Repulsive Jobs Report

Last Friday (October 2), jobs report for September came out way weaker than expected. Non-farm payrolls report shows 142K jobs were added, vs 200K expectations. Unemployment rate stood unchanged at seven-year low of 5.1%. Not only that, but wage gains stalled, labor force shrank, and July and August gains were revised lower.

July job gains were revised lower to 223K from 245K (-22K) and August job gains were revised lower to 136K from 173K (-37K), totaling downward revisions of 59K. Average jobs gains for third quarter is now at 167K, lower than the 2014 average of 260K. So far, job growth has averaged 198K a month this year, compared with an average gain of 260K a month the previous year.

Total Non-Farm Payrolls – Monthly Net Change
Total Non-Farm Payrolls – Monthly Net Change

Unemployment rate stayed at 5.1% only because people stopped looking for work. In other words, they lost confidence in the labor market. 350K people dropped out of the labor force which took labor force participation rate fell to 62.4%, the lowest in 38 years (1977), from 62.6% in the previous three months.

Labor Participation Rate (Source: @ReutersJamie)
Labor Participation Rate (Source: @ReutersJamie)

Wages also showed weakness. Average hourly earnings fell by a penny to $25.09 after rising 9 cents in September. The average workweek declined by 0.1 hour to 34.5 hours.

There are increased worries that global slowdown is weighing on the domestic economy. The repulsive jobs report knocked down the chances of a rate-hike for this year. Federal Funds Rate (FFR) shows less than 10% and less than 35% chance of rate hike in October and December, respectively. Regardless of weak jobs growth, I still expect 0.10% rate-hike this month. But, I don’t expect 25 basis points for the year. If 0.25% were nothing, the Fed would have raised it already. The Federal Open Market Committee (FOMC) will meet on Tuesday-Wednesday, October 27-28.

Weak jobs report seems to point out a weak third quarter GDP growth following a strong rebound in the 2nd quarter. According to final GDP report released on September 25, second quarter grew at an annual pace of 3.9%, vs previous estimate of 3.7%. Advance (1st estimate) GDP report for the third quarter will be released on Thursday, October 29.

In the first quarter, the economy grew only 0.6% because of strong U.S. dollar, low energy prices, West Coast port strike, and the bad weather. Well, winter is approaching. Who’s not to say that the weather will hamper the growth again? The dollar is still strong and the energy prices are still low.

Energy sector continues to struggle. The mining industry – which includes oil and natural-gas drillers — lost 10K jobs last month, totaling 102K losses of jobs since December 2014. Energy companies continue to layoff workers since low energy prices are hurting companies. Energy companies like Chesapeake Energy and ConocoPhillips continues to reduce its workforce and its operations, and cut capital expenditures to offset higher costs.

Earlier in September, the Job Openings and Labor Turnover Survey (JOLTS) report showed that there were 5.8 million job openings in July, a series (series began in December 2000) record and higher than 5.4 million in May, as employers cannot find qualified workers.

It’s likely to get worse in the longer-term because of higher minimum wages. If employers pay higher wages, more people, especially teenagers, are likely to drop out and work. If states and companies continue to raise minimum wages, jobs that require skills such as programming, etc, will not be filled in the United States, but in countries with higher amount of education. That’s why recent minimum wage increases will batter, not help, the U.S. economy in the longer-term.

Reactions to the jobs report:

US markets fell immediately after the report, but rebounded later. 10-year Treasury yield fell below 2%, to the lowest level since April. US Dollar plunged, but recuperated about half of the losses later.

Standard & Poor 500 ETF ("SPY") - Hourly
Standard & Poor 500 ETF (“SPY”) – Hourly


10-Year Treasury Index ("TNX") - Hourly
10-Year Treasury Index (“TNX”) – Hourly


US Dollar ("/DX") - Hourly
US Dollar (“/DX”) – Hourly

Another Quantitative Easing In The United States?

Last Thursday (September 17), the Federal Reserve left rates unchanged due to low inflation, recent turmoil in financial markets and in economies abroad, particularly China.

Markets were pricing less than 30% chance of rate-hike and most people in the financial markets were not expecting rate-hike. Well, not me. I was actually expecting 0.25%, 10 basis points rate increase, as I stated in my previous post.

“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” Federal Open Market Committee (FOMC) said in statement. They are referring to events that took place in August, that can be described in one word; uncertainty.

Before we go any further, let’s compare the last two Fed statements.

Statement Comparison in PDF

Federal Reserve "Dot Plot" - September 2015 Meeting
Federal Reserve “Dot Plot” – September 2015 Meeting


According to the Fed’s famous “Dot Plot” – that is where committee members think interest rates are going – one committee member, for the first time ever, thinks the U.S needs to move to negative interest rates until the end of 2016.






