For much of the third quarter, Jobless Claims data have provided rays of hope that job growth was gaining speed. However, for two consecutive weeks we have seen initial claims edge higher. Initial jobless claims for the week ended September 6th came in at 315,000, up from a prior revised 304,000 (up from 302,000) and higher than the Street consensus of 300,000. Continuing Claims for the week ended August 30th came in at 2,487,000, up from a prior revised 2,478,000 (up from 2,464,000), but below the Street consensus of 2,490,000. The four-week average of claims, a less-volatile measure of initial claims, increased to 304,000 from 303,250 the prior week.
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The Labor Department mentioned that data can be volatile around holidays. That might explain the rise in initial claims last week, but, in our opinion, a modest rise to 315,000 from a prior 304,000 does not merit an explanation. It looks like statistical noise to us.
Since the beginning of Q3 2014, initial jobless claims have averaged 300,800 per week. The low was a print of 279,000 for the week ended 7/19/2014. The high print was today’s 315,000 for the week ended 9/6/14. The low print was probably influenced by the lack of seasonal plant closures and today’s high print was probably influenced by the Labor Day holiday. Initial jobless claims of around 300,000 seem to be the current structural level. The 2014 year-to-date average for initial claims stands at 317,100. If we back out the weak first quarter, initial claims have averaged 309,300. Initial Claims bottomed in July and have edged higher since. This is still an improvement from the 2013 average of 343,300. Employment has improved, but only moderately.
Jobless Claims data can provide a picture of firing activity, but as we have seen during the current recovery, decreased firing does not necessarily move in lock-step with increased hiring. For 2014 (YTD) Nonfarm Payrolls have averaged 215,380 new jobs created per month. This is somewhat better than the 194,250 average for 2013. Many of our readers are believers in mean reversion. We are as well, but also believe that the mean is constantly changing (this is not as contradictory as it sounds). Fans of the “mean” might not be fans after viewing the following chart:
Nonfarm Payrolls YTD 2014 (source: The BLS and Bloomberg):
The chart appears to indicate that job growth peaked during the spring rebound and is reverting to the mean. Charts can be manipulated to display nearly any outcome simply by cherry-picking the start and end dates. A two-year look tells a somewhat different story.
Nonfarm Payrolls 2013-2014 (source: The BLS and Bloomberg):
The data indicate that job growth has been volatile, but job growth has been relatively consistent. It is our view that job growth will probably continue at a pace of around 200,000 to 225,000 per month. Take a look at the next chart and see if you notice a correlation with Nonfarm Payrolls.
Care to venture a guess what this chart represents? We were going to leave readers in suspense, but today is not a day for frivolity. This is a chart of Wholesale Inventories data since January 2013. It appears as though job growth tends to increase at or about the same time there is a buildup of inventories. The data appear to portray a “flexible” job market. Businesses add workers when they need too. This is actually good for the U.S. economy. A lack of flexibility is one of the albatrosses around the neck of the Eurozone. This augurs well for corporate profits and asset prices, but less well for wages. At the present time, we expect wage growth to remain tame.
Five years ago, as the Fed launched “QE1” to try to lift the economy, out of its post-crisis malaise, the airwaves were alive with predictions of skyrocketing inflation and spiraling long-term interest rates would cause foreign investors abandoned the U.S. dollar. When that didn’t happen, QE2 was thought to be the inflation catalyst. Then it was the so-called “Twist” and then “QE∞” which was supposed to be the cause of building inflation pressures and rising rates. The following chart of 10-year Treasury yields tells a different story.
Ten-year UST yields since 2009 (source: Bloomberg):
Even after the spike in long-term yields during the “taper tantrum” of 2013, long-term U.S. Treasury yields remain lower than they were when the Fed began QE in 2009. It was assumed that when the Fed halted asset purchases, long-term rates would spike higher as few market participants would step in and take the Fed’s place. As we have seen this year, there is no shortage of buyers for U.S. Treasuries.
