Job Creation in 2014

A fully paid up subscriber sent this abstract of a research paper from the NBER which posits that the job gains in 2014 were a result of the decision by Congress in late 2013 to not reauthorize extensions of emergency unemployment benefits.

Access to the full paper is available for $5.

Via the NBER:

Marcus Hagedorn, Iourii Manovskii, Kurt Mitman

NBER Working Paper No. 20884
Issued in January 2015
NBER Program(s):   EFG

We measure the effect of unemployment benefit duration on employment. We exploit the variation induced by the decision of Congress in December 2013 not to reauthorize the unprecedented benefit extensions introduced during the Great Recession. Federal benefit extensions that ranged from 0 to 47 weeks across U.S. states at the beginning of December 2013 were abruptly cut to zero. To achieve identification we use the fact that this policy change was exogenous to cross-sectional differences across U.S. states and we exploit a policy discontinuity at state borders. We find that a 1% drop in benefit duration leads to a statistically significant increase of employment by 0.0161 log points. In levels, 1.8 million additional jobs were created in 2014 due to the benefit cut. Almost 1 million of these jobs were filled by workers from out of the labor force who would not have participated in the labor market had benefit extensions been reauthorized.

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Five Year Auction

Via CRT Capital:

We are apprehensive about this morning’s 5-year auction as the sector has recently pushed toward the yield lows and is only offering a modest outright concession. Moreover, with the WI suggesting the lowest yield for a new 5-year since May ’13 we’re cognizant that could prove a disincentive to bid aggressively. The FOMC meeting triggered a solid bid on Wednesday and we’re expecting that a more significant accommodation will be required to takedown the new issue.  Recent history illustrates that 5s tend to tail, doing so at seven of the last nine auctions and while the average stop-through is larger (1.3 bp) than the average tail (0.8 bp), the frequency of tails overwhelms.  On the other hand, foreign demand has been strong for Treasuries as an asset class vs. lower-yielding European sovereigns and the liquidity provided by the auction could prove enticing – note that foreigners tend to buy roughly 17% of the 5-year auction. Issuing 5s and 7s on the same day muddies the data a bit, but volumes are strong for an auction day at 111% of the norm.

* 5s have recently seen weak receptions with seven of the last nine auctions tailing for an average of 0.8 bp vs. two stopping-throughs averaging 1.3 bp.

* Foreign buying has ticked higher recently, taking 17% at the last four auctions vs. 16% of the prior.  Foreigners bought $14.6 bn of the maturing issue – middle-of-the-range for rollover potential.

* Non-dealer bidding has been steady at 5-year auctions recently, taking 64.6% at the last four auctions vs. 65.1% at the prior four.  Investment Fund buying has increased, taking 43% of the last four auctions vs. 39% at the prior four.  On an outright basis, fund buying has taken $15.2 bn vs. $13.8 bn prior.

* Technicals are mixed with momentum in the middle of the range with both fast and slow stochastics at 49.  We’re looking to the recent range as the most relevant trading parameters and see initial resistance at the FOMC-day low yield-print of 1.223% and then the Jan low yield-close of 1.157% with the range bottom at 1.150% immediately beyond there.  For support we have a modest volume bulge near 1.31% before this week’s range top at 1.362% and also note the downward-sloping trendline at 1.380% before the 21-day moving-average at 1.40%.

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What to Watch for Today

Via Bloomberg:

WHAT TO WATCH:
* (All times New York)
Economic Data
* 8:30am: Initial Jobless Claims, Jan. 24, est. 300k (prior
307k)
* Continuing Claims, Jan. 17, est. 2.405m (prior 2.443m)
* Continuing Claims, Jan. 17, est. 2.405m (prior 2.443m)</li></ul>
* 9:45am: Bloomberg Consumer Comfort, Jan. 25 (prior 44.7)
* 10:00am: Pending Home Sales m/m, Dec., est. 0.5% (prior
0.8%)
* Pending Home Sales y/y, Dec., est. 10.8% (prior 1.7%)
* Pending Home Sales y/y, Dec., est. 10.8% (prior 1.7%)</li></ul>
* 10:00am: ISM Seasonal Adjustments
Supply
* 11:00: U.S. to announce plans for auction of 3M/6M/1Y bills
* 11:30am: U.S. to sell $35b 5Y notes
* 1:00pm: U.S. to sell $29b 7Y notes