During the press conference, Janet Yellen – the chairwoman of the Fed – indicated that negative rates were not “seriously considered at all today” and that the policymaker in question was “concerned by the inflation outlook”. The Fed looks at a model “Phillips Curve” which states that inflation and unemployment have a stable and inverse relationship. It hasn’t been working lately.

We know, as of today, both employment and inflation is low, likely due to the fact that many people are not in labor force and they are not included in unemployment calculation and due to low energy prices.

She said something that I found very interesting, “That’s something we’ve seen in several European countries. It’s not something we talked about today. Look. If not– I don’t expect that we’re going to be in the path of providing additional accommodation but if the outlook were to change in a way that most of my colleagues and I do not expect and we found ourselves with a weak economy that needed additional stimulus, we would look at all of our available tools and that would be something that we would evaluate in that kind of context.” This shows that even the Fed is uncertain about the future and another quantitative easing is a possibility.

If you want to see the body language from Yellen as she said it, go watch the press conference video. It can be very interesting. Any body language experts here?

The Fed also raised growth forecast for the year and cut unemployment projection.

Federal Reserve Economic Projections - September 2015 Meeting
Federal Reserve Economic Projections – September 2015 Meeting

Yellen expressed that some countries other than China are also danger to the U.S, “…we saw a very substantial downward pressure on oil prices and commodity markets…significant impact on many emerging market economies that are important producers of commodities, as well as more advanced countries including Canada, which is an important trading partner of ours that has been negatively affected by declining commodity prices, declining energy prices….important emerging markets have been negatively affected by those developments. And we’ve seen significant outflows of capital from those countries, pressures on their exchange rates and concerns about their performance going forward. So, a lot of our focus has been on risks around China but not just China, emerging markets, more generally in how they may spill over to the United States.”

Back to “wait and see” mode again. Weak start in the year hammered the chances of rate-hike in June. Now, outsiders hammered the chances of rate-hike in September. Next stop?

If the current situation stays unchanged, I expect rate increase of 0.10% (again) in October (FOMC press conference will be called if the Fed decides to change rates). But, the current situation might get much worse. The bad news might come from China again.

Xi Jinping, China’s president and Communist Party chief, will arrive in the U.S next week to meet President Obama and business leaders. After the meeting when Mr. Xi is back in China, unpredictability arrives.

China would not want to create tension with the U.S before they meet face-to-face. Thus, unpredictability comes in two or three weeks. China might devalue their currency again, by 5% or more. They might even dump much more U.S Treasuries again.

It’s reported that China dumped U.S Treasurys of $83 billion and $94 billion in the month of July and August, respectively. Why would China sell U.S Treasurys? China is in dire need of cash. Capital outflows are increasing substantially and their stock market are declining substantially. China would want to cut its holdings of treasurys to support the yuan.

According to latest data from the U.S Treasury Department, China’s holdings of U.S Treasuries was $1.240 trillion in the end of July (is probably much less now), the smallest since February 2015. In end-June, China held $1.271 trillion. China remains the world’s largest holder of U.S debt. What does that mean for the U.S?

If U.S’s #1 lender stops supporting or stops buying U.S debt, the cost of everything that depends on Treasury rates could rise, putting pressure on the Federal Reserve and prevent the Fed from raising rates. Treasury yields (inverse relationship with prices) are the benchmark that sets the cost of borrowing.

China’s abandonment of U.S Treasury debt is a warning.

Imagine if China’s major trading partner, Japan, joins China in selling U.S Treasuries. Japan is the second-largest holder of U.S. Treasuries, with $1.197 trillion in July. The devaluation of Yuan will make Japanese exports less competitive. Japan’s economy is still suffering despite Abenomics. As I stated in my post “Global Markets Crash + Asian Crisis Part 2“, Abenomics has failed. Soon enough, Japan might also be in dire need of cash and they might start cutting their holdings of U.S Treasuries.

Recently, Standard & Poor’s slashed its ratings on Japanese debt from AA- to A+ because of weak economic growth, blaming Abenomics “…we believe that the government’s economic revival strategy–dubbed “Abenomics”–will not be able to reverse this deterioration in the next two to three years.” According to Standard & Poor, Japan’s Debt/GDP ratio currently stands at 242.4%, a dangerous level for developed country.

I believe Bank of Japan (BoJ) will increase its purchases of government debt to cover the danger of Japan’s Debt/GDP ratio and will sell portion of U.S Treasurys.

We can conclude everything will probably get much worse. The Fed will have no other choice, but to start another round of quantitative easing. In other words, debt monetization, a process of buying Treasury and corporate debt on the open market, increasing money supply. When increasing money supply, interest rates should fall.