Yesterday’s auction to reopen the current 10-year U.S. Treasury note ($21 billion) was met with the highest demand from indirect bidders (which include foreign central banks) since December 2011!
Indirect bidders purchased 53% of the new supply of 10-year notes, up from an average of 45.3% for the past ten auctions. This is a significant increase. The bid-to-cover ratio, which gauges demand was 2.71, matching the average at the past 10 auctions. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 13.5 percent of the notes, compared with an average of 17.2 percent at the past 10 auctions. Christopher Sullivan, chief investment officer at United Nations Federal Credit Union in New York told Bloomberg News:
“International relative value players likely still see good value in 10-year notes north of 2.5 percent. It was a surprisingly good result given the negative tone of the bond market of late.”
We were not surprised that international demand increased. The 10-year U.S. Treasury is yielding about 150 basis points more than the 10-year German bund. Consider this; with the 10-year German bund yielding about 1.00% and the 10-year U.S. Treasury yielding about 2.50%, one can earn about two-and-a-half times the return in the U.S. 10-year versus the German 10-year. Add to this the likelihood that the U.S. dollar will probably continue to strengthen as the economy improves and the Fed removes accommodation at a time ECB policy and the euro are moving in the opposite direction and it really is not surprising that demand for the 10-year note was this strong.
With the U.S. economy expanding one might believe that investors should avoid long-dated securities as an improving economy usually means increased demand, wage increases and inflation. However, in today’s global economy, employment slack and demand must be viewed globally. With plenty of people willing to work for fairly low wages around the world (and not be forced to emigrate) and demand slowing around the world, strong inflation pressures do not appear on the horizon at the present time.
It appears as though investors did not fear inflation when the bought they heck out of today’s new supply of $13 billion 30-year Government bonds. Indirect bidders (central banks included) bought 45.5% of the amount sold, compared with 45.9% at the last auction. Considering that today’s auction was a reopening of the existing 30-year and the so-called long bond is not the long-term benchmark issue, demand from indirect bidders was strong. Primary dealers bought 32.8%, compared with 29.8% in the previous sale. Direct bidders purchased 21.8%. The bid-to-cover ratio was 2.67 versus a prior 2.60, indicating stronger demand.
Investors have been taught to look at U.S. economic data for clues as to the direction of U.S. interest rates and the magnitude of interest rate moves. However, we live in a global economy. As such, bond market participants are international. Foreign investors use sovereign debt to pick up yield and as vehicles with which to speculate on currencies. Central banks use sovereign debt to manage exchange rates between their home currencies and those of their trading partners. As the U.S. is the world’s largest consumer of imported goods, U.S. Treasuries tend to attract much attention from foreign central banks.
For all of the flaws within the U.S. economy, all other large economies pale in comparison. In the institutional world, investment decisions are made mostly on a relative value basis rather than an absolute value basis (which is popular among retail investors). As outdoorsmen often say:
When in the woods with your friends and a bear charges, you don’t have to be faster than the bear, just faster than your friends.
The U.S. economy might not be as fast as it once was, but it is faster than its friends.
By Thomas Byrne – Director of Fixed Income – Investment Consultant
Thomas Byrne brings 26 years of financial services experience to Wealth Strategies & Management LLC. He spent the last 23 years as Director of Taxable Fixed Income for Citigroup, Inc. and predecessor firms in New York, NY. During the course of his long fixed income career, Mr. Byrne was responsible for trading preferred stock, corporate bonds, mortgage backed securities, government debt, international debt and convertible bonds. Mr. Byrne was also responsible for marketing, sales, strategy and market commentary within the taxable fixed income markets.
- November 2012 – Present, Wealth Strategies & Management LLC, Stroudsburg PA
- December 2011 – November 2012 – Bond Squad, Kunkletown, PA
- April 1988 – December 2011, Citigroup and predecessor firms, New York, NY
- June 1986 – March 1988 – E.F. Hutton, New York, NY
Director of Fixed Income
Wealth Strategies & Management LLC