US & Canada Archives - Page 90 of 177

February 12, 2014

Firming Treasury yields support the Dollar

The yield on ten-year Treasury Notes recovered above resistance at 2.75 percent after penetrating the descending trendline, suggesting the correction is over. Follow-through (above say 2.80) would indicate another test of 3.00 percent. Bearish divergence on 13-week Twiggs Momentum, however, continues to warn of weakness. Breach of 2.50 is unlikely, but would offer a target of 2.00 percent*.

10-Year Treasury Yields

* Target calculation: 2.50 – ( 3.00 – 2.50 ) = 2.00

The Dollar Index continues to test resistance at 81.50. Breakout would signal a primary advance to 83.00*. Recovery of 13-week Twiggs Momentum above zero would strengthen the signal. Reversal below 79.70 is unlikely, but would warn of a primary down-trend — strengthened if support at 79.00 is broken.

Dollar Index

* Target calculation: 81.5 + ( 81.5 – 80 ) = 83

February 11, 2014

The hole in US employment

US employment is topical after two months of poor jobs figures. Employers added 113,000 new jobs, against an expected 185,000, last month and a low 75,000 in December. Rather than focus on monthly data, let’s take a long-term view.

The number of full-time employed as a percentage of total population [red line below] fell dramatically during the GFC, with about 1 in 10 employees losing their jobs. Since then, roughly 1 out of 4 full-time jobs lost has been restored, while the other 3 are still missing (population growth fell from 1.0% to around 0.7% post-GFC, limiting the distortion).

Employed Normally Full-time as Percentage of Population

Comparing employment levels to the 1980s is little consolation because this is skewed by the rising participation rate of women in the work-force. The pink line below shows how the number of women employed grew from under 14% of total population in the late 1960s to more than 22% prior to the GFC. The effect on total employment [green line] was dramatic, while employment of men [blue line] oscillated between 24% and 26%.

US Men & Women Employment Levels as Percentage of Population

Part-time employment — the difference between total employment [green] and full-time employed [red] below — has leveled off since 2000 at roughly 6% of the total population. So loss of full-time positions has not been compensated by a rise in casual work. Both have been affected.

US Full-time and Total Employment as Percentage of Population

The “good news” is that a soft labor market will lead to low wages growth for a considerable period, boosting corporate profits.

The bad news is that low employment levels will depress sales growth [green line]….

Total US Business Sales Percentage Growth and over GDP

And discourage new investment…..

Which would harm future growth.

February 9, 2014April 18, 2024

S&P 500 finds support

The S&P 500 hammer candlestick on the weekly chart indicates support at 1750 and the secondary trendline. Follow-through above 1800 would strengthen the signal, suggesting an advance to 2000*. Breakout above 1850 would confirm. Recovery of 13-week Twiggs Money Flow above 40% (the most recent high) would indicate that the correction is over. Breach of 1750 seems unlikely, but would warn of a test of the primary trendline, around 1700.

S&P 500

* Target calculation: 1850 + ( 1850 – 1700 ) = 2000

CBOE Volatility Index (VIX) retreated below 20, suggesting low risk typical of a bull market.

VIX Index

February 5, 2014

Crude: Nymex WTI down-trend

Nymex Light Crude is headed for another test of resistance at $100/barrel. Respect of resistance is likely, given the primary down-trend, and would suggest another test of primary support at $92/barrel. Breach of primary support would offer a target of $84/barrel*. Recovery above $100 is unlikely and another 13-week Twiggs Momentum peak below zero would strengthen the bear signal. Brent crude is headed for another test of support at $104/barrel. Breach would join Nymex crude in a primary down-trend.

Brent Crude and Nymex Crude

* Target calculation: 92 – ( 100 – 92 ) = 84

February 5, 2014

Taxes and corporate profits

A secondary element — when compared to wages, raw materials and interest rates — is the impact of a lower effective tax rate [blue line] on US corporate profits (CP/GDP). Part of the post-GFC fall in the effective corporate tax rate can be attributed to tax losses, incurred during the GFC and used to shield current income. Tax savings are likely to be short-lived, with effective tax rates returning to pre-GFC levels around 24%.

