And with that jobs data point, the Fed has gone surfing…

June 6, 2016

And with that jobs data point, the Fed has gone surfing…

Cancel the June Fed meeting and good luck getting the FOMC out of their board shorts and bikinis long enough for a July meeting. While one data point should never be enough to influence change, the five sigma surprise in the non-farm payroll numbers last week could create an exclamation point to the ongoing trend of slow economic data. The markets quickly responded to the data by collapsing short & long term Treasury yields, crushing the U.S. Dollar, launching Gold, commodities and Utility stocks. Also key was a continued strengthening in credit spreads as investors bought high grade and high yield credit as they were comfortable with slowing economic data with few thoughts of recession. Among equities, buyers were most interested in Small Caps, Value Stocks and Higher Beta stocks as the S&P 500 neared its 52-week high. So while the Fed members wax up their boards and the ‘Sell in May’ crowd reaches for a bottle, I hope you find some slow days in the market to catch your own wave or two.

Friday’s NFP number and the previous month’s revisions were quite a surprise…

@jsblokland: OUCH! #nonfarmpayrolls rise just 38K in May, fewest in almost six years! Macro is playing with #Yellen.

As a result, the market moved away from a June, July, September and even November rate hike. Now looking into 2017 which would be quite different from Fed talk…

The two-year yield got pounded 12 basis points last week. But the trend is still higher…

The Fed’s top reporter thinks the voters may now wait until September to evaluate more data. Better get your cabin lined up for Jackson Hole…

The Fed’s top reporter thinks the voters may now wait until September to evaluate more data. Better get your cabin lined up for Jackson Hole…The Federal Reserve’s plans for raising short-term interest rates went on hold after Friday’s dismal jobs report, with officials now wanting to wait and see whether the economy remains on track before they make a move.

A rate increase at the Fed’s June 14-15 meeting is almost surely off the table. A move at their July meeting six weeks later is still possible though less likely, because officials won’t have that much more economic data to reassure themselves about the course of the economy’s expansion, according to their remarks.

Some officials could prefer to wait until their September meeting to consider lifting rates, provided the economy picks up during the summer.

(WSJ)

Recent PMI data would line up more with the market’s thoughts of ZERO interest rate hikes in 2016…

Business expectations for the Services PMI is at the lowest level since 2009. Within the Manufacturing PMI index, the Output component is also at seven-year lows.

(JPMorgan/Cazenove)

Another top mind thinks that Temporary employment data is throwing up a red flag…

@TimDuy: Still think temp services hiring is a red flag that the Fed should not ignore. Decelerating for more than a year.

Tough to think about hiking when the market has flattened the yield curve to its lowest level in eight years…

@DriehausCapital: ICYMI: Fed chatter has pushed UST 2Y/10Y spread to its lowest level since ’08. Not a great omen for more hikes. KCN

On the week, stocks were flat but again correlations were falling with high income Utilities and Staples enjoying the economic data while Financials were buried…

The Utility group gets a slow clap for the new 52-week and all-time high. And the group is +16.5% YTD!

Again, the buying in High Yield bonds has been impressive. The default rate has been rising mainly due to energy credits, but the decline in spreads tells you that defaults are soon to roll over and head lower…

(JP Morgan)

Ned Davis’ team also points out the positive impact of the credit markets on the equity markets…

@NDR_Research: Corporate bonds have excellent record in calling stocks (excl. 2000); says there should be good support for stocks.