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Is the Global Economy Hooked on the US Dollar

This research piece was sent to me by Martin Enlund who is the author and Chief FX strategist at Nordea Markets. It is an interesting and worthwhile read. I apologize to Mr Enlund for leaving out some charts which do not translate well to my low rent blog.

Via a fully paid up subscriber (Martin Enlund):

Well I don’t know why I came here tonight,

I got the feelin’ that somethin’ ain’t right,

I’m so scared in case I fall off my chair,

And I’m wonderin’ how I’ll get down the stairs

– Stealers Wheels – Stuck in the Middle With You

Caveat: this mail has nothing to do with the Fed’s most recent decision, but provide food for thought on USD liquidity and markets potential dependency thereof. For Nordea’s take on yesterday’s FOMC decision, read here.

The liquidity elephant in the room  

Why is it that, every time the Fed stops its money-printing programs, or initiates the end of such programs (the tapering process), global nominal activity eases, inflation expectations drop, the USD appreciates, volatility rises and long-term bond yields plummets? (chart 1)

It could be that either i) the Fed’s QE programs have been more important than thought, as they have provided abundant USD liquidity to the rest of the world (which needs a lot of it, see our pieces on Quantitative Tightening), or ii) the programs haven’t very important at all: the 2009-2015 relationship between QE and both real and financial developments is mostly noise.

The first argument infers that the world is much more dependent on USD liquidity than commonly thought. Why could this be? Being the only true safe-haven currency, and the currency most often used in pricing and transactions, countries will want to have FX reserves of which the most must be in USD (having e.g. EUR, CHF or SEK would help little in a  truly adverse scenario). Maybe world trade cannot grow without a rising supply of USD / without FX reserves growing? It could be added that six years of zero-interest rate policies and QE program may have made the rest of the world more dependent on USD than in earlier times (due to the USD now being used as a funding currency to a greater extent, which suggests higher structural demand for USD in coming years – for instance in FX reserves). In short, if the market needs to re-price the availability of USD liquidity, it would be positive for the price of the USD, but also disinflationary for the world via its effects on world trade and global activity. (A consensus economist would not agree with any portion of this).

According to the second line of thinking, the “QE on/QE off” phenomenon is just a bogus correlation: the positive effects from a drop in interest rates (caused only marginally by QE expectations) have caused a boost to global activity just as the Fed had formally initiated a QE program. This bounce in activity eventually led to higher bond yields, of which the delayed negative effects just happened to kick in as the Fed ceased its new money-printing program. Looking ahead, a leading indicator based on changes in interest rates does indeed global activity should pick up and indeed accelerate soon after Easter this year (chart 2). If this is what will play out this year, all will be well – and the ECB will congratulate themselves on work well done! (even though they should not).

If the world is hooked on USD liquidity, how should we think?

The first theme is the more interesting of the two (goldilocks scenarios seldom are, at least not for the FI & FX crowd).  If the rest of the world is more dependent on USD liquidity than commonly believed, then the recent disinflationary process will continue until either i) the Fed launches a new QE program providing liquidity, or ii) US domestic demand grows quick enough so as to widen the current account deficit materially (through which the rest of the world will obtain USD liquidity), or that iii) the USD appreciates enough so that it via price effects provides a widening of the current account deficit. It does seem as if the pattern since the eighties suggest that at least some crises (LatAm, Asia) were “solved” with a widening of the US current account deficit (chart 3)

Last year’s dramatic oil price developments fit quite nicely with this non-consensus conjecture. The US non-petroleum trade deficit has been widening since 2010, but since the US has been growing more self-sufficient in terms of energy, the trade balance has actually narrowed – as have the current account deficit. The rest of the world would have been able to obtain more dollar liquidity since 2010 if not for the structural changes in the energy sector (chart 4).  The drop in oil prices should however help the US trade deficit to widen as the US shale industry lowers its oil production (when?), which would then prompt wider trade and current account deficits.

