Today we learned that the U.S. economy added a paltry 38,000 jobs in the month prior. Our Macro team nailed it.
In this edition of Washington To Wall Street, Hedgeye Potomac Chief Political Strategist JT Taylor and Director of Research Daryl Jones discuss what a third-party Libertarian presidential bid may mean for Donald Trump’s Oval Office aspirations.
"Less than six months into the year, the Fed has been hawkish, pivoted to dovish, pivoted to hawkish and will now pivot to dovish," Hedgeye Senior Macro analyst Darius Dale wrote on Twitter earlier today.
Today's #JobsBomb spells trouble for those flippant Fed heads. Here's why.
Stepping back a moment to better contextualize today's Jobs Report in both delta and differential terms, here are two charts from Dale:
"If you think this heinous Jobs Report is a one-off, you are literally paid to be willfully blind to #TheCycle," Dale writes. Take a look at what Jobless Claims data has long been signaling (i.e. we're about 3-6 months of improving claims data away from recession).
And here's the KEY chart that shows Non-Farm Payrolls rolling off the February 2015 cycle peak in rate-of-change terms (i.e. #NotGood).
In other words, as the linear, labor economists at the Fed continue to witness deteriorating jobs data, it will become increasingly difficult to sell the "all is good" U.S. economic narrative.
In fact, the market is already pricing in a more dovish Fed. Look at the latest implied rate hike probability reading versus where it was yesterday (note the probability of a July rate hike was nearly cut in half in the matter of a day):
We'll take this time to reiterate what we've been saying for a while now...
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Takeaway: Volume was light in the holiday shortened week, but equities and futures volume remain +11% and +6% higher Y/Y, solid growth for Financials.
Weekly Activity Wrap Up
Volume in the holiday shortened week was lower than the 2Q16TD quarterly average, however cash equities and futures maintained good year-over-year volume growth. Cash equities came in at 6.7 billion shares per day, bringing the 2Q16TD average daily volume (ADV) to 7.0 billion, +11% higher year-over-year. Futures came in at 18.3 million contracts per day this week, bringing the quarter's ADV to 18.8 million, +6% higher than the year-ago quarter. Additionally, CME's open interest currently tallies 114.1 million contracts, +25% higher than the 91.3 million pending at the end of 2015. This compares to ICE's OI growth of just +5% YTD. Meanwhile, options volume of 12.8 million was low enough that it dragged down the 2Q16TD ADV to 15.2 million, -1% lower than the 2Q15 ADV.
U.S. Cash Equity Detail
U.S. cash equities trading came in at 6.7 billion shares per day this week, bringing the 2Q16TD ADV to 7.0 billion. That marks +11% Y/Y growth. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 25% share of second-quarter volume, which is +95 bps higher Y/Y, while NASDAQ is taking a 17% share, -132 bps lower than one year ago.
U.S. Options Detail
U.S. options activity came in at a 12.8 million ADV this week, bringing the 2Q16TD average to 15.2 million, a -1% Y/Y contraction. In the market share battle amongst venues, NYSE/ICE's 17% share of 2Q16TD volume is +41 bps higher than one year ago. Additionally, NASDAQ's 22% share is +27 bps higher year over year. BATS has also been taking share from the competing exchanges, up to an 11% share from 10% a year ago. Meanwhile, CBOE's 26% market share of 2Q16TD is down -123 bps Y/Y. Finally, ISE/Deutsche's 14% share is -153 bps lower than 2Q15.
U.S. Futures Detail
14.7 million futures contracts per day traded through CME Group this week, bringing the 2Q16TD ADV to 14.4 million, +8% higher Y/Y. Additionally, CME open interest, the most important beacon of forward activity, currently sits at 114.1 million CME contracts pending, good for +25% growth over the 91.3 million pending at the end of 4Q15, an expansion from the previous week's +24%.
Contracts traded through ICE came in at 3.6 million per day this week, bringing the 2Q16TD ADV to 4.4 million, a +3% Y/Y expansion. ICE open interest this week tallied 66.9 million contracts, a +5% expansion versus the 63.7 million contracts open at the end of 4Q15, consistent with the previous week.
Monthly Historical View
Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.
Please let us know of any questions,
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
Editor's Note: Below is a Hedgeye Guest Contributor research note written by Dr. Daniel Thornton. During his 33-year career at the St. Louis Fed, Thornton served as vice president and economic advisor. He currently runs D.L. Thornton Economics, an economic research consultancy.