Brazil continues to have its problems. If you have a quick solution for presidential corruption, Zika and a National Soccer team not in top form, raise your hand…

(Markit Economics)

Maybe this could help Brazil: Starting this month, Global Trade accelerates…

(Bloomberg)

Bernstein speculates that the Saudis might be taking Aramco public to front run the peak of oil demand…

“Often the simplest explanation is the most likely to be correct. With Saudi running a significant budget deficit, the listing of Aramco is one way to plug a gap in government finances. More broadly the listing of Aramco could be an example to other state owned firms, as Saudi reaches its ‘Thatcher’ moment in seeking to privatize state owned companies to increase efficiency as part of their plan to move beyond oil. The problem for oil markets is that privatized state companies tend to grow more quickly following privatization. Perhaps Aramco’s growth will be focused on refining and natural gas, but it is possible that Saudi have also realized that demand is likely to run out before supply and it makes more sense to deplete their own reserves ahead of others. While this is pure conjecture at this point, it could have bearish implications for oil markets. In the near term however, Saudi will not want to list Aramco at a low oil price. In the run up to 2018, we expect that Saudi will do everything in its power to ensure oil markets remain balanced and prices stable. This could be positive near term for oil equities.”

(Financial Times)

Wonder if any Saudis subscribe to Dagens Naeringsliv?

@elonmusk: Just heard that Norway will ban new sales of fuel cars in 2025. What an amazingly awesome country. You guys rock!!

Ivy Zelman is a great housing analyst. She is mentioned in Barron’s this week, so go read her full interview…

Barron’s: April new home sales soared 17%. Where are we in the housing recovery?

Zelman: Four years in. The first increase was in 2012. There are multiple years ahead. We are still 35% below a normalized level of starts, and that’s for a single-family. Every cycle is different. This cycle will be elongated, and the slope of the recovery is flatter than what we thought the trajectory would look like when we called the bottom in 2012. Builders have been slower to see the growth. There’s a shortage of shelter. We’re pretty indifferent whether shelter should be owned or rented. We’re just saying there isn’t enough. The U.S. is at a 30-year low of inventory available for sale. We are predicting double-digit housing-starts growth this year, next year, and in 2018.

(Barron’s)

Looking broadly at real estate prices, commercial has returned to its peaks, while residential should still have some better legs…

(Goldman Sachs)

Conor Sen thinks the shortage in residential housing is going to be a very important story…

The bigger business story over the next 5 years is going to be a capacity-constrained US economy where the housing sector is taking “inputs” like labor and capital from all other sectors. Ergo, housing is set to eat the US economy.

One way to show how much more growth housing, and construction more generally, has in front of us is to look at construction’s share of total employment. It’s currently 4.6%, and in every cycle ever it’s gotten to at least 5%. Given 1) the size and hence housing needs of the Millennial generation in years to come, 2) the lack of construction, of single family especially, since the financial crisis, 3) the potential for infrastructure spending from the next president, whether it’s the Hillary/Dem version or the Trump “build a wall” version, 5% seems like a reasonable conservative target for how high this will go over the next 3-5 years.

(CSEN)

While you are watching the NBA Finals, know that kids are moving away from basketball shoes…

(Goldman Sachs)

If you need another amazing Amazon data point…

Amazon isn’t likely to release granular data about its Prime subscribers any time soon, which means a privately run survey has a little more weight than we might otherwise give it—especially with a conclusion as resounding as the one drawn by Consumer Intelligence Research Partners on Tuesday. The firm’s latest report estimated an Amazon Prime retention rate that may only be rivaled by alcohol, cigarettes, and other drugs: 96 percent.

That’s how many Prime members elect to renew the service after two full years of use, according to CIRP’s estimate (which involved a survey of 2,108 people in the US). CIRP’s numbers also found that 91 percent of one-year subscribers elect to renew for a second Prime year, while 73 percent of the service’s free-trial users decide to pay for Prime.

(Arstechnica)

Prime video has been big for Amazon. Here is a slice of how U.S. Video consumers are getting their content…

(SpotX)

Public Service Ad of the Week…

(AdWeek)

Finally, a good photo for aspiring musicians to tape up on the garage wall while they are practicing away…

@ianbremmer: Planes of Angela Merkel, François Hollande & Iron Maiden in Zurich. Heavy metal indeed.

And Lastly…

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