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EMPLOYMENT, INCOME & SPENDING: ACCELERATING, BUT...

So, there are basically two kinds of economists/pundits. Those that acknowledge and accept the unpredictability of both the monthly BLS employment data and the market’s reaction to it and liars.

 

The fact that the October employment data would be hostage to a host of distortions –higher sampling error, seasonality in education hiring,  and government shutdown impacts on gross hiring, hours worked, the headline and U-6 unemployment rates - has been pretty well advertised (BLS). 

 

Given moderate estimates (+120K) and the expectation for negative impacts from the government shutdown, the balance of risk heading into the release was to the upside as a weaker number could be explained away by the aforementioned distortions while a higher number (in spite of the negative drags) would drive renewed policy uncertainty.   

 

Optically, the October Employment figures were solid.  But since the prevailing lens with which the market is filtering the payroll data is less a fundamental one than one with an eye towards the implications for prospective Fed policy adjustment, its perhaps best to take a brief cerebral sojourn and interpret today’s release through the eyes of a Fed head. 

 

That interpretation would probably read something like this:   

 

The labor market data is good, but not great – with that “goodness” up for debate given the distortive effects of the shutdown.  The unemployment rate remains above target, Labor Participation remains at trough levels (although it’s partly a secular/demographic driven), inflation is still well below target and wage inflation remains subdued.   Fiscal policy will remain an uncertainty/headwind through at least February of next year, credit market liquidity is in decline, and housing/credit activity has slowed subsequent to the expedited back up in rates that followed our last hint at incremental hawkishness. 

 

If past is precedent, such an interpretation = no policy change without further confirming evidence.   

 

 

THE DATA:  Steady with an extra side of caveat…. 

 

STEADY GROWTH:  As we highlighted alongside the September release – while the absolute NFP numbers have been trending lower since 1Q13, on a rate of change basis, the YoY growth and 2Y growth rates have been relatively stable over that same period – a dynamic largely stemming from the existent seasonal distortion in the data. 

 

This dynamic held in September has employment growth held steady while absolute net job gains declined sequentially.  October again looks similar with the 2Y growth rate holding right in line with trend.  We continue to expect seasonality to drive strengthening headline improvement in the employment data over the next 6 months with peak positive impact occurring in March

 

A TALE OF TWO SURVEY’S: The largest oddity in today’s release was the massive divergence between the household survey (which drives the Unemployment Rate), which showed net job loss of -732K, and the headline strength in the Establishment survey (which drives the NFP figure) which showed a net gain +204K with a positive two month net revision to Aug/Sept of +60K. 

 

Further, while the Establishment Survey showed accelerating improvement and job gains across all industries except wholesale Trade, the Household survey reflected decelerating payroll growth across all age cohorts, a 720K decline in the total labor force and another new low in labor participation.   

 

What do you do with that?  Practically, we’ll probably just have to wait for next month’s data to get a “cleaner”, confirmatory read on Trend.   

 

SHUTDOWN IMPACT:  The impact of the government shutdown appears to have shown up primarily in the temporary layoff tally which increased by +435K on the month.   

 

Elsewhere, U-6 Unemployment ticked up to 13.8% from 13.6%, part-time employment continued to decline, state and local government employment growth continued to accelerate, and hourly earnings growth and ave hours were essentially flat sequentially. 

 

 

Takeaway:  Alongside the continued strength in the initial jobless claims data, the BLS employment figures reflect ongoing, albeit moderate, improvement in the domestic labor market.  The odds of today’s data shifting the course of policy action in the immediate term seems unlikely.  We continue to navigate heightened policy uncertainty, and the resultant market volatility, with our lowest gross and net exposures of the year.   

 

EMPLOYMENT, INCOME & SPENDING: ACCELERATING, BUT... - Employment Summary 110813

 

 

PERSONAL INCOME & SPENDING:  TREND IMPROVEMENT

 

Personal income increased 0.5% MoM in September, outpacing spending growth of +0.2% while the savings rate increased to its highest level since December of 2012 ahead of the government shutdown. 

 

From an intermediate term perspective, the trend improvement in personal income growth remains encouraging for forward consumption.  Personal Income & personal disposable income growth are both rising, Per Capita DPI is accelerating and the household savings rate is moving higher.  

 

Notably, the positive improvement in income is occurring despite the discrete drag from government  where budget cuts are driving the largest decline in government employment growth in decades and negative income growth for approximately 17% of the workforce. 

 

If negative growth in government employment bases and government sourced personal income growth goes positive alongside some measure of budget resolution (i.e. sequestration alternative), consumption growth could see meaningful support in 2014.     

 

EMPLOYMENT, INCOME & SPENDING: ACCELERATING, BUT... - Income   Spending 110813 

 

Christian B. Drake

Associate

 



NOTHING COULD GO WRONG. RIGHT?

Takeaway: Bernanke, Draghi & Co. are the real threat.

NOTHING COULD GO WRONG. RIGHT? - illuminati

 

I’m sick and tired of half-baked econ PhDs trying to centrally plan our lives.

 

The European Central Bank cutting rates and devaluing The People’s currency as European growth is accelerating (not a typo) took my level of disgust up another notch yesterday. I didn’t think that was possible. I guess I thought wrong.

 

Like the Fed, the European central planners thought that cutting rates was going to “stimulate growth”, or something like that. Meanwhile, the market’s reaction to yesterday’s European rate cut “news” was global #GrowthSlowing.

 

Huh?

