a full time job.
The U6 unemployment is 14.5%. That includes people looking for a job, those with part time jobs because they can't find full time work, those that dropped off the rolls because their unemployment ran out and discouraged workers who have quit looking. That U6 number includes 22,432,000 workers. The U6 rate was created by the Clinton administration to try and get Greenspan to keep rates lower longer because of the total number of unemployed. Who knew it might be used again against Bernanke in 2012?
Gallup has a daily poll on jobs and unemployment that is not seasonally adjusted and without B/D adjustments. The BLS numbers always have big estimates of "seasonal factors" in their numbers plus the Birth/Death adjustment for businesses thought to have been created in that month. For March that birth/death estimate accounted for +90,000 of the +120,000 jobs reported. Gallup publishes their data constantly and as of last week they show the unemployment rate in the U.S. to be 10.0%. They show the U6 under/unemployment rate to be 18%. Are you listening Ben?
Gallup Underemployment Chart
Unemployment for 16-19 year olds is 25%. For those without high school graduation it is 12.6%, college graduates 4.2% and those over 55 at 6.2%. Married white couples 5.3%, Asian couples 6.2%, never married whites 10.5% and never married Asians 9.2%.
It takes 150,000 new jobs per month just to keep up with new workers, graduates and immigrants, entering the work force. Over the last 25 months the average monthly job gain has been 143,000. In theory the unemployment rate should have risen. Instead it has fallen from 9.8% to 8.2% over that period. Mathematically this does not compute until you remove those "discouraged workers" from the labor force computations. That means their unemployment ran out and they are no longer counted as belonging to the labor force.
Between January 2008 and February 2010 there were 8.8 million jobs lost. Since that February low 3.6 million have been recovered or 41%. The real labor force has grown by 4.6 million over the same period. Not enough jobs have been created to even account for old workers much less new ones. That is a very poor percentage indicating a relatively weak recovery. In the chart below the red line is the current recovery in jobs compared to all the prior recession recoveries since 1948.
Chart of all Prior Recoveries (Source: Federal Reserve)
There were two other economic reports on Friday to round out the calendar. The Monster Employment Index came in at 143 and flat with February. Online job advertisements did not increase or decrease. However, the index normally rises in March so a failure to do so is actually negative. The index has risen in March for each of the last nine years.
In March jobs in agriculture declined -4.6%, professional and technical services -4.3% and management -3.5%. Job openings rose in hotel and food services +6.5%, mining +4.2% and transportation services +4%. Analysts were again quick to claim that warmer weather pulled hiring into January and February that would normally have occurred in March.
The California Manufacturing Survey for Q2 rose from 58.9 to 60.3. That is the highest level since Q2-2011 and managers reported improvements in all components. New orders rose from 57.2 to 64.2 and employment rose from 52.9 to 55.2. Production increased sharply from 61.0 to 68.9.
The economic calendar for next week will focus on the Fed Beige Book and the price inflation reports at the producer and consumer level. Other than the Beige Book the rest of the economics should not be market movers. With a FOMC meeting on the 24th the Beige Book, which reports economic conditions in each of the Fed regions, will be another piece of the puzzle in determining what action the Fed might take at that meeting.
Bernanke speaks on Monday night in Stone Mountain Georgia on Fostering Financial Stability and you can bet there will be a reference to jobs and the Fed.
The big news for next week is the start of the Q1 earnings cycle. Alcoa kicks it off on Tuesday but the big dogs will be Google on Thursday and JPM/WFC on Friday. Google is always a highly volatile event with large price swings after the release. In January Google dropped -$55 the day after their earnings. The drop from $639 to eventually hit $564 several days later has been erased with Google closing on Friday back at $632. Google is always good for a big post earnings gap. The only challenge is picking the right direction ahead of time.
JP Morgan (JPM) earnings will be interesting because of the letter Jamie Dimon wrote to regulators last week. The 30 page letter complained about favored investment and trading strategies that would be illegal once the various new regulations go into effect later this year. Dimon said the bank would be profitable and profits would increase but his hostile tone and complaints about banning lucrative strategies caused a sharp drop in the price of JPM shares. Given the rally in those shares since November I am not surprised to see some profit taking ahead of earnings once resistance was hit at $46.50.
