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This note was originally published May 08, 2015 at 13:49 in Macro
The May employment report was “okay”. The moderate rebound in net monthly payroll gains to +223K in April was largely offset by the negative revision to the March estimate with the revised +85K gain the lowest since June of 2012.
The early market vote is mixed but with a dovish shading as the $USD is up small alongside gains in both equities and bonds. More broadly, the return to middling – and the discrete lack of either collapse or escape velocity improvement – will mostly serve to perpetuate further uncertainty/volatility as another month is devoted to speculation and spurious investor activity in the attempt to front-run a Fed faced with somewhat equivocal data.
We’re not big on adding to the noise of manic data reporting on employment Friday but below are some quick highlights. If you have any specific questions or would like to dig/discuss a particular dimension of the labor market in more depth, let us know.
Earnings & Income: Average hourly earnings in the private sector accelerated +10 bps sequentially to +2.2% YoY. However, earnings for nonsupervisory and production employees – which BLS estimates to be ~80% of the workforce – grew just 1.8% YoY, marking a 3rd consecutive month of sub-2% growth. While labor slack continues its slow march towards tautness, a sustained acceleration in both wage and broader core inflation remains very much a phantasm.
In terms of the read-through to spending and aggregate personal and salary/wage income for April. The combination of little change in hours worked and earnings growth, a moderate gain in total employment and modest positive mix in high-wage/low-wage employment on the month should support continued Trend improvement in aggregate income in April.
As we’ve highlighted, with income growth accelerating alongside the rise in the savings rate in recent months, the capacity for consumption growth has increased more than actual reported household spending. That trend showed a moderate reversal last month with income gains softening, savings declining and spending rising. As it stands, consensus forecasts for accelerating PCE continue to buttress full year GDP growth estimates which remain at +2.8% despite what will be another 1st quarter of negative growth following revisions to the 1Q15 estimate.
Unemployment & Participation The U-3 Unemployment rate dropped to 5.4% while the U-6 rate (Underemployment Rate) ticked down 10.8% from 10.9%. In contrast to last month, the improvement stemmed from largely positive fundamental developments as the flow of workers out of the labor force ebbed, the number of total employed (+192K) changed at a premium to total unemployed (-26K) and the Labor Force Participation Rate ticked back up to 62.8% from last months multi-decade low of 62.7%.
Participation by prime working age adults has troughed but has yet to really inflect. Whether the nascent return to positive employment growth in the 45-54 year old bucket can tip the scale in that direction will take time to discover.
Energy Sector: Job loss in the energy sector extended into March/April according to both BLS and Challenger Job Cut data. Oil & Gas extraction employment - which includes data thru April - saw a employment decline -3K on the month, marking a 3rd month of negative gains in the last four. Broader energy sector employment - data thru March - showed a 5th consecutive month of net decline, dropping by -9K sequentially with the rate of YoY growth dropping to -0.6, the first month of negative year-over-year growth in 58 months.
The weakness accords with the Challenger Job Cut data for April released yesterday which showed energy sector job cut announcements re-ramping to +20K in April after a brief March respite. Note also that we’ll get the state level employment numbers on May 27th where trends in the shale states will again be the focus. Collective net employment gains across the primary basket of energy states was -56K in March, the first delta negative month since September 2010. The notable -26K decline in Texas led state level job losses as angst over a prospective state-level recession continues to percolate.
Industry Employment: Manufacturing employment followed-up last months brick with a paltry +1K estimated gain in April. The confluence of strong dollar, declining export demand, cratering energy sector investment, and residual port shutdown impacts all continue to weigh on the industry. The softness was not unexpected given the lackluster gains the last two months, the declines in energy sector employment and the slowdown observed in the ISM employment sub-indices.
Housing: Key housing employment demographics remained solid in April and should continue to flow thru to housing demand at a modest rate.
Christian B. Drake
Takeaway: Current Investing Ideas: VNQ, EDV, ITB, TLT, MUB
We have grown increasingly ursine on the continued upside for domestic equities over the past month. As Keith wrote in last weekend's note, we believe investors should be paring back some of their gross exposure on the long side of US Equities. We are opting to err on the side of caution right now, believing that better risk/reward opportunities will ultimately present themselves as we remain patient.
On a related note, our analysts have a long and successful track record highlighting profitable opportunities on the short side of various overpriced stocks. To name just a few, Weight Watchers (WTW) which has fallen approximately 75% since being added to our Best Ideas list last year; Yelp which has dropped over 20% since being added, as well as Linn Co LLC (LNCO) a Master Limited Partnership which has fallen almost 70%.
In other words, we go both ways here at Hedgeye.
To that end (and in light of the fact that we have removed a number of our favorite longs in recent weeks) we wanted to give you a name we believe is a prime short candidate. It is featured below.
