If you believe the market reporters the Nonfarm Payroll number on Friday was perfect. Not too hot and not too cold.
The Nonfarm Payroll report for May showed a gain of +175,000 jobs and +10,000 more than analysts expected. April job gains were revised lower from +165,000 to +149,000. March was revised higher from +138,000 to +142,000. With the revisions the May report added a net of +163,000 jobs. Service jobs added +57,000 with half of the gains by temporary services. Construction gained +7,000, hospitality added +43,000, retail +28,000 and healthcare +26,000.
Now for the bad news. The three month average of job gains has fallen to +155,000 from a high of +233,000 in February. Manufacturing lost -8,000 jobs. Government lost -3,000 and less than expected. Average weekly hours were flat at 34.5, which was somewhat positive since it did not show a further decline towards the 30 hour threshold for Obamacare coverage. The jobs added were mostly low paying food service workers and part time jobs. Temporary workers rose by 72,000 over the last three months.
The unemployment rate rose from 7.5% to 7.6% because there were 420,000 new people joining the labor force. May and June are graduation months and we should see a net addition for June as well. The separate Household survey showed a rise of +101,000 unemployed workers. Moody's expects payroll gains to remain "well under" 200,000 jobs per month for the rest of the year. The long term unemployed (more than 27 weeks) was unchanged at 4.4 million. The average long term unemployment is now 36.9 weeks.
The headline gain of +175,000 jobs should be taken with a large grain of salt because it includes an upward adjustment of +205,000 from the "birth-death" calculation. That is the highest monthly guess since May of 2012. They added +193,000 jobs in the April report. Basically the BLS tries to guess how many jobs may have been missed because of new businesses that might have started or existing businesses that may have died. When they have the real data three months from now the May headline number will be revised. I believe when the "adjustments" are larger than the ending number the data is clearly flawed. They estimated a gain of +5,000 in manufacturing to bring the sector up to only a loss of -8,000 instead of -13,000.
The larger U6 unemployment rate was 13.8% or 21,486,600. That is everyone unemployed that would work if a job was available and 7.9 million "involuntary part time" workers because they can't find a full time job.
The Labor Force Participation Rate rose +0.1 to 63.4% and just above the 35 year low of 63.3% set in March. Not much improvement for such a big market rally.
Over the last year the number of people NOT in the labor force rose by 1,741,000. Over the same period the number of people employed rose by 1,596,000 or an average of +133,000 a month. How healthy is the economy when more people dropped out of the labor force than were hired? The U.S. has to create more than 150,000 new jobs per month just to accommodate graduations and immigration. That does not take into account the millions out of work. We are slowly losing ground despite what the headline numbers say.
Labor Force Participation Rate Chart
Nonfarm Payroll Chart
I think it would make more sense to concentrate on the employment rate, currently 58.6% than the unemployment rate at 7.6%. The employment rate is barely off a 30 year low. It has not been this low since 1983 and is only marginally higher than during the Great Recession. I would point out that the Fed has not gotten a lot of employment bang for its $2.5 trillion in QE since the recession. The economy needs to add about 10 million more jobs to return to the pre recession employment levels.
Employment Rate Chart (Source CNN)
The big concern over the May payroll number was the impact on QE3 and the potential for the Fed to begin tapering their purchases. The hawks were out in force on Friday saying the Fed needed to begin tapering now so they would be done by early 2014 when the economy begins to gain traction. I wish I had the crystal ball they are using to predict economic growth. Apparently they just got it fixed because it has been giving bad data for the last three years. Bank of America, Goldman Sachs and others have recently downgraded their projections for growth to well below the Fed estimates. Who would you trust to be right, BAC, GS or the Fed?
The Fed claims they will not change monetary policy until unemployment reaches 6.5% (currently 7.5%) or inflation rises to 2.5% (Currently +0.7% headline, +1.1% core today). In theory neither of those numbers are not going to be reached for a long time. However, their recent commentary suggests they are about ready to begin tapering those QE purchases down from the current $85 billion a month. Apparently "tapering" is not the same as changing monetary policy or they would have to change their FOMC statements.
The Fed is so confused and opinions so diverse even they don't know what they are really going to do. The payroll numbers were not strong enough to change their QE stance based on their stated goals. Numerous Fed heads have said they would be open to tapering if they saw "several months" of payroll gains over 200,000 per month. February is the only month over 200,000 so far this year so "several months" would put us well into Q4 since the summer months of June, July and August are not normally strong job creation months.
