Friday, May 8, 2015

April 2015 Employment Report

Today was an interesting day.  I'm not sure what to make of it.  Stocks moved up on the employment report, but interest rates moved down.  In the interest rate market, I wonder if there are two separate groups of concerns about the zero lower bound.  One concern is that the economy never achieves escape velocity.  Another concern is that the economy achieves escape velocity but the Fed puts the brakes on too soon and too sharply.  So, a day like today with a lukewarm employment report might increase the escape velocity concern but decrease the Fed brakes concern.  It hit a sweet spot where the economy looks like it continues to recover, but not so strongly to move the Fed to act.  And, the continued movement through time without a major breakdown would continue to reduce uncertainty in general.  So, we might have seen a continued convergence of the mode, median, and mean forward rate expectations today, as variances in forward expectations continue to decrease, with a the general movement in expectations being slightly lower.  The reduced uncertainty would have a positive effect on equities, whose main concern would be revenue stability going forward.  How's that for a just so story?

The slope and the expected date of the first increase have been generally moving in the same directions since the QE3 taper began, but earlier in the week, they diverged.  Forward rates had been rising because of renewed strength in the expected slope.  This week, the slope continued to rise, but rates were pulled back down because the expected date of the first increase moved back from September into October.  Friday's movement after the employment report was pretty stable regarding the date of the first rate hike.  Most of the pullback in rates today was from a slight reversal in the slope expectations.

Regarding the employment report, itself.  I think it was a bit of an aberration.  Looking at durations, we continue to see steady trends downward in long-duration unemployment.  But, very short term unemployment saw a strong rise.  This is very likely a statistical outlier.  We have several weeks of freshly declining unemployment claims.  It could be that that won't hit the unemployment figures until next month.  We should see short term unemployment drop by about 300,000 next month.  Next month will have to be an outlier for unemployment to come in above 5.2%.  That will be an interesting print heading into the June Fed meeting.  Surely we don't have to worry about a rate hike in June any more, but expectations for a September hike would firm up if August unemployment could realistically be at 5.0%.

Next is the comparison of insured unemployment and total unemployment.  We should expect the blue line to trend back down toward the normal relationship.  This month was a big jump away from that trend.

Finally, flows data.  The first graph shows the 6 individual flows that I follow.  The next graph shows the weighted moving average of the net movement between each pair of flows.

Net flows from Not-in-Labor-Force to Employment remain strong, in the same range as the strong labor markets of 2005 and 2006.

The net flows from Employment to Unemployment appear to have weakened somewhat, but this looks like it is mostly due to three months of Employment to Unemployment flows at the top end of the trend range, which are not confirmed by recent trends in insured unemployment.  Unemployment to Employment has not been particularly weak relative to trend.

So, employment looks generally positive to me.

On the other hand, This week's H.8 report now makes 3 consecutive weeks with flat levels of closed end real estate loans at commercial banks, compared to March.  So, while I think the employment trend will eventually move the Fed to raise rates, probably in September, I am still waiting for mortgage growth to confirm an expansion of nominal economic activity.  Home prices are so far out of equilibrium that a functional credit market should see mortgage growth well over 10%.  The fact that we aren't seeing that yet is bothersome.  The grapevine is telling me that, at least in Phoenix, real estate is a sellers market, so I'm not sure where things are headed.


  1. So, a day like today with a lukewarm employment report might increase the escape velocity concern but decrease the Fed brakes concern.

    An alternative, somewhat similar, way to frame Friday's story says that employment report had in line payroll numbers amid below expectations AHE growth and a slightly increased LFPR. So you have a slight downtick in the consensus NAIRU (or natural rate, whatever) which is positive for stocks while supporting a slightly lower front half of the FF curve given the loosening of policy that comes from a fixed inflation gap and a small positive surprise on potential output. Note that far forward rates didn't move much so you don't have to start talking yourself into some strange portfolio balance or term premium effect on the 10YR for this move.

  2. I suspect rates go down. I think the Fed will make the same mistakes as the BOJ. Too timid, fighting the last war (inflation).
    There are $12 trillion in bank deposits and money funds about earning nothing. Supply and demand.
    The Fed needs to consider quantitative easing as conventional policy and near permanent policy.

  3. Interesting piece about housing:

    1. Interesting. Thanks for the link. I wish I could see their data on the different countries. They all seem to have had a temporary bump in ownership rates, but the timing of the peaks don't seem to match up in a systematic way. I wonder what all is going on there.