The Fed is being held hostage by outsiders, such as China and Brazil. It probably won’t end well for the U.S, promoting another round of Quantitative Easing.

Markets’ reactions to the Fed report:

S&P 500 (“SPX”) – Hourly Chart
S&P 500 (“SPX”) – Hourly Chart
US Dollar (“/DX”) – Hourly Chart
US Dollar (“/DX”) – Hourly Chart
Gold ("/GC") - Hourly Chart
Gold (“/GC”) – Hourly Chart
EUR/USD - Hourly Chart
EUR/USD – Hourly Chart


Jobs Report Surprises To The Upside – IMF Wrong? (You Decide)

Last Friday (May 5, 2015), Bureau of Labor Statistics released non-farm payrolls (jobs report) for May and it was way beyond expectations. 280,000 jobs were added in May (largest since December) vs. expectations around 225,000. It’s a strong sign that the US economy is recovering from the contraction that occurred in first quarter of 2015 (January-March).

Total Non-Farm Payrolls - Monthly Net Change (June 7, 2015)
Total Non-Farm Payrolls – Monthly Net Change – 2014-Present


The unemployment rate ticked higher by 0.1% to 5.5% from 5.4%, as more people are entering labor force (because their confidence in the jobs market are increasing). In May, 397,000 people entered labor force, mostly recent college graduates.

Average hourly earnings increased 0.3% on month-to-month basis from 0.1% in April. Over the year, it increased 2.3%, largest rise since August 2013. It’s indication that future consumer spending will increase. When consumers spend more money, companies generate more money and eventually hire more people. Basically, it’s a short-term demand in the economy.

March and April numbers were revised. March was revised from 85,000 to 119,000 (+34,000) and April revised from 223,000 to 221,000 (-2,000).

There were big increases in employment in professional and business services (+63,000), leisure and hospitality (+57,000), and healthcare (+47,000). Meanwhile, employment in mining fell for the fifth month in a row (-17,000) as low energy prices continues to hurt energy companies.

This is the most important US economic report because it shows how first quarter, which contracted 0.7%, are due to transitory factors and guides the Federal Reserve on the path of raising the interest rates. As a result of strong jobs report, June rate-hike door is not closed. Federal Open Market Committee (FOMC) will be meeting on Tuesday, June 16, and Wednesday, June 17. At 2 PM EST, economic projections, statement and federal funds rate will be released followed by 2:30 PM EST press conference. The markets will be extremely violent during the time because it’s highly watched by investors and traders.

After the release of the report, US Dollar (USD) rose. USD against JPY (Yen) soared to a new 13-year high. US markets were mixed as investors/traders differently interpret what the jobs reports means for the future.


S&P 500 Index (SPX) - Hourly
S&P 500 Index (SPX) – Hourly
USD/JPY - Hourly
USD/JPY – Hourly


The day before the jobs report, the International Monetary Fund (IMF) slashed its forecasts for US economic growth and called for the Fed to hold off its first rate increase until the first half of 2016. The IMF said a series of negative shocks, including unfavorable weather, a sharp contraction in oil sector investment, the West Coast port strike, and the effects of the stronger dollar, hindered the first quarter of 2015. Thus, it promoted a downgrade to its growth expectations to 2.5% for this year, from 3.1% in April.

Economic Forecasts Souce:
Economic Forecasts

IMF says that FOMC should remain data dependent and act after signs of a pickup in wages and inflation. Well, the jobs report for May was positive, including wages. So is IMF wrong? Did they talk too early? You decide.

In IMF’s view, “raising rates too soon could trigger a greater-than-expected tightening of financial conditions or a bout of financial instability, causing the economy to stall. This would likely force the Fed to reverse direction, moving rates back down toward zero with potential costs to credibility.” —- “raising rates too late could cause an acceleration of inflation above the Fed’s 2 percent medium-term objective with monetary policy left having to play catch-up. This could require a more rapid path upward for policy rates with unforeseen consequences, including for financial stability.”

So when is the right time to raise rates? I believe it’s in July or September (no meeting in August) only if we continue to see pickup in wages, employment, and Consumer Price Index (CPI). Even through the chance of rate hike in June is very low, I would not be surprised if Fed decides to hike rates. Even if they do, it will be surprising to most people at Wall Street and markets will definitely be violent – I would consider it “mini-SNB” (SNB – Swiss National Bank), because of SNB’s action in January (unscheduled release – removing the cap on euro-franc).

Feel free to contact me by going to “Contact Me” above or leave your comments below. Twitter: @Khojinur30. Thank you.