On Friday the market rallied because some analysts said the Goldilocks number would keep the Fed from making any changes in the near future. I expect the opposite next week. I believe the hawks will start making their case that moderate payroll growth is economic progress and they will be calling for the tapering to begin. With the next FOMC meeting the following week we can expect plenty of posturing ahead of that meeting but most likely no actual changes at the meeting. The Fed will need to officially warn in a meeting statement that they are considering reducing purchases before they actually do it. They don't have to warn the markets but they know it would be ugly if they did not warn. That could happen at the June meeting. Several Fed heads have mentioned in their comments the change could occur in the "next several meetings" so we should expect a change to occur.
Dallas Fed President Richard Fisher warned, "We cannot live in the fear that the market is going to be unhappy that we are not giving them more monetary cocaine."
Remember, the government is not issuing as much debt today as they were in 2012. This means there are fewer treasuries in the market for the Fed to buy. The Fed needs to taper their purchases to keep from buying all the paper in the market and monetizing the government debt even more than they are already. The ratings agencies have warned against a continued increase in that monetization.
The following chart is a comparison of when the market expects QE to end compared to Goldman Sachs estimates.
QE3 End Calendar
I know I am boring a lot of readers with this analysis and I apologize. I just want everyone to be aware of the potential for Fed stress in the market over the next two weeks.
The economic calendar for next week is relatively light. The events that could cause trouble are coming from Japan. With the Nikkei down -21% from the May 23rd high of 15,942 to the 12,548 low on Friday the Nikkei has entered a bear market. On Monday Japan releases their GDP and Tuesday the Bank of Japan will announce their decision on rates. On Thursday the BOJ will release the minutes of the rate meeting. With their market in free fall and Abenomics at risk there could be some major announcements that could impact our market.
Investors in Japanese stocks thought they had a guaranteed rally for months to come because of the very aggressive BOJ QE program that buys not only bonds but REITs and equity ETFs. You can imagine their surprise when the market crashed -21% in three weeks.
The Nikkei crash in the middle of a monster QE program struck fear into some U.S. investors and we saw increased volatility over the last three weeks. If the Japanese market were to suddenly rally the U.S. market could catch fire as well. Likewise if the Nikkei continues to fall we would probably decline with it.
On the U.S. calendar the 10-year Treasury auction on Wednesday could be interesting. Yields on the ten-year have rebounded to 2.16% and Alan Greenspan warned on Friday that rates are going up and they could rise at a much higher rate than investors expect. The taper talk is undermining the Fed's attempt to keep rates low. Mortgage rates are back at 4% and home sales are slowing. Mortgage applications declined -11.5% last week. The strength of the auction could impact the Fed's decisions at the FOMC meeting the following week. If demand is lackluster and yields spike they could worry about the impact of a taper statement before the economy is actually improving at a faster pace.
Over the last year the average GDP growth has been +1.8%. The last GDP revision for Q1 is not for a couple weeks and not expected to change much from the last 2.38% reading. This is inflated because of a blip in inventory. However, the Q2 GDP at the end of July is only expected to have risen by +1.5% to +1.7%. The Fed may want to wait to insure the number does not decline further before making any QE changes. Remember, the sequestration is expected to cause a -1.5% drag on GDP in Q2 and Q3. The Fed does not know how that is going to hit the economy until it happens.
Lipper said bond funds saw $9 billion in outflows for the week. You don't have to guess where that money went as investors bought the dip in equities on Thursday when the S&P rebounded from its 50-day average.
Ten Year Yield Chart
Retail sales on Thursday will be important to see if spending is keeping pace with sentiment. We have seen very high sentiment readings over the last month but talk is cheap. Did consumers put their money where their survey responses suggested?
The dollar imploded on the weaker than expected ISM, Beige Book and ADP Employment. It rebounded slightly on Friday after the Nonfarm Payrolls but only slightly. The weaker dollar will help the economy and improve earnings for international companies but it needs to return to the levels we saw in Q4 before the impact will be noticeable. The dollar had its worst week against the Yen since October 2008 as the Yen carry trade quickly unwound.
Dollar Index Chart
Precious metals were crushed on Friday as a result of the better headline number on the jobs report. The idea being that the U.S. economy was not as bad as the Manufacturing ISM suggested on Monday. The Armageddon trade is fading and equities are the only game in town. Money is rotating out of precious metals and into equities.
Silver was hurt the worst with a breakdown under support at $22 to close at a two-year low at $21.64. Gold hit $1423 intraday on Thursday as the dollar sold off but then plunged to $1384 at the close on Friday.