Wells Fargo (WFC) also reports on Friday and the stock price is holding right at strong resistance of $34.50. Both JPM and WFC were parties to a $26 billion mortgage settlement on Friday. We will hear a lot about this all week. The banks involved were BAC, C, JPM, WFC and Ally Financial, formerly GMAC. The banks will begin to compensate homeowners who may have been impacted by the so-called robo-signing scandal. Under the settlement the banks will commit $17 billion toward modifying mortgages for delinquent borrowers. That will include principal reductions of as much as $100,000 for roughly one million homeowners who are underwater and behind on payments.
Another $3.7 billion will go towards refinancing mortgages for borrowers who are current on payments. That will help some 750,000 borrowers take advantage of the historic low rates. There is also $5 billion in fines to states and the federal government.
Just getting the settlement in place will help all those banks and we should have some update on costs when JPM and WFC report earnings on Friday.
Wells Fargo Chart
Yahoo (YHOO) is holding an all staff meeting on Tuesday to discuss the planned reorganization and new management structure. Last week they announced the planned layoff of 2,000 employees or 13% of the company. On Friday Blake Irving, Chief Product Officer, announced he was leaving. The first of what could be a flurry of managers fleeing a sinking ship. Yahoo shares have been trading in a lackluster manner despite the changes being telegraphed every day. It appears investors have given up trading on Yahoo news.
With the market closed on Friday there was a serious lack of stock news. Actually other than the payroll news there was no news at all. Everything that happens on Monday will be related to that payroll report.
Oil prices rose on Thursday to $103.31 for WTI and $123.31 for Brent. That WTI number will likely drop sharply on Monday because a slowing jobs environment will be equated with slowing demand for oil and gasoline. Eventually cooler heads will prevail because a Fed reaction to the payroll number will weaken the dollar and reflate oil prices.
WTI Crude Chart
Brent Crude Chart
Gasoline prices continue to rise because gas prices are dependent on Brent crude not WTI crude. Gasoline prices in the U.S. rose to $3.94 on Friday and regardless of what happens on Monday they should continue rising. The Iranian oil embargo is gaining speed and may end up more successful than initially expected and cut Iranian sales by 1.5 mbpd. The rising price of gasoline could have impacted hiring to some extent because business owners remember vividly the impact of high gas prices in 2008.
Gasoline prices normally rise between February and Memorial Day. Since 2000 the average increase has been +27%. This year gasoline has only risen +14%, or +48 cents since Feb 1st. Refiners are required by the Clean Air Act to make gasoline for summer use that burns cleaner to reduce smog clouds. That clean burning gasoline costs an extra 10-15 cents per gallon to produce. Since oil used to make most U.S. gasoline has averaged $120 per barrel this year the odds of gas prices moving over $4 in the weeks ahead are very good.
JP Morgan pointed out that since the gasoline prices began to rise there has been an impact on retail spending. Diane Swonk pointed out that up to 50% of prescriptions are not being picked up. Prescriptions for those on fixed income are being cut in half. That means consumers are only asking for half the initial quantity in order to lower the cost and manage cash flow.
Gold prices rebounded slightly on Thursday ahead of the payroll report but gold futures did not trade on Friday. If the economy is seen as weakening then gold prices should rise. If the Fed moves back into the easing column then gold prices should rise. We are still waiting to see if the chart pattern completes that reverse head and shoulders or if support fails and we move to a new low.
The chart below is the percentage of stocks on the NYSE that are trading over their 50-day average. Since the beginning of March the percentage has been declining dramatically yet the major indexes have been testing new highs. Those indexes were benefitting from the mega-caps like Apple and IBM. The rest of the market has been sliding away while the big caps were being used as safe deposit boxes by fund managers. That may begin to unravel next week.
NYSE 50-Day average percentage.
The S&P futures at 1375 after the payroll report suggests the S&P could open significantly lower. The S&P could even open lower if China's economic numbers to be reported on Monday are not market friendly. Higher Chinese inflation will prevent them from lowering rates to avoid a hard landing.
If the S&P falls through 1375 at the open on Monday and dip buyers don't show up in volume then 1340 is the next material support. We are clearly heading for a serious change in market sentiment if that happens.
The Dow chart has been in a rising wedge for months and a close under 12,900 on Monday would complete the pattern and project a lower trend for some period of time. However, I feel the support at 12,750 is going to be a factor. As long as that support holds you could make a case for further gains. Unfortunately with the Q1 earnings cycle kicking off next week and not expected to show any material earnings growth the pressure will be on the bulls to keep the rally going. The bears are likely to have an easier task with the three Es of economy, earnings and Europe weighing on the market as we head into the sell in May cycle.