 

Yes. Much like the “growth” style factor being for sale in US Equities ever since the Fed’s unaccountable decision not to taper (Financials down, Staples/Telcos straight up), that’s precisely how Mr. Market voted, worldwide, after the ECB rate cut:

  1. US Growth Stocks got killed yesterday (Nasdaq -1.9%); Russell2000 now -3.7% from its YTD high
  2. European Growth Stocks stopped going up (yes, we sold everything on the ECB “news”)
  3. Asian Stocks continued lower overnight – China and Japan down another -1.1% and -1.0%, respectively

Actually, since the Fed’s slow-growth-no-taper decision and ECB rate cut, from their recent highs:

  1. China’s Shanghai Composite Index is -6.7%
  2. Japan’s Nikkei is -4.7%
  3. US Growth Stocks like Facebook (FB) and Tesla (TSLA) are -12% and -27%, respectively

These academic wonks of the Keynesian empire fundamentally believe that Deflating The Inflation (from the world record inflation they perpetuated via currency devaluation in 2011-2012) is now the world’s greatest threat.

 

No. To be clear, their most recent policy moves are the new threat. 

 

Are these un-elected people at the Federal Reserve and ECB frauds? Or are they just completely bought and paid for by the Bond Bull Lobby and currency debauchery camps?

 

NOTHING COULD GO WRONG. RIGHT? - ben bernanke mario draghi

 

I don’t know. But I do know that ECB chief Mario Draghi worked at Goldman Sachs. And I also noticed that Goldman just had the worst FICC (Fixed Income, Currency, Commodity) quarter in the Federal League…

 

Was Goldman’s prop and/or FICC team choking on too much illiquid bond and currency bubble paper that they finally had to start taking some marks?

 

Why is Goldman’s Hatzius such a raging dove? Why is he trying to scare the hell out of the Fed on #RatesRising when his own desk is saying the opposite? Why is he all of a sudden lobbying for the Fed to change the goal posts on a lower “unemployment” target?

 

Who can really get out of any of these bubbles (MBS, REITS, etc.) that Bernanke backstopped? How will it end? Or are they trying to convince you, like they did in late 2007, that nothing could possibly go wrong?

 

(Editor's note: This is an excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough.)


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Stock Report: CurrencyShares British Pound Sterling (FXB)

Stock Report: CurrencyShares British Pound Sterling (FXB) - HE II FXB table 11 8 13

THE HEDGEYE EDGE

Our bullish call on the British Pound was borne out of Hedgeye’s Q4 2013 Macro themes call. We continue to believe that the health of a nation’s economy is reflected in its currency. The Pound has benefitted from the UK’s fiscal discipline to embrace austerity before its regional peers during the global recession – a policy decision that is paying off in spades through accelerating growth above its European peers. Additionally, we expect a stronger currency to increase consumer spending power by deflating imported inflation.

 

Incidentally, our bullish call on the British Pound versus the US Dollar was further strengthened today with the European Central Bank unexpectedly cutting its main interest rate by 25 basis points to a record low of 0.25%.  From our perch, it’s now anyone’s guess how the central bank currency wars between the USD and EUR will play out.  However, anchored on our Q4 2013 Macro theme of #EuroBulls (presented on 10/11/13), we continue to like the British Sterling.

 

Finally, data out this week showed the UK Services PMI for October hit a 16-year high at 62.5 (above 50 = expansion), an outperformance over its peers. Our call for #GrowthAccelerating in the UK is now showing up in economic forecasts: the European Commission in its autumn report this week raised UK GDP expectations, to +1.3% in 2013 from  +0.6% and to +2.2% in 2014 versus a previous estimate of +1.7%.

 

TIMESPAN

INTERMEDIATE TERM (TREND) (the next 3 months or more)

We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper. 

 

Additional bullish signals include the slope of UK economic growth, just clocking a 3-year high, and the British stock market (FTSE) is breaking out to new highs. The fundamental data, from business and consumer confidence to retail sales and manufacturing, continue to confirm the improving growth environment we’re forecasting.

 

Taken together, we expect a continuation of this positive data to propel the Pound higher.

 

ONE-YEAR TRAILING CHART

Stock Report: CurrencyShares British Pound Sterling (FXB) - HE II FXB chart 11 8 13


MCD: #GROWTH SLOWING

“Around the world, we are focused on providing the menu quality and choice, customer service and affordability that are the hallmarks of the McDonald’s experience.”


- McDonald’s October Press Release

 

 

Despite management’s aforementioned focus, there is something that is not resonating with McDonald’s customers.  While MCD is a fundamentally strong company, we find it difficult to believe that it will be able to drive “initiatives that will deliver the greatest benefit” for McDonald’s customers, as promised. 

 

The charts below show sales trends across MCD’s four main regions – and they are not pretty.  October’s results prove that same-store sales continue to steadily decelerate on a two-year basis.  That said, we are comfortable in reiterating our view that McDonald’s has legitimate, inherent issues that management must address.

 

Next week, McDonald’s will host its analyst day to address the initiatives management has lined up for 2014 in order to stem the decline in global sales.  Our research tells us that the company will make an aggressive push to sell more coffee in attempt to capture incremental market share in the coffee category next year.  We expect this to be a main topic at the analyst day on November 14, 2013.

 

Our goal is to understand the potential consequences, both good and bad, of this strategy.  Delving more into this topic, we have conducted a proprietary Retail Coffee Consumer Survey, which features some of the top coffee retailers, including MCD, SBUX, DNKN, KKD, and Peet’s. 

 

We will be holding a conference call on Tuesday, November 12th at 11: 00am EST in order to present our findings and analysis.

 

 

MCD: #GROWTH SLOWING - MCD SSS

 

MCD: #GROWTH SLOWING - MCD table

 

 

 

Howard Penney

Managing Director

 

 


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