EM FX reserves held in custody at the Fed have been declining since September, in a manner reminiscent of what happened after then-Fed chairman Bernanke triggered the global taper tantrum in 2013 (chart 5).

In this light, maybe Singapore’s recent move to ease monetary policy, or China’s decision on liquidity and its changes to CNY fixings are just natural consequences of the rest of the world trying to compete for now less ample USD liquidity.

If true, we should expect further broad USD appreciation, and for the US to import more of the world’s disinflation as a result. Keep an eye on EM FX reserves, if they start growing briskly it should be a sign of a positive turning point as the consumer of last resort – the American one – will finally be back to bail us all out.

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FX

Via Marc Chandler at Brown Brothers Harriman:

Dollar Firmer after FOMC

– The FOMC meeting was a non-event
– German state CPI data started to come out
– RBNZ kept rates steady at 3.5%, as expected, but introduced possibility of rates going either up or down
– South Africa Reserve Bank meets and is expected to keep rates steady at 5.5%
– Banco de Mexico meets and is expected to keep rates steady at 3.0%

Price action:  The dollar is mostly firmer against the majors in the wake of the FOMC meeting.  The antipodeans are underperforming.  Kiwi is sharply lower after the RBNZ moved to a more neutral stance regarding rates, trading below .7300 for the first time since March 2011.  It has dragged Aussie below .7800 ahead of next week’s RBA meeting. The Scandies are outperforming. The euro is trading near $1.13, while cable is trading near $1.5150.  Dollar/yen initially rose after weaker than expected Japan retail sales, but has since fallen back below 118.  EM currencies are broadly weaker, with RUB, TRY, and KRW underperforming.  MSCI Asia Pacific was down 1.4%, with China underperforming, weighed down by talk of further curbs to margin trading accounts.  Euro Stoxx 600 is down 0.2% near midday, while S&P futures are pointing to a lower open.