If you can spare a minute, please let us know your thoughts on us providing short candidate ideas. While Investing Ideas has focused exclusively on long ideas since its inception, we are always seeking to evolve. We would love to hear from you. You can email your thoughts to .
Have a great weekend.
Below are Hedgeye analysts’ latest updates on our current high-conviction long investing ideas, a special SHORT IDEA and CEO Keith McCullough’s updated levels for each.
Please note we removed ZOES, RH and EWG this week.
As always, we also feature two additional pieces of content at the bottom.
Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.
Our Gaming, Lodging & Leisure analysts, Todd Jordan and Felix Wang, remain bearish on Royal Caribbean (RCL) for the following reasons:
RCL was the darling in 2014, up 74% in share price. 2015 is a different story as the stock has lagged Carnival (CCL) and Norwegian Cruise Line (NCLH). While the stock clearly got ahead of itself, we also think RCL is facing some fundamental headwinds, particularly in Europe. While its newbuild ships are doing well, RCL’s legacy fleet is underperforming by a wide margin in Europe, and the discrepancy has widened in the past months.
In addition, since the beginning of the year, we’ve been highlighting weakness in Europe as a potential risk. It appears that has been realized, as evidenced through RCL’s forward guidance and our monthly pricing surveys.
Moving forward, 2015 estimates are no slam dunk as European uncertainty remains. Given our current estimates, we think there’s a chance they miss Double Double targets in 2017. RCL’s still elevated valuation leaves little room for error.
Click image to enlarge.
It was a relatively light data week for housing with weekly mortgage application data and the March employment report offering incremental updates on the current state of housing demand. On the market side, interest rate volatility remained a concern for the public homebuilders but one we believe remains shorter-term in nature absent another expedited, step function increase in interest rates.
In other words, we think the rate related pressure will be largely transient unless we see a further back-up in mortgage rates on the order of +50-100bps from here – a potentiality we would not view as probable at this point.
On the fundamental side, the drumbeat of improvement remains ongoing:
The MBA’s weekly Mortgage Application Composite index recorded a -4.6% decline with refinance activity sliding -8.3% alongside a 2nd week of rising rates. The Purchase Index, meanwhile, rose to a 23-month high as demand increased +0.8% sequentially and +12% on a year-over-year basis. Purchase demand thus far in 2Q15 is tracking +14.2% QoQ and +13.4% YoY.
25-34 year old employment growth made a higher cycle high, accelerating +80bps sequentially to +3.2% year-over-year. Accelerating employment growth in this key housing demand demographic is encouraging and should continue to flow through to rising headship rates and housing demand at a modest-to-moderate rate.
Industry employment rose +3K in April alongside the strong rebound in broader Construction employment which was up a big +45K on the month as activity rebounded alongside the thaw in the weather. On a year-over-year basis, employment growth continues to hold in the mid-single digits as conditions in the resi construction labor market continue tightening
The highly anticipated Non-Farm Payrolls report came and went Friday, and it was largely a non-event:
Our thesis on interest rates remains lower-for-longer, but that view is being tested in the short-term.
The U.S. dollar has gone on a big reversal since the Fed’s March 18th meeting. Since the meeting, the dollar has moved lower and rates higher. Despite the fact that our investing ideas product is meant to articulate our intermediate-term to longer-term view, this short-term move in rates has caused confusion with respect to our lower for longer call.
Put simply, we have been wrong on the direction of our four macro tickers in the newsletter. A continuation of this trend will force us to re-evaluate the longer term call.
As Darius Dale wrote in Friday morning’s Early Look:
“One thing we do have a high degree of conviction on is our ability to forecast the rate of change in both growth and inflation. We are also pretty good at figuring out how trends in these omnipotent macro factors front-run changes in monetary policy.”
With the existence of easy inflation comparisons in the 2nd half of the year (remember that inflation was non-existent in 2H 2014 and we model growth and inflation on a year-over-year basis), we have expected inflation to accelerate for some time.
As evidenced in the chart below, CPI tends to track the directional moves in the CRB index accurately, and an appropriate weighting of the chart below supports the idea that these expectations are being pulled forward.
Click image to enlarge.
While history suggests long-duration fixed income works in a QUAD3 scenario which we are moving closer to hitting in Q2, the performance hasn’t been as strong as a QUAD 4 set-up. However if the debate is between QUAD4 and QUAD3, bonds work in both scenarios.
Welcome to the internal Hedgeye macro team debate. There is no hard line marking a transition between QUADS and asset allocation exposures. With that being said, we’re at the fork in the road and are confident we will be able to express more clarity in our view in the near-term. Stay tuned. #LOWERFORLONGER.
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ADDITIONAL RESEARCH CONTENT BELOW
Macro analyst Christian Drake goes granular on the May employment report.
The company delivered a bottom line beat despite a slight top line miss in 1Q15.
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