Please note that while the views expressed in this column do not necessarily reflect the opinion of Hedgeye, Thornton's analysis is hard-hitting and provocative. A must-read for thoughtful investors.
In a speech on May 26, Fed Governor Jerome Powell noted that “A long period of very low interest rates could lead to excessive risk-taking and, over time, to unsustainably high asset prices and credit growth.”
One cannot help but wonder what Governor Powell considers to be a “long period.” The federal funds rate quickly headed to zero when the Fed increased the monetary base by making loans to financial institutions following Lehman Bros. bankruptcy announcement on September 15, 2008. The Federal Open Market Committee (FOMC) slowly reduced its target for the funds rate from 2% to effectively zero by December 15, 2008, in spite of the fact that the funds rate was already near zero, see "Requiem for QE."
The funds rate target remained at this level for SEVEN years before the FOMC increased the target to between 25 and 50 basis points on December 16, 2015. So the funds rate has been excessively low for nearly 7.5 years. This is unprecedented, and an extremely long period.
I am also struck by Powell’s suggestion that “very low interest rates could lead to excessive risk-taking and, over time, to unsustainably high asset prices and credit growth.” It’s already happened! The FOMC’s low rate policy has already led pension funds and retirees to take excessive risks.
It has also produced unsustainably high asset prices as evidenced by this graph from "My Scary Chart." The figure shows household net worth as a percent of disposable income. The first two peaks were due to unsustainable increases in assets prices: The first, to equity prices, the second to home prices.
The third is due to a combination of equity and home prices. This rise in household wealth also seems to be unsustainable. The question is: Does it decline slowly to the trend line or does it fall precipitously like the previous two?
The FOMC’s policy has already caused banks to make an extraordinary quantity of loans in a slow growth economy and has caused the M1 money supply measure to more than double since Lehman’s announcement, see Excess Reserves and Excessive Risk Taking.
Powell appears to be waking up to the consequences of the FOMC’s policy. He concluded his speech with, “My view is that a continued gradual return to more normal monetary policy settings will give us the best chance to continue to make up lost ground.” However, he is yet to come to the realization that the return to “normalcy” needs to happen quickly not gradually. Waiting two or more additional years won’t improve the economy; it can only cause further harm.
We profiled the Jobs report in this morning’s Early Look and on The Macro Show and you needn’t go much deeper than the headline to capture the larger flavor of the May release, so we’ll leave it to others to split hairs on the internals.
Apart from the NFP data, we thought a couple other quick callouts were worth a highlight:
About that Bottom | ISM adds Insult to NFP Injury: While Manufacturing PMI’s have been putting in an alleged "bottom" for a year now, the bottom continues to fallout of the ~4/5th of the economy that is Services.
Today’s (still poorly named) ISM Non-Manufacturing report (calling the vast majority of the economy “Non-Manufacturing” is, to quote Garnett Williams, like referring to the bulk of zoology as the study of nonelephant animals) showed expansion in the Services Sector slowed to its weakest pace in 27-month in May at 52.9.
The drop was ubiquitous across the primary sub-indices with New Orders matching a 27-month low, Employment falling into Contraction, Backlogs dropping to 50-even and Export demand cratering -7.5pts sequentially to 49.0.
A lower-low, by defnition, is not a bottom.
Seasonality: We re-highlighted the topic of seasonality in April in today’s Early Look. Specifically, the fact that the reported April data showed some of the largest sequential increases in years across a number of primary domestic macro series (NHS, PCE, Retail Sales, etc) occurred, incidentally, alongside the infrequent, compound benefit of 5 weekends + the Easter shift – effectively giving April a 40% increase in high consumption weekend days.
We’ve looked at historical incidences of the same calendar dynamic that characterized this April and while the tendency is for some measure of hangover in the subsequent month, the sample size isn’t particularly large and is subject to other externalities (i.e. recessions, regulatory changes, etc).
A relevant empirical question here – with employment, services activity and confidence reports for May all sliding moderately-to-severely in May – is whether the April data was more headfake than harbinger and whether it was the 'escape velocity' or 'statistical distortion' stars that were aligned to start 2Q.
Barring revision, the April data will help buttress reported growth in 2Q but the early balance of May data suggest May-laise will largely offset the April exuberance.
..... another noodle to noodle over this weekend as you noodle over the Fed’s requisite noodling over lagging economic data.
Christian B. Drake
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