• As we expected, the FOMC meeting was a non-event.  Policy was kept steady, and the Fed retained “patient” with regards to starting the tightening cycle.  Note that the two dissents from December (Fisher and Kocherlakota) are not on the FOMC in 2015.  Thus, this vote was unanimous.  Looking at the side-by-side comparisons with the December statement, economic activity was upgraded from “moderate” to “solid” while jobs growth was upgraded from “solid” to “strong.”  It added a new phrase about “international developments” that suggests a possible delay to rate hikes.  But short of full-blown crisis in the rest of the world, we don’t think the Fed will alter their timeline very much.  If we had to characterize this statement, we’d say it leans more towards being hawkish than being dovish.  
• It’s worth noting that the dollar ended Wednesday at or near the highs against most of the majors and EM, the yen being the main exception.  With the dollar maintaining or extending those gains, we think our hawkish take is the right one.  That is, the Fed has upgraded growth and jobs outlooks, and remains on track to hike near mid-year.  US equities ended Wednesday near the lows and futures are pointing to a lower open today, also suggestive of a more hawkish Fed take.
• There was a lot out on the data front, and here is a summary.  German state CPI data was on the soft side, pointing to a growing risk of deflation at a national level.  Nationwide CPI is due out later today, expected at -0.1% y/y (-0.2% y/y EU harmonized).  Germany also reported steady December unemployment rate at 6.5%.  Eurozone M3 rose 3.6% y/y in December, slightly higher than expected and enough to bring the 3-month average to 3.1%, up from 2.7%. Of note, this was the first increase in bank lending since July 2012.  Spanish retail sales for December rose sharply to 6.5% y/y from 1.9% in November, a far larger increase than expected.
• Before that, Japan released a set of very weak retail sales figures.  The December readings came in at 0.2% y/y, down from 0.5% in the previous month and well below the 0.9% expected. The rate was -0.3% on a m/m basis.  Dollar/yen initially rose on the weak data, but has since drifted lower.  During the North American session, weekly jobless claims and December pending home sales will be reported.  
• The RBNZ as widely anticipated adopted a more neutral tone.  Its more aggressively hawkish comments about the currency led to a sharp drop in the New Zealand dollar.  It fell below $0.7300 for the first time since March 2011.  It traded just below $0.7900 on January 15, just to put the move in context.  The Australian dollar was dragged lower, even though the terms of trade figures were not as poor as feared.  A well-known local RBA watcher stuck with expectations for the RBA to ease next week, even though the slightly firmer than expected CPI figure Wednesday had appeared reduce the chances.
• South Africa Reserve Bank meets and is expected to keep rates steady at 5.5%.  After the lower than expected CPI print for December, Governor Kganyago said the bank was assessing the impact of lower oil prices before making a call on whether to cut interest rates.  This meeting seems too soon, but there is a chance of a dovish surprise.  If not, we think a cut at the March 26 meeting is almost certain if current disinflation trends continue.  Before the policy decision, South Africa reports December PPI, expected to rise 6.0% y/y vs. 6.5% in November.  For USD/ZAR, support seen near 11.40 and then 11.20, resistance seen near 11.60 and then 11.80.
• Banco de Mexico meets and is expected to keep rates steady at 3.0%.  Inflation is falling sharply, and suggests that Carstens will likely reevaluate his outlook for higher Mexico rates in 2015.  Indeed, we look for a fairly dovish statement again, same as the last one.  After being consistently dovish this past year, Carstens warning of higher rates really caught markets off guard.  However, 1-year swap rates have moved back to the lows after a brief Carstens-related spike higher in late December/early January.  We still think the risk is tilted towards lower Banxico rates, not higher.  For USD/MXN, support seen near 14.50, resistance seen near 15.00.
• The Philippines Q4 GDP surprised on the upside, rising by 6.9% y/y and translating into a 6.1% growth for the year.  This was the best three year expansion since the mid-1950s.  It appears as if the industry-friendly policies of President Aquino are bearing fruit, but certainly lower oil prices are helping as well.  For USD/PHP, support seen near 44.00 and then 43.50, resistance seen near 44.50 and then 45.00.

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Record High Volume in Secondary Corporate Bond Trading

Bloomberg reports that secondary market trading of corporate bonds yesterday was the highest since January 2005. I am not certain but it is my guess that the Trace system was inaugurated in 2005 and so that the volume yesterday is the highest since record keeping began.

Via Bloomberg:

IG CREDIT: Record High Trading Volume Seen; SIR to Price
2015-01-29 10:58:54.237 GMT

By Robert Elson
(Bloomberg) — Trace count for secondary trading closed at
$20.8b, highest since at least Jan. 2005, vs $8.8b Tuesday,
$18.5b last Wednesday.
* Previous days over $20b were in Sept. 2013, May 2009; 4 days
between $19b-$20b have occurred
* 10-DMA $15.8b
* 144a trading added $2.5b of IG volume vs $1.3b Tuesday,
$3.3b the previous Wednesday
* Top 3 most active issues were 2016 maturities from KO, ORCL,
MRK
* Most active issues longer than 3 years
* PETBRA 6.25% 2024 with client buying 3.3x selling,
together accounting for 73% of volume
* T 4.35% 2045 was next with client flows at 99%
* USB 2.125% 2019 was 3rd, client selling 10x buying
* USB 2.125% 2019 was 3rd, client selling 10x buying</li></ul>
* BAYNGR 3.375% 2024 was most active 144a issue; client flows
took 100% of the volume
* BofAML IG Master Index at +151 vs +150; 2014 range was +151,
seen Dec 16; +106, the low and tightest spread since July
2007 was seen June 24
* Standard & Poor’s Global Fixed Income Research IG Index
unchanged at +181, for 5th session in a row; +182, the wide
for 2014-2015, was seen Jan. 16; +140, the 2014 low and new
post-crisis low was seen July 30, 2014
* Markit CDX.IG.22 5Y Index at 68.3 vs 66.9; 76.1, the wide
for 2014 was seen Dec 16; 55 was seen July 3, the low for
2014 and the lowest level since Oct 2007
* CP priced $700m 10Y; weekly volume $12.25b, and 2015 at
$126.05b.
* SIR deal to price today added to pipeline of expected
domestic, SSA issuers and M&A-related deals for 2015

