NFP and Private payrolls both beat deflated expectations in February but the trailing 3M/6M/12M averages all decelerated, following the ISM and ADP data lower, despite (what should be) peak positive seasonality.
In the Household Survey, the Unemployment Rate ticked higher and Labor Force Participation was static sequentially as the total labor force increased +264 (the net number of +223K Unemployed plus +42K increase in employment) against an increase of +170K in the civilian population.
Employment growth slowed sequentially across all age buckets except 25-34 & 55-64 years olds while state & local Government employment (13.9% of the NFP labor force) posted its sixth straight month of positive growth.
On the income side, the continued acceleration in earnings growth was a notable positive.
We provide a visual summary of the February Employment data below along with some specific commentary.
INCOME INFLECTION? The Trend in earnings growth remains positive, but not enough.
Yesterday the FED reported new highs in household net wealth as gains in equities and home values accelerated materially in 2013. Equity gains have outpaced the rise in the value of the aggregate housing stock off the lows which, on the margin, disproportionally benefits the wealthy. Cash-out refinancing activity remains muted and recent consumer spending data shows demand at the high end is beginning to flag.
With equities barely positive YTD and home price gains decelerating, the slowdown in wealth effect spending looks set to continue. Moreover, with the savings rate back near historic lows, the ability for further reductions in savings to drive incremental consumption growth appears limited.
The net of these dynamics – should they continue - is simply that growth in salary and wage income is/will becoming increasingly important in driving ongoing consumption growth. As the February data on hourly earnings shows, the recovery in earning growth remains positive, albeit painfully slow.
Average hourly earnings growth for private employees accelerated 20bps sequentially to +2.2% YoY while nominal hourly earnings for non-supervisory and production employees accelerated to +2.5% YoY – its fastest rate of improvement since October of 2010.
As we’ve highlighted recently (LOSE-LOSE? WAGE INFLATION & LABOR'S BAD BANK) the chief source of frustration is that earnings growth, despite ongoing improvement, remains well below historic averages.
As can be seen in the 2nd chart below, nominal spending continues to grow at a positive spread to nominal earnings growth.
This trend will become increasingly challenged if accelerating earnings growth, supporting broader based household consumerism, fails to materialize in the face of trough savings rates, a pullback in high end discretionary spending, and continued corporate capex conservatism.
NFP: Better Sequentially but Negatively Diverging from Trend
NFP and Private payrolls both beat deflated expectations in February but the trailing 3M/6M/TTM averages all continued their deceleration. Its notable that both the initial claims and payroll data has diverged from (strong) prior seasonal trends and continues to deteriorate in the face of the build to positive peak seasonality into 2Q.
WEATHER: Negative Outlier Again in February, but...
A reported 605K employees were out of work due to bad weather in February. This compares with a ten year average of ~350K. Collectively, employees out of work over the December-to-February period averaged 379K which compares with the 10Y average of ~293K.
So, the agonizingly ballyhooed weather distortion on reported, domestic macro data to start the year is real…. to an extent.
Does a full discounting of the weather take the reported labor market, consumer spending and industrial/manufacturing data from very bad to “just bad” or all the way to “good”. We’d argue that the trend, inclusive of the negative weather distortion, is still one of modest-to-moderate deceleration.
With the $USD broken, 10Y yields failing to break above 2.80% Trend Resistance, and slow growth sectors/assets continuing to outperform, we’d also argue that the market agrees with our interpretation of the slope of domestic economic activity.
Part-time employment continued to ebb and Temp employment advance while construction and manufacturing jobs remain in moderate recovery mode and Mining and Energy employment (which generally pay comparatively higher wages) continue to gain in share.
At the Industry level in February, Goods employment remained positive with Construction and Manufacturing adding +15K and +6K jobs, respectively. Professional/Business Services (+79K) led Services gains for a second straight month while Information shed workers (-16K) for a third consecutive month.
Christian B. Drake
This report contains some of our thoughts following Darden’s most recent presentation on creating shareholder value. Overall, the presentation was riddled with disingenuous facts and consistent with what we’d expect from a CEO who is out of touch with reality. This is the second presentation of this type, making the first one on December 19, 2013 look more like a reactionary response rather than the proactive move the company claims.