Dow Futures Chart
The Nasdaq 100 futures fell to strong support at 2725 and without any further headlines on Monday that would be a reasonably strong initial support level. However, a break of that support could give up another -100 points before encountering decent support.
The Nasdaq Composite could decline to 3,000 at Monday's open but that would not put it in jeopardy. It would take a close under 2850 to really bring out the bears. That is not likely to happen over the next several days. Fund managers would have to completely abandon the big caps in order to produce that kind of decline and I think many will be reluctant to simply cash out everything until later in April.
Nasdaq 100 Futures
Nasdaq 100 Chart
Nasdaq Composite Chart
The Russell fell out of its recent range but remains well above critical March lows. The Russell futures declined -15 points to close at 799. The Russell index has strong support at 785 and the March lows.
The Russell next week will be a critical sentiment indicator. If that 785 level appears to be in jeopardy then turn out the lights the party may be over.
Russell Futures Chart
Russell 2000 Chart
Spain rose again as a potential trouble spot last week as deficits soared along with interest rates on Spanish bonds but that should not be a surprise to readers. We have known for weeks that Spain would be the next trouble spot. Stay tuned for more volatility over Spain.
Greece pro bailout parties are reportedly recovering lost ground ahead of the April elections. The parties lost support when they agreed to the bailouts but now that time has passed some of that support is returning. However, 92 members of the Greek parliament have offered amendments to dilute the previously passed austerity budget that was required to get the bailout. The Greek Prime Minister has vowed to defeat them all. It is immaterial. Greek is going to default. It is only a matter of time. The next challenge for Greece will come after those April elections if the winner decides to dump the bailout agreements as some have promised.
An Iranian parliamentarian, Gholamreza Mesbahi Moghadam, made headlines over the weekend when he said Iran already has the technological capability and scientific knowledge to develop a nuclear weapon. He said Iran could easily produce the highly enriched uranium and build a nuclear weapon but Iran had elected not to go that route. The IAEA has already agreed that Iran could quickly enrich its 20% uranium to bomb grade at 90% with little difficulty. Moghadam may have been trying to convince foreign powers of Iran's peaceful intent but instead he probably heightened the suspense in Israel. Iran is scheduled to meet in six party talks next week in Turkey. The last talks were canceled after two days when they could not agree on what to talk about. Iran refused to talk about anything nuclear despite that being the reason for the talks. This time may be different thanks to the growing oil embargo. The five permanent members of the UN Security Council plus Germany make up the six parties other than Iran at the meeting. This could be a headline producer with Israel eager to strike soon while they have a window of good spring weather.
With the start of earnings next week we could see an ugly trend develop of weaker results and lowered guidance. After last week's earnings and warnings the official Q1 earnings estimate for the S&P 500 has gone negative. The S&P 500 companies are now expected to post a decline in earnings for Q1 of -0.1%. After eight quarters of double digit earnings growth we saw a decline to +6% in Q4. Thanks to a weaker Europe and higher oil prices we are likely to post the first quarter of negative earnings since the recession. Earnings revisions are dropping fast. Just two months ago the estimate was for +3% earnings growth.
In theory investors are not freaking out because the comparisons from the +19% growth in Q1-2011 are so strong. Not exceeding those earnings is not necessarily bad news. It should mean that earnings are still strong, just not growing. That idea will be tested with the guidance. If guidance is decent then the market may shake off the weak results. If guidance is poor and suggesting another declining quarter in Q2 then investors may decide to run for cover. Today Q2 earnings are expected to rise by +7% and another +5% in Q3, +16% in Q4, +14% Q1-2013 and +13% in Q2-2013. I would be extremely surprised if those double digit estimates come to pass but that is another story for another day. Those are based on Europe's economy stabilizing and returning to growth by the end of 2012.
The earnings scheduled for next week are not likely to give us much insight into the future. AA, GOOG, JPM and WFC are notable companies but not likely to give us much broad market direction. The following week is where the rubber meets the road as dozens of big names report. Let's hope that road is not a mess of skid marks at the end of the week.
Monday's market is likely to be chaotic. Futures are showing a big decline at the open and investors will have China's economic numbers to digest as well. We could see a monster buy the dip rebound or we could fall straight through to next level support. Because the market was closed on Friday and investors have had all weekend to ponder the circumstances anything is possible. The NYSE 50-day average chart I showed earlier suggests quite a few investors were already looking for the exit. The payroll report may have shown them the door.
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