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Shell Oil to Slash Capital Spending

Shell Oil reported earnings this morning and as one would expect with the significant decline in oil prices it was a dismal performance. I think the more important point,however, is the company’s decision to slash capital spending. The company said it will slash that spending by $15 billion over the next three years.

I have been a believer in the thesis that consumers will spend their energy windfall dollars in other sectors in which they have discretion. With this report we can observe the importance of that behavior as some other sector of the global economy will need to compensate for the loss of capital spending in the energy patch.

Via the FT:

Last updated: January 29, 2015 9:05 am
Shell earnings slide on plunging crude price

Christopher Adams, Energy Editor

Royal Dutch Shell is to cut more than $15bn in spending in an effort to plug dwindling revenues from oil sales, as it reported a sharp slide in quarterly earnings due to the plunge in crude prices.

The Anglo-Dutch energy group, the first of the world’s big oil companies to report full-year results for 2014, on Thursday signalled that a period of adjustment lay ahead for much of the industry following a near 60 per cent slide in crude prices since last summer to less than $50 a barrel.

Excluding exceptionals such as tax adjustments from the sale of certain assets, profits for the fourth quarter of last year were $3.26bn, lower than analysts’ estimates of about $4.1bn and down from $5.85bn in the third quarter. But earnings were up 12 per cent from a year ago.

Shares in the group fell more than 4 per cent soon after the open in London, trading at £20.62, on disappointment that earnings came in below expectations.

Ben van Beurden, chief executive, said the group would respond to the fall in oil prices by “stepping up our drive for stronger capital efficiency”.

This would include lower capital spending this year than in 2014, with the company curtailing more than $15bn of potential spending over the next three years. Early stage projects would be deferred. Shell made clear that deeper cuts could be made if needed, saying it had options to further reduce spending.

“We are taking a prudent approach here and we must be careful not to overreact to the recent fall in oil prices,” Mr van Beurden said.

Shell’s fourth-quarter earnings were $4.16bn on a current cost supplies basis, down from $5.27bn in the previous three months.

But they were 93 per cent higher than a year ago, when the group’s performance was so poor it issued a profit warning. Full-year earnings were $19.04bn, a rise of 14 per cent from 2013.

The oil price collapse — triggered by weaker than expected demand in China and Europe, Opec’s decision in November not to cut output and booming US shale production — has spurred the world’s biggest energy groups to slash spending in an effort to shore up cash flow and protect dividends.

French oil major Total has already signalled it will cut capital spending by 10 per cent this year and BP, the UK-based energy group, has taken a restructuring charge of $1bn to pay for group-wide redundancies.
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Analysts focused on the disappointing fourth-quarter earnings figure for Shell, saying the key miss was in the upstream division, due to higher tax and other costs. One said the planned spending cuts were lower than expected.

Shell’s oil and gas production was 3.2m barrels of oil equivalent a day, slightly lower than the fourth quarter of 2013. Excluding the impact of sales and other factors such as the expiry of its Abu Dhabi licence, sales were 7 per cent higher than a year ago.

