“Winning Culture creates great friendships and Happy Locker rooms!”
-Kermit Davis, Head Coach Mid Tennessee State, 12-seed
I’m closing in on the century mark in terms of Early Look production.
At ~1K words/note and ~5.5 characters/word, that sums to ~550K characters of crafted content.
All Early Looks are not created equal and we invariably throw up some bricks but it’s been both our charge and privilege to timestamp a transparent stream of analytical consciousness, daily.
I still think we can do better.
Incidentally, with ~3700 positions closed in Real Time Alerts since inception in 2008, we’ve realized ~550K bps of collective, positive P&L.
In the intended spirit of congruous and accountable research, I believe what we do and what we say have been dutifully complementary.
In idea expression and content delivery, I know we can still do better.
Macro markets are dynamic and as confounding as they are non-boring.
As soon as you get the right answer, the question changes …
… the million basis point march soldiers on.
Back to the Global Macro Grind…
Did you pick the right 12-5 upset yesterday?
The eerie consistency of the 12 seed upset phenomenon has become so pervasive the tournament committee has taken to front loading those games on the schedule to step function the Madness out of the gate. Perhaps having the 12-5 games lead off the tourney was schedule happenstance, I doubt it.
Too busy pre-gaming to notice yesterday’s 12-seed macro upset?
CHURN: The JOLTS data comes out on a month lag to the NFP report and provides the internals on the gross flow of both hirings and separations. As we’ve highlighted, a hallmark of an efficient and well-functioning labor market is a fluid flow of workers – job openings and the creation of new positions is a direct measure of the economy’s health (or perceived health), and the more that companies are hiring and creating new positions, the easier it is for job-seekers to find work and for skill and need to find their most productive match. Conventionally, the churn and underlying dynamism of the labor market sits as a proxy for the health of the broader Macroeconomy.
Anyway, a few points:
- Job Openings retraced back to cycle highs
- Quits hit their highest level of the cycle
- Churn: On a gross basis, 5.44 million people were hired in January while 1.6 million were laid off or fired and 3.2 million people quit their job. Total Hires + Separations (our proxy for churn or total labor market dynamism) reaccelerated to a new cycle high at 10.7 million.
- Available Workers per Job Opening: Available Workers (the sum of Unemployed + those Not in the Labor force but Want a Job) per Job Opening (JOLTS reports) dropped to 2.38 in January – matching cycle lows and holding well below the pre-recession average of 3.32.
The simple point is that activity in the labor market is consistent with our expectation for some continued, positive multi-month mojo (at least through May). And with every “slack” chart hitting cycles highs and/or approaching levels consistent with prior cycle peaks, the baseline expectation for wage growth should be higher. If you were at the drive through you’d be ordering the Phillips Curve combo with sloth sauce … or something like that.
Here are the other Top 2 Plays to round out yesterday’s macro highlights:
Philly Fed: Beat expectations for March as New Orders rose to the highest level since 1987. We certainly don’t anchor our outlook on a single regional survey but multi-decade highs are notable, particularly when the series is trending with the balance of the other regional and national manufacturing/industrial activity indicators. Also notably, the capex plans component rose to its highest level in 18 years, according with the investment plans component of the Empire Manufacturing Index. As can be seen in the Chart of the Day below, the early March data has our composite Capital Expenditures Plans Index tracking at its highest level in over a decade.
Housing | Constructive Inteference? Single-Family Starts breached a new cycle high at +872K in February as the dynamic of improving single-family activity and declining multifamily activity continues to drive a middling trend in total new construction growth.
Following the Builder Confidence data on Wednesday, we offered the following Bull/Bear contextualization of current conditions in the housing market. I think it’s worth repeating:
Bear | Rates, Supply, Volumes, Affordability: Unequivocally, periods of expedited or sustained increases in mortgage rates have resulted in deteriorating price and volume growth and material underperformance in housing related equities. Supply remains at historical lows and should continue to constrain volume growth to zero-to-mid single digits. Tight inventory is also driving moderate acceleration in HPI which, together with rising rates, is driving a negative trend in affordability. The specter of a continued back up in rates, de minimis demand growth and declining affordability doesn’t present as a bullish backdrop for housing over the nearer term. Indeed, while builders have outperformed in 2017, the balance of housing subsectors have not.
Now, those same factors through a variant lens:
Bull | Rates, Supply, Volumes, Affordability: The preponderance of domestic macro data is 2nd derivative positive, income growth is improving and tax reform/fiscal stimulus remains as a pocket ace. Consumer and Builder Confidence around housing is improving and mortgage applications are reflecting a notable pickup in the early March data. Indeed, Building Materials and Furniture Sales were the strongest components of this morning’s Retail Sales data for February. If rates have already priced in the March increase and multiple hikes in 2017 then most of the rate related affordability drag may now be rearview with the prospects of curve flattening rising. Supply may be a volume constraint but if it is, indeed, the primary constraint that is a fundamentally bullish condition and accelerating HPI, while dragging on affordability, will improve equity positions for households and margins for builders and incent supply in both the existing and new markets.
The issue, of course, is that those variant interpretations are both partially true and carry duration sensitive implications.
To employ a physics wave metaphor we’ve used before: constructive interference describes the phenomenon of wave propagation and the propensity for two, in-phase waves to meet and produce a resultant wave larger in magnitude than either of the individual waves. Conversely, destructive interference, describes the propensity for two, out of phase waves to cancel each other out.
In other words, as we see it, the potential energy within housing is building but it will remain out of phase with the reported data which we expect to remain underwhelming over the nearer term. Our focus will be on tracking and front-running that transition from destructive to constructive interference.
And 1 for the Road…
Industrial Production: Aggregate hours worked in the manufacturing space from the Employment report provides a good lead read on Manufacturing activity in the Industrial Production data. The February NFP data suggest another month of positive sequential growth in industrial production – a gain which would translate into a 3rd consecutive month of positive year-over-year growth following the longest non-recession streak of negative growth ever. Mild weather in February, while supporting Housing Starts, will probably drag on the headline IP figures – an impact that should reverse alongside unseasonably cold weather thus far in March.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.49-2.65%
SPX 2
VIX 10.68-12.22
EUR/USD 1.05-1.07
Oil (WTI) 46.01-49.95
Gold 1190-1231
Copper 2.56-2.70
To growth’s march… and occasional madness,
Christian B. Drake
U.S. Macro Analyst
