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Money Monitor: 'Hot-Air-Asset-Balloon' Descending


In short, the May Payroll data is weak, and reveals intensifying consumer distress.


Editor's Note: This article was written on Friday, June 2nd.

Today's US Payroll Employment Report is even weaker than it appears, and it appears weak from a macro-eco perspective.

In terms of the weakness that is 'apparent,' we evidence the chart on display below, courtesy of top-shelf eco-web-site, revealing that the 12-Month Moving Average of monthly Non-Farm Payroll Employment has reversed to the downside and that the monthly gain was far below a declining 'average.'

Subtle, yet more telling, is the fact that the latest eco-expansion has failed to deliver the same strength in payroll employment growth, as has been seen during past periods of job creation recovery.

The chart strongly suggests the trend has changed, towards the soft side.

As for the innards, data scalpel in hand we carve away:

  • Civilian Population up + 229,000
  • Total Employed up + 288,000

Net job creation - 59,000 - was weaker than the headline gain of 75,000. Slice away the jobs from the last two months that have been 'revised' into oblivion, 37,000 and the net-net job growth shrinks to just 22,000.

Of specific note:

  • New Part-Time Employed, Economic Reasons up + 159,000, a huge single-month increase, equal to +4.0% nominally, and twice the level of the headline growth in all jobs.

Clearly, this indicates a less robust full-time employment dynamic than is 'suggested' by the headlines, if not implying an outright contraction. Worse:

  • New Part-Time Employed, Slack Work or Business Conditions up + 229,000, a monstrous single-month increase equal to a +9.3% nominal increase.

In short, the May Payroll data is weak, and reveals intensifying consumer distress, as evidenced within the heavy skew towards people that are taking part-time jobs out of necessity, which is actually 'boosting' the job creation. In the meantime, sight less seen, higher paying full-time jobs and employment that comes with 'benefits,' are barely growing at all.

Moreover, we rewind to our latest focus on the FOMC Minutes for the May-10 monetary policy meeting, and the specific mention of the Aggregate Hours Index, as a key indicator to be gleaned (by the Fed) from within the Payroll data. In other words, we light up the Macro-Scope to examine the data series that the Fed itself considers important:

  • Aggregate Hours Index, Total Private down (-) 0.2%, led by a sizable (-) 0.3 point dump in the index for Manufacturing, with specific weakness in the Chemical industry.

More telling, the decline in Aggregate Hours was broad based, with only 8 out of 41 'sector-industries' posting an increase during May, with 2 unchanged, while an overwhelming majority, 31 posted a decline.

Overall, since the beginning of the year, the Total Private Aggregate Hours Index, often used as a proxy for forward GDP expectations, has grown by only one-half of one percent.

This is simply sub-par growth, worse so relative to inflation.

Telling, is the overt weakness that is developing in the Retail sector, employment-wise. Note the detailed data from within today's Payroll report:

  • Employment, Retail Trade down (-) 27,100, the second straight huge decline. Note the breadth, by 'sub-sectors':
    • Electronics Stores
    • Appliance Stores
    • Furniture and Home Furnishing Stores
    • Building Material and Garden Supply Stores
    • Health and Personal Care Stores
    • Food and Beverage Stores Clothing Stores
    • Sporting Goods and Hobby Stores
    • Book and Music Stores
    • General Merchandise Stores
    • Department Stores
    • Miscellaneous Store Retailers
    • and even Gasoline Stations

Indeed, over the last two months, cumulatively, Employment in Retail Trade has plunged by a steep (-) 4.7% or at a (-) 28% annualized pace.

And it gets worse:

  • Aggregate Hours Index, Retail Trade down (-) 0.7 points, to 99.9, from 100.6 in April, a sizable single-month plunge.
  • Average Weekly Earnings, Retail Trade down (-) $7.71 per week, to $380.91 per week, a huge single-month plunge of (-) 2.0% nominally.

In fact, overall, Total Private Weekly Earnings fell by (-) 1.1% during May, or, at a deep (-) 13.2% annualized pace of deflation. And that is BEFORE we add 'inflation' to the calculation, which clearly implies that real Average Weekly Earnings plummeted during May, experiencing overt 'deflation.'

Overall, when we throw in the chart on display below, revealing the rise in Initial Claims for Unemployment Benefits and the upside (weakening job market) reversal in the 4-Week Moving Average of Claims, it becomes increasingly clear that the US Labor market has lost its (already sub-par) upside momentum.

Indeed, within the context of the chart below, we note again today's May Payroll data, and the following data nugget:

  • Average Duration of Unemployment … 17.1 weeks during May … up from 16.8 weeks posted in April.

Gee, no wonder Consumer Confidence is soft.

For sure, in line with a weakening Labor dynamic, disinflation in average weekly income and an oversized increase in the number of people working part-time for economic reasons, the headlines related to the softening Housing market might provide the final nail in the confidence-coffin.

The latest buzz comes as a result of yesterday's release of US House Price data by the Office of Federal Housing Enterprise Oversight, by far the most comprehensive nationwide home price data.

Observe the text of the report:

"The quarterly rate of home US home price appreciation is about one percentage point below the rate from the previous quarter and is the lowest rate since the first quarter of 2004."

And, from Patrick Lawler, OFHEO Chief Economist:

"Increasing sales inventories are apparently giving buyers greater bargaining power, while increasing interest rates are dampening demand."