Furthermore, we were disappointed to find out the company cancelled its analyst meeting at the end of the month and believe this signals yet another sign of weakness. It makes sense, however, as the company has been under a lot of public scrutiny – and rightfully so. Considering these two recent events, we believe Mr. Otis did himself a disservice this past week. In the end, it makes the case for the activist shareholders stronger. It has become increasingly clear that they must stop the Red Lobster spinoff and aggressively push for more significant changes.
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Takeaway: Though Nike is no-stranger to athletes causing controversy, Manziel belongs on the upper half of the risk management watchlist.
- "Rovell's sources were not able to disclose the financial terms, but they did say the deal—which was negotiated by LeBron James' business partner Maverick Carter and Fenway Sports Group—is a multi-year offer that will be the most expensive for a rookie in this year's class."
- "Manziel chose Nike over other companies such as Adidas, Under Armour and New Balance's Warrior brand."
Takeaway from Hedgeye’s Brian McGough:
Nike is likely looking at something in the vicinity of $20 million/year for Manziel. But one thing is for sure,
Nike is going to have to babysit this one.
True, they may have 'handlers' for all their high-value athletes, but the sports world knows all too well that things don't always go according to plan. See previous tabloid-rich events like:
1. Kobe Bryant and his sexual assault case (after which his Nike contract was re-written).
2. Tiger Woods and his -- whatever you call it -- case.
3. Lance Armstrong and his pathetic admission of basically lying his whole career.
Athletes -- even those considered squeaky clean -- are high risk assets. Something tells us that Johnny Manziel belongs on the upper half of the risk management watch list.
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The EUR/USD and GBP/USD have ramped an impressive 1.96% and 2.15%, respectively, in the last month -- the performance is consistent with our Q4 2013 Macro Theme call of #EuroBulls (presented on 10/11/2013) and our bullish outlook on the British Pound since last November.
Below we update our outlook on each currency cross:
- ECB President Mario Draghi kept rates on hold this week (as expected) and did not issue any “new” non-standard measures, adding in its 2014 outlook for GDP to expand +10bps to +1.2% (vs the previous forecast in December) and inflation to dip -10bps to 1.0%.
- Broadly, we believe Draghi’s continued posture of “ready and willing to act” (to ensure the survival of the Eurozone at any cost and to keep financial conditions accommodative) will continue to support the common currency and strengthen investor confidence in the equity market #EuroBulls (etf FXE).
- On the other side of the cross (USD) we expect Fed-head Janet Yellen to likely pull back on the tapering program to a more dovish position in response to our Macro call of #GrowthSlowing that should weigh on the USD to the downside.
- EUR strength reflects country/regional strength: Manufacturing and Services PMI continue to remain grounded above the 50 line (expansion). Services hit a 32-month high at 52.6 in February and Manufacturing grinded higher to 53.2.
- Confidence up: Eurozone Feb Economic Sentiment Indicator rose to 101.2 in February (exp. 100.9) vs 100.9 in January. The Services Sentiment Indicator rose to 3.2 FEB (exp. 2.5) vs 2.3 JAN.
- The deflation of inflation across the Eurozone (the current reading at 0.8% Y/Y) equates to more consumer purchasing power via lowering the consumption tax.
- Other Data: Eurozone Retail Sales rose to 1.3% JAN Y/Y (exp. -0.2%) vs -0.4% DEC and the Eurozone Unemployment Rate maintains the 12% level.
- We remain marginal European equity bulls over US equities. Our preferred investment in the region is long German and UK equities (EWG and EWU) and long the Pound/USD (FXB).
- We remain bullish on the British Pound versus the US Dollar (etf FXB), a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve).
- The Bank maintaining the base interest rate at 0.50% this week along with its asset purchase program target (QE) 375B GBP.
- UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers. In the BOE’s Quarterly Inflation Report (in February) 2014 GDP was revised higher to 3.4% from 2.8% previously forecast.
- PMIs remain one highlight: Manufacturing in February came in at 56.9 versus expectations of 56.8 and Services recorded 58.2 versus expectations of 58.0.
- CPI has also moderated in recent months, currently at 1.9% in January Y/Y – we expect this cut in the consumption tax to continue to boost business and consumer confidence and with it consumption
- The British Pound is holding its Bullish Formation, trading above its intermediate term TREND and long term TAIL levels of support.
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