Thursday, November 5, 2015
Just eyeballing the chart above tells me that the BLS's estimate of private sector employment tends to be more volatile than ADP's, and both tend to track each other over time. That further suggests that the BLS jobs number—to be released early tomorrow—has a decent chance of beating expectations (currently about 170K), since the ADP numbers have have been averaging just under 190K for the past 7 months. This ostensibly "good" news would probably be disappointing for the market (at least initially), since it would raise the probability of a Fed rate hike next month. The market wouldn't be caught totally by surprise, however, since the implied probability of a December rate hike has risen from 30% two weeks ago to 56% today. I think the market is beginning to realize that the economy is in decent enough shape (growth unlikely to change much from the 2-2.5% trend of recent years) to withstand a very modest increase in short-term interest rates.
In my view, the Fed can hike rates any time they like and it's not going to worry me. Rates naturally move higher as optimism increases and the economy matures. Higher rates would be a confirmation of growth, not a threat to growth.
As the chart above shows, large companies have not been very dynamic over the past two business cycles. Payrolls at large companies (500 or more employees) today are still about 10% below where they were in early 2001. Meanwhile, small and medium-sized companies have posted much more impressive growth.
Manufacturing hasn't been very impressive in the past year or so (weakness in the oil patch), but the service sector (which is far bigger) has been pretty impressive. The ISM service sector business activity index is at the high end of its range. More evidence of the hot-cold economy we're in: some do very well, others not so much. But on average things are growing at a fairly steady pace.
The employment sub-index of the ISM service release yesterday bounced back to a very strong level. This suggests that businesses feel pretty good about the future, because they plan to increase their hiring.
The service sector of both the U.S. and Eurozone economies are doing reasonably well. Between them, they account for a significant share of global GDP. Reason to remain optimistic or at least refrain from being pessimistic.
The prices of 5-yr TIPS (here proxied by the inverse of their real yield) and gold continue on a downward trend. The market is gradually losing its pessimism (which, at its height drove gold to $1900/oz and real yields to -2%) and coming to accept that the economy is likely to continue to grow, albeit slowly, and that the Fed is likely to acknowledge the improvement in expectations by raising rates a bit.
This last chart illustrates how real yields tend to track the economy's real growth rate. Both have been rising a bit in recent years. Nothing to get excited about, but somewhat reassuring nevertheless. Wake me when real yields on 5-yr TIPS break through 2%, and I'll wager the economy will be doing a whole lot better. And the Fed will be paying IOER of 3-4%.
Posted by Scott Grannis at 4:00 PM