Observe the disinflation in the annualized rate of US Home Price appreciation since the secular-macro-peak was set in the 3Q of 2004:

  • 3Q-04 … up + 18.2%
  • 4Q-04 … up + 10.0%
  • 1Q-05 … up + 11.0%
  • 2Q-05 … up + 14.7%
  • 3Q-05 … up + 12.9%
  • 4Q-05 … up + 12.3%
  • 1Q-06 … up + 8.1%

At best, the trend has shifted towards 'disinflation.' At worst, as we have already detailed in a recent Money Monitor focus on the US Housing market ("Boom Boom, and the Boom"), US Home Prices have actually deflated on a nominal basis in the last two months.

Evidence the chart on display below, courtesy of the Office of Federal Housing Enterprise Oversight, which at the very least suggests that the macro-secular uptrend in Home Price appreciation has been violated.

We shine the spotlight on the plot of the 'purple' line in the chart above, reflecting the annualized rate of appreciation, mirroring the data we dissected above, revealing the 'breakdown,' and 'topping pattern.'

More evidence to support thoughts of a housing market on descent is on the offer within yesterday's weekly report from the Association of American Railroads, and their 'Loadings' data:

  • Loadings of Primary Forest Products down (-) 17.8% yr-yr
  • Loadings of Lumber and Wood Products down (-) 9.3% yr-yr
  • Loadings of Stone, Clay, and Glass down (-) 3.6% yr-yr
  • Loadings of Non-metallic Minerals down (-) 12.4% yr-yr

Shifting gears, we observe the Railroad 'Loading' data from the petro-patch perspective, as demand for petroleum products has not softened at all, in the face of persistently high prices:

  • Loadings of Petroleum Products up + 7.4% yr-yr
  • Loadings of Coal up + 6.0% yr-yr.

Indeed, lost in the shuffle is a very simple yet significant fact. Unleaded Gasoline will settle the week at its fourth highest close ever, above $2.15 on a weekly-closing basis for only the fourth time ever, as evidenced in the chart on display below.

Is it any wonder why Consumer Expectations are plunging and threatening to breakdown to a new secular low, as seen in the chart below?

As for the remaining 'leg' of paper-asset wealth reflation (i.e. US stocks) we spotlight the chart below plotting the Bond Yield Adjusted 'price' of the S&P 500 Stock Index (S&P value divided by 30-Year Bond yield). This perspective reveals the appreciation to new paper wealth reflation highs and the 'negative-divergence' in terms of the momentum driving that appreciation.

Looking at it from a different angle, chart the straight S+P 500 plot (blue bars) over the Yield-Adjusted plot, as seen below, revealing that most all other previous periods of paper-equity-wealth reflation was 'driven' by stock price appreciation. This is currently not the case, suggesting more bearish divergence.

Confidence has eroded enough that I fielded an advice-seeking phone call from my Dad, who was wondering whether he should "take a big profit" in his core equity holdings and move into cash, on the basis of the push in short-term Bank-Brokerage CD Rates to near 5%.

In other words, Dad is thinking about dancing the Hoochie-Koo, buying bonds and selling the spoo.

With his brokerage firm offering a 6-Month Rate of 4.6%, he is considering selling his General Electric (GE) stock (bought at $22, now $34), his Boeing (BA) (purchased at $38, now $84), and his Caterpillar (CAT) (bought at $25, last at $72), and ditching the dough into a fixed-income product.

Hoochie-Koo Daddy-O, check out the chart below as we spotlight the ROC window extracted from the chart above, exposing what we might consider a 'proxy' for the rate of yield-adjusted paper equity market reflation. There are three clearly defined asset-reflation peaks, in the eighties prior to the 1987 crash, the late nineties prior to the 2000 tech-bubble burst and more recently.

On each occasion, the magnitude of wealth reflation has been less intense. The most recent reflation was only half as intense at the late nineties, which was only half as intense as the one in the mid-eighties.

Moreover, we focus on the 5-Year Moving Average of the Rate-of-Change, noting that it has failed to reclaim the +25% level, a rate which had provided a floor for paper-equity market reflation during the recession of the early nineties. Simply, the current 'appreciation-rate' of +16.5% is well below the 5-Year Average, and, the Average itself has now reversed to the downside, directionally.

Moreover, if we spotlight the periods of 'deflation' in this 'indicator,' we can quickly identify them as a time-frame in which the Fed was aggressively stimulatived with monetary policy. Indeed, the most recent period of 'deflation' was cause for the infamous comments from (now) Fed Chairman Ben 'Boom Boom' Bernanke as relates to dropping bundles of money out of a helicopter as a means to stimulate consumer demand.

More strategically specific is the observation that can be made in line with the direction of the long-term 5-Year Moving Average plotted in the chart below, in terms of being bullish on stocks versus bearish on bonds during periods when the MA is rising and vice versa!

Bottom Line: As is fully supported and validated by today's Payroll data dissection results and the technical evidence presented herein, we are dancing the Hoochie-Koo bullish the Bond versus bearish the Spoo.

Within that context we look for 'confirmation' from the 'Fed,' as per the market's expectation for future policy decisions, defined within the Eurodollar strip. Observing the chart on display below plotting the December 2007 Eurodollar Deposit Rate contract.

Simply, we are looking for confirmation that a peak may have been put in place already, a la the double-top pattern exhibited in concert with a second failed push above 5.5%. A break below an implied yield of 5.33% would strongly suggest a technical peak in forward rates has been seen.


That is the sound of a leak in the 'Hot-Air-Asset-Reflation-Balloon' which is now descending amid an intensifying 'disinflation' in wealth and income.

Rock and Roll Hoochie Koo!

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