The 164k new jobs number was still fine and I suspect reflects an historically low labor pool more than it does a lack of job openings. In fact – while some pause among employers related to trade risks (as cited in the ISMs) could be a factor – the rate of weekly jobless claims (45-year low and record number of weeks below 300k) and the actual job openings number in the JOLTS report (which suggests that the LFP decline is more about new retirees than it is wannabe workers giving up) firmly supports the low labor pool thesis. I read this morning in the Wall Street Journal where small towns in middle America are offering all manner of monetary incentives to attract workers. That’s right, municipalities offering incentives to attract employees to their communities, as opposed to employers.
The weaker than expected wage growth number emboldened gold and bond traders on Friday, not to mention stock bulls in general, as it hinted that the Fed should be good with just two more (three total) rate hikes this year. Thing is, the BLS wage number is very volatile, while the Employment Cost Index – which shows wages, etc., screaming higher – is a much more reliable metric. Three more hikes (4 total) this year is very much in the cards.
The PWA index just score its 2nd consecutive week in the 60s, with, per the inserts below (click any to enlarge), improvement worth noting in the financial stress subindex, while the staples/discretionary equities ratio continues to plunge (defensive staples stocks are grossly under-performing cyclical discretionary stocks) and consumer confidence remains at or near (depending on the survey) expansion highs.
It’s clear to us that the economy is doing quite well -- accelerating into the phase that demands somewhat higher interest rates -- which has us remaining patient while short-timers fret (i.e., huge volatility) over rising rates and the threat of a trade war (the latter being worth fretting over). We therefore remain long cyclical stocks, neutral on staples, healthcare and telecom (although 5G and consolidation has us watching telecom closely) and out of bonds, utilities, reits and precious metals.
One caveat: Should the Administration’s tariff rhetoric turn real, and if the virtually certain resulting market plunge doesn’t have them quickly abandoning their protectionist course, we’ll expect the general setup to deteriorate to the point where it’ll demand a defensive bias within client portfolios sooner than it otherwise would have…