Think back to music in 1969. Hits included Honky Tonk Woman by The Stones, Suspicious Minds by Elvis, Proud Mary by CCR, Get Back by the Beatles. Some classic tunes that have stood the test of time. And then you have this.
Sugar, ah honey honey
You are my candy girl
And you got me wanting you
The Archies, 1969 (https://www.youtube.com/watch?v=TSP0e5rXUl8)
This was #1 in the U.S. for four weeks. The Brits suffered an even worse bout of insanity, putting it on top of their charts for eight weeks. If anyone ever says “Music was better back in my day”…how do you explain this?
Why is this relevant? Well, on the first Friday of almost every month we get the monthly payrolls report. This week was no exception. Friday’s report was solid. Non-farm payrolls grew by 263K and the unemployment rate fell to 3.6%. Both numbers were better than expected, and the drop in the unemployment rates takes us to levels last seen in 1969.
Just as impressive if the fact that we have now gone 104 months without a contraction in non-farm payrolls. This is the longest streak ever.
The other key feature of the report was the wage number. Average hourly earnings increased 0.2% month-on-month and 3.2% year-on-year, less than expected. The lack of accelerating wage pressure was warmly greeted by the markets because it meant decent growth was being combined with no imminent Fed action.
It All Comes Back to Inflation
And the Fed was in the spotlight on Wednesday. At their periodic meeting they surprised almost no one by not changing rates and saying any future changes would depend on what happens with growth and inflation. Yawn!!
The statement did note that inflation measures have declined and are now running “below 2 percent.” If the latest inflation reports are anything to go by, inflation is running way below 2%.
The recent fall in inflation had some analysts speculating the Fed might talk about rate cuts to get inflation back up towards 2%. Chairman Powell downplayed this scenario. He essentially argued the fall in inflation is transitory and will hook higher later this year. Of course, they didn’t think inflation would dip either, so their forecasting skills are maybe a bit off. But the cynic in me also suspects that Powell isn’t going to commit to rate cuts at this point unless the market forces him to. If stocks stay stable, he’ll sit tight. If we see another 15% to 20% draw-down, he’ll react.
Even after the payrolls report the market is still pricing in a cut this year. Today’s fed funds range is 2.25% to 2.50%. The market is essentially saying it is a coin flip between rates staying where they are now and rates being cut at least once this year.
Take this analysis out to 2020 and the odds of a rate cut increase to 80%. This is pretty amazing actually. The lowest unemployment rate since the Archies were top of charts and the market is betting on rate cuts. Very strange.
The big question for the rest of the year is whether inflation trends back towards 2% like Powell thinks, or continues to soften in the months to come. If there’s an argument for softer inflation it came in the productivity numbers that came out this week. U.S. worker productivity increased at its fastest pace in more than four years in the first quarter, as you can see below.
Of course, productivity isn’t booming like it did in the late ‘90s, but the trend is in the right direction. If this continues, all things being equal, the economy could run hotter for longer while keeping inflation in check. As Alpine Macro notes:
“U.S. labor productivity has been in a slow but steady revival. In the second half of the 1990s, a surge in U.S. labor productivity led to a multi-year bull market in the dollar, and a booming stock market. The current productivity upturn in the U.S. has the potential to evolve into a significant upswing, with existing capital stock being upgraded with newer technology and fresh capital injection. If so, both the dollar and U.S. equities could stay stronger for some time to come.”
Something to watch.
The Great Deal Maker
It looks like we are inching towards a trade deal with China. On Tuesday President Trump dropped a central demand that China halt alleged instances of commercial cyber theft. The rumor mill seems to agree that the President wants a trade deal done in May. But as the Financial Times notes:
“The absence of strong provisions against Chinese theft of US trade secrets will raise concerns that the Trump administration is prepared to settle for limited progress on crucial ‘structural’ reforms in the trade agreement.”
But be that as it may, it seems reasonable to think Presidents Trump and Chinese President Xi will sign a final deal sometime before a late-June meeting of the G-20. Is this good news for the market? Maybe, but we have probably gone a long way towards pricing in a deal. For example, the chart below shows that stocks exposed to US-China trade have already rallied markedly year-to-date.
If a trade deal is struck in the next few weeks, focus will probably turn towards 1) auto tariffs on European car manufacturers, and 2) the likelihood of an infrastructure bill.
Physical Intimidation, LBJ Style
I know, the Fed is pretty boring, but stick with this one. There were a couple of interesting titbits this week other than the Fed meeting:
1) Stephen Moore dropped out of the running for the Fed board. First Herman backs down, apparently because the job doesn’t pay enough, now Moore. This whole situation is very weird.
2) It turns out that President Trump still isn’t a fan of the Fed. He went on a Twitter rant Tuesday, this time calling on the Fed to cut rates by 1% and restart quantitative easing.
Now you could point out that candidate Trump wasn’t keen on low rates and QE back in 2016, but what’s the point.
To really take this story up a notch we need to see some physical intimidation, LBJ style.
This is a good summary of when LBJ physically went after William McCesney Martin, the Fed Chairman at the time. As the article notes:
“…Johnson got Martin alone and did not mince words. According to different accounts, the 6-foot-4 Johnson pushed the shorter Martin up against a wall.
‘You went ahead and did something that you knew I disapproved of, that can affect my entire term here,” Johnson said, as Martin recalled later in an oral history. “You took advantage of me and I’m not going to forget it, because here I am, a sick man. You’ve got me into a position where you can run a rapier into me and you’ve run it.’
‘Martin, my boys are dying in Vietnam, and you won’t print the money I need,’ he said.”
The picture below shows LBJ and Martin (yes, the guy in glasses). I don’t think this would have been a fair fight!!
Talk about old school politics!!
Have a good weekend.
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