Effective Corporate Tax Rate

February 5, 2014

Interest Rates and the Dollar: Not much change

The yield on ten-year Treasury Notes is headed for a test of primary support at 2.50 percent after penetrating the rising trendline. Bearish divergence on 13-week twiggs Momentum strengthens the signal and reversal below zero would warn of a primary down-trend. Breach of 2.50 remains unlikely, but would offer a target of 2.00 percent*.

10-Year Treasury Yields

* Target calculation: 2.50 – ( 3.00 – 2.50 ) = 2.00

Despite falling yields, the Dollar Index is testing resistance at 81.50. Breakout would signal a primary advance to 83.00*. Recovery of 13-week Twiggs Momentum above zero would strengthen the signal. Reversal below 79.70 is less likely, but would warn of another test of support at 79.00.

Dollar Index

* Target calculation: 81.5 + ( 81.5 – 80 ) = 83

February 5, 2014

Wages and corporate profits

Employee Compensation as a percentage of Net Value Added (by US Corporate Business) has fallen sharply since the GFC, boosting corporate profits. Again we can observe an inverse relationship, with corporate profits spiking when compensation rates fall, and vice versa.

Employee Compensation compared to Net Value Added

A sharp fall in unemployment would send wage rates soaring, as employers bid for scarce labor. But that is not yet on the horizon and we are likely to experience soft wage rates until the economy recovers.

February 5, 2014

Interest rates and corporate profits

Low interest rates clearly boost corporate profits. The inverse relationship is evident from the strong profits recorded in the 1950s, when corporate bond rates were lower than at present, and also the big hole in profits in the 1980s, when interest rates spiked dramatically during Paul Volcker’s reign at the Fed.

Corporate Profits and AAA Bond Yields

The outlook for inflation is muted and the rise in interest rates likely to be gradual over several years, rather than a sharp spike, if the Fed has its way.

February 5, 2014

Commodity prices effect on corporate profits

Sharp spikes in the US Industrial Commodities PPI (producer price index) often precede a drop in Corporate Profits (expressed below as a ratio to GDP). And sharp falls in the PPI tend to precipitate a surge in profits.

US Corporate Profits/GDP compared to Industrial Commodities PPI - 5 Years

The 5-year chart above shows PPI growth close to zero since 2012. With wages, raw material costs and interest rates near long-term lows, there is little wonder that corporate profits have surged. The question is: how long will the three remain low? That depends on how fast the global economy recovers. And how long rising demand (from the recovery) is able to withstand rising input costs.

For the chartists: A Long-term View

A long-term view of Corporate Profits/GDP compared to Industrial Commodities PPI shows the relationship is not a perfect inverse, but profits clearly tend to run counter to the rate of PPI growth.

US Corporate Profits/GDP compared to Industrial Commodities PPI

February 5, 2014

A Mis-Leading Labor Market Indicator | Liberty Street Economics

From a paper by Samuel Kapon and Joseph Tracy at the Federal Reserve Bank of New York:

As the economy recovered and growth resumed, the unemployment rate has fallen to 6.7 percent. …..The employment-population (E/P) ratio frequently is used as an additional labor market measure. The E/P ratio is defined as the number of employed divided by the size of the working-age, noninstitutionalized population. An advantage of the E/P ratio over the unemployment rate is that it is not impacted by discouraged workers who stop looking for employment.

Employment-population (E/P) ratio

Since the end of the recession, the E/P ratio has largely remained constant—that is, virtually none of the decline in the E/P ratio from the Great Recession has been recovered to date. An implication is that the 7.6 million jobs added since the trough of employment in February 2010 has essentially just kept pace with growth in the working-age population. In its failure to recover, the E/P ratio would seem to depict a much weaker labor market than indicated by the unemployment rate. An important question is whether this is a correct or a misleading characterization of the degree of the labor market recovery…….

Hat tip to Barry Ritholz.