Upstream earnings included a net gain of $915m, largely on divestments, while there was a $369m charge relating to an Australian deferred tax asset.

The company kept its fourth-quarter dividend stable at $0.47 a share and said it would hold the payout steady for the first quarter of 2015.

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Not Exactly Detente

When Nixon and Kissinger engaged in detente and rapprochement with China forty something years ago it was an amicable process. The current dictator of Cuba is not jumping at the olive leaf our Chamberlain like President has tossed in his direction as he made some hard line statements today about the process. He wants Guantanamo back and he wants damages for the harm the 50 year embargo inflicted on his Communist paradise. It is a paradoxical paradise as in a real paradise real people would not sit themselves down in an inner tube and attempt to float 90 miles across the sea to freedom.

I do not understand why we are chasing these people.

Via the WSJ:

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Smorgasbord of Reaction to FOMC

This arrived earlier today from a fully paid up subscriber and is a collection of economist views on the FOMC statement earlier today.

Via a fully paid up subscriber:

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Bank America Opines on Lift Off and Credit Spreads

Bank of America research piece today opines that the market is wrong and the FOMC is correct on rates. The author quotes a speech by New York Fed President Dudley who suggested that the FOMC may have to tighten more to drive long rates higher. He did not comment on the collateral damage which might occur amidst that friendly fire.

Via Bank America Merrill Lynch research:

Prepare for liftoff

Today’s market reaction to the FOMC was stronger dollar, bull flattening in rates and lower risky asset prices. This suggest the markets now price in a higher likelihood that the Fed starts hiking interest rates too soon. Our view is that consensus indeed expects the Fed to start hiking later and slower than what appears the view of the FOMC.

Prepare for liftoff. As our economists and strategists discuss below the market reaction of a stronger dollar, bull flattening in rates and lower risky asset prices in response to the more hawkish FOMC statement suggest the markets now price in a higher likelihood that the Fed starts hiking interest rates too soon. From our conversations with credit investors over the past several months our view is that consensus indeed expects the Fed to start hiking later and slower than what appears to be the view of the FOMC. Clearly if the Fed maintains its outlook for mid-year liftoff that should lead to repricing of our markets, which is what we argued in our commentary after the previous (December 2014) FOMC meeting (see: Situation Room: Two is a couple, four is the baseline 17 December 2014). With that view, today’s market reaction makes sense – including the 1.37bps widening of IG spreads and 0.33pt decline in HY prices (both CDX). However we find it more likely that instead, US economic data will be strong enough to justify rate hikes by the middle of this year – perhaps in June, which appears the most commonly held view at the FOMC, or by September, which is the view of our economists. Unfortunately with that view the continued decline in rates – including today’s moves – only means that the Fed has that much more work to do when they begin hiking rates, and that the interest rate shock will likely be much worse. Remember that in each cycle the economy at one point improves so much that the Fed must start hiking rates in order to tighten financial market conditions enough to avoid an overheating economy and the creation of “bubbles”. As New York Fed President Dudley suggested in his December 1 speech, that means higher long term interest rates (in addition to higher short term rates of course). To achieve that goal we are concerned the Fed could be forced to do “reverse QE” – i.e. bring down the size of their balance sheet a lot sooner and more aggressively than priced into the markets. – Hans Mikkelsen (Page 3) FOMC: steady as she goes. June liftoff remains an option. The Fed made relatively few changes to its January policy statement, but those it did make clearly indicate that a June start to the rate hiking cycle remains on the table. The FOMC gave little ground on the low inflation risks, largely looking past them while upgrading their assessment of activity and job growth. The inclusion of “international” developments as a factor in their policy stance confused market participants. We see it mostly as a way to forestall criticism that the Fed is not sensitive to global issues, and perhaps as a compromise among members. Our base case remains a September liftoff, and we expect to get more insight into the debates on the FOMC with the release of the minutes in three weeks’ time. – Michael S. Hanson, Priya Misra, Ian Gordon (Page 5)

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