The payroll report helped boost the price of oil to a two-week high but that was also fueled by increasing concerns over Syria and the potential spread of violence through the Middle East. Also lifting prices was news of an outage at Nexen's 200,000 bpd Buzzard field in the North Sea. In the U.S. BP's 405,000 bpd Whiting, Indiana refinery is on schedule to restart by the end of June after a $4 billion remodeling effort.
Syria said its oil production has fallen from 380,000 bpd to 20,000 bpd because of the civil war. The rebels have captured the fields in northern and eastern Syria where most of the production is located.
Tropical Storm Andrea left the Gulf of Mexico without causing any trouble for the oil patch. Andrea is sprinting up the East Coast towards Massachusetts this weekend but winds are slowing and now in the 40 mph range. No material damage is expected and the storm is evaporating.
Crude Oil Chart
The EU is projecting accelerating growth in 2014. The IMF is projecting accelerating growth in 2014. The Federal Reserve is expecting accelerating growth late this year and into 2014. Unfortunately doctor copper is NOT projecting any global growth. Even though several copper mines have been shut down for strikes or mine problems the price of copper is holding just over two year lows at $3. Copper demand and prices rise ahead of economic growth. Copper is not rising.
The short squeeze on Friday was the second best gain of the year for the Dow. Also, the Dow has not had a consecutive three day loss in 160 days. That is the longest streak since 1950. You would think that a +400 point rebound from Thursday's low would have come on decent volume. You would be wrong. Friday's short squeeze only managed volume of 6.4 billion shares. Advancers were slightly less than 2:1 over decliners. That is another weak point for the second best day of the year. The internals should have been a lot stronger. The Dow and S&P both bounced from critical support that should have fueled a rebound with even wider breadth. This was simply a short squeeze from a short term oversold condition. The majority of traders believed the Nonfarm Payrolls would miss estimates and everyone was leaning to the downside in their positions.
The S&P declined -15 points intraday to the 50-day average on Thursday and round number support at 1,600 before rebounding to close at 1,622. This was a textbook rebound. Shorts found themselves off balance at the close and Friday's gap higher on the payroll number pushed them into a panic.
The key levels to watch on Monday will be Friday's afternoon low at 1,632 and the resistance from Tuesday at 1,645. A break in either direction should be considered tradable. Stronger resistance at 1,660 would be critical if the rebound made it that far.
S&P Chart - 3 Min
S&P Chart - 30 Min
S&P Chart - Daily
The Dow went from oversold on Thursday to overbought on Friday with the +400 point rebound. Resistance at 15,200 became intraday support after the morning breakout. The critical number for Monday is 15,300 followed by 15,400. When the index was breaking out to new highs these barriers did not exist. As the index declined every lower high becomes future resistance. Like the S&P the Friday afternoon intraday low at 15,160 becomes a pivot point if broken.
Dow Chart - 30 Min
Dow Chart - Daily
The Nasdaq is no different than the S&P and Dow. The short squeeze pushed the index to downtrend resistance where it closed on Friday. It was the same for the Composite and the Nasdaq 100. In theory they should fail at this level. However, theory rarely works in reality. The Composite has additional resistance at 3,480 and again at 3,500. Tech stocks can move higher but it could be a tough climb.
Nasdaq Composite Chart - 60 Min
Nasdaq 100 Chart - 30 Min
While the major indexes averaged a +1.3% gain on Friday the Russell 2000 managed only a .8% gain. The small caps lagged in terms of Friday gains but they had also lagged on the decline earlier in the week. They did not decline as far because they were not as heavily shorted. They have a similar pattern of downtrend resistance but it is not as pronounced. The major resistance for the Russell is the highs from the prior week at 995. That would be a +7 point gain from Friday's close and a good place for an undecided market to stumble. A break over 995 faces that round number resistance at 1,000 that failed twice in late May. Each spike over 1,000 came on a gap open and each spike was immediately sold.
Russell 2000 Chart - 60 Min
The Dow Transports were the opposite of the Russell with a +2.4% gain on Friday. The transports had been down for 10 of the last 12 days and were in danger of a critical support break. They were heavily shorted after the Manufacturing ISM fell into contraction on Monday. The thought behind the selling was contracting business shipping and the rally was over. Those shorting the transports were crushed on Friday. The rebound took the transports to 6,343 and just a hair over resistance at 6,340.
Dow Transports Chart - Daily
The market this week has little in the way of economic reports to push it around. The market will be on its own and the bulls will have to find some conviction to push the market higher. The dip buyers did their part when the S&P hit the 50-day average and now it is up to the real investors to step up and buy stocks. If that conviction is lacking we could see another retest of support.
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Enter passively and exit aggressively!
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"Opportunity is missed by most people because it is dressed in coveralls and looks like work"