Friday, March 4, 2016

Stronger commodity prices trump stable jobs growth

The February jobs report was good (beating expectations plus upward revisions to prior months), but it only marked a continuation of the moderate 2 - 2½% growth trend that has been in place for the past 6-7 years. More impressive, however, is the emerging rally in the commodity markets and, by extension, the emerging market economies. It's looking more and more like the the threat posed by the China slowdown, plunging oil prices and soaring credit spreads is fading away. In its place global growth is likely stabilizing as commodity prices firm up. Against this backdrop, central banks, the majority of which are still deathly afraid of recession and deflation, seem out of step. I think that's why gold has done so well of late: markets are sensing that monetary policy may now be too easy and therefore inflation is more likely to rise than fall. Think of gold as an early-warning indicator of the direction of future inflation. Not always right, of course, but worth paying attention to.



Private sector jobs, the ones that count, have been growing at a fairly steady pace of 2 to 2½% for just over 5 years. This, added to weak productivity of less than 1% per year, is going to give us something in the neighborhood of 2.5% real growth this year. All the monetary "stimulus" in the world is not going to change the fact that this remains the weakest recovery ever. What needs to change is fiscal policy, and that won't change meaningfully until next year, provided we have a new president who understands that the private sector needs better incentives if it is to work and invest more. 


One thing does appear to be changing, however. Labor force growth has been tepid since 2008; the number of people either working or willing to work has been growing at an annualized rate of only 0.4% for the past seven years, until recently. Over the past six months, the labor force grew at an annualized rate of 2.3%. This equates to some stirrings of life in an otherwise sleepy economy. 


As a result, the labor force participation rate looks to have bottomed. It's too early to get excited, however, since new entrants to the labor force don't appear to be fighting for top-paying jobs. But it is an important change on the margin which bodes well for the future, and that's a good reason to remain optimistic.


What's changing today is the outlook for commodity prices. After falling from 2011 through the end of last year, they are turning up. Gold prices are up 20% in just over two months. Industrial scrap metal prices are up 10% since mid-January.


And one of the most important commodities (crude oil, see chart above) is up 37% in just under one month. What this means at the very least is that market forces—prices—have brought commodity supplies back into line with commodity demand. And it's not too hard to imagine that as supplies have been reduced, demand has picked up. Rising commodity prices probably signify that the fundamentals of the global economy are improving on the margin, and that is very good news.


One example: vehicle miles driven last year were up 5% from mid-2014, which is when oil prices started to plunge (see chart above).


After falling 80% from early 2011 through January of this year, Brazil's stock market is up a staggering 45% in dollar terms, thanks to the confluence of stronger commodity prices and promises of a badly-needed change in government. Mexico's stock market is up 15%, and Australia's stock market is up 14% over the same period.


In this last chart we see that gold has shrugged off its 4-year losing streak, jumping 20% since mid-December. TIPS prices have jumped too, as have 5-yr breakeven spreads, which are up from 1.0% a month ago to 1.45% today.

Deflation? That's yesterday's news. Today markets are beginning to worry that inflation might be on the rise while central banks still have their policy pedals to the metal.

14 comments:

elmer fudd said...

scott, i ask you to consider how you joined the panicked herd a couple of weeks ago and called for more QE. Incessant central bank intervention with sugar and steroids is not what markets need, ever. Market forces and cycles are the only genuine, non addicting mechanism to maintain HEALTHY markets. I have always appreciated your commentary, just stay away from being part of the crowd calling for central bank candy...

Scott Grannis said...

EF: Note that I don't equate QE with "sugar and steroids." My post a month ago on the subject was quite clear on that, I think. QE boils down to swapping bank reserves (T-bill equivalents) for notes and bonds. QE is not "printing money." Note also that I called for the Fed to at least make it clear that rate hikes were off the table, and they have done that. Since then time has passed and commodity markets have turned up. Money demand is still strong, but I would have to say that more QE is now no longer necessary.

William McKibbin said...

Beware of the "sucker rally" now underway...

Benjamin Cole said...

Well, I like your use of the word "Trump" in your headline. But please capitalize the word!

Great wrap-up.

So commodities prices fall for five years straight. Now they blip up, so deflation is dead. Perhaps, we will see. I do think we are close to bottom on commodities, due to supply and demand. I also think oil has a soft ceiling around $80, due to shale oil. Monetary policy? Hard to figure into oil prices.

10-year Treasuries offer 1.9%, so institutional investors say inflation dead. In my book, they are saying no inflation for the next 10 years, or they are saying the official measurements of inflation overstate the true rate of inflation. That, or there is a capital glut and they are happy to park their money somewhere.

Remember you are entitled to returns, but also losses on your capital, in true free markets. If you think you are entitled to a positive interest rates on savings, think again. Only if Mr. Market agrees.

The gold bugs are saying the People's Bank of China is a big buyer of gold. That makes sense in one regard. They need the yuan to depreciate. They can print yuan and buy gold, which they believe is an asset, and depreciate the yuan. What a nation does with a lot of yellow metal in a vault is beyond me. But gold prices may be in an artificial bubble.

Scott Grannis: You say QE is not "printing money." What happened to the US dollar during the Fed's QE years? What happened to the Japan yen during the BoJ's recent, more-aggressive QE program? To be sure, the picture is sometimes muddied, and it is always muddied in macroeconomics, so nobody is ever wrong. But it sure looks like QE played a role in currency exchange rates. That makes sense to me.



elmer fudd said...

scott, central banks around the world send messages out to "jawbone" market participants, often in lieu of actual structural changes. Now I an just a dummy mail carrier for the postal service. But if i toss a dog a biscuit as he runs up to the fence, he becomes accustomed to running up to the fence, expecting a biscuit. In the same way over the last several years, central banks have tossed the markets biscuits. Now the markets are addicted to the biscuits. They hang around waiting on another biscuit. They look bewildered and disappointed if they dont get the biscuit. That is what bugs me! The markets are addicted to the biscuits... indeed the market expects and DEMANDS the biscuits... JIMINY CRICKETS!!!

Benjamin Cole said...

Remembering When...

August 23, 2010

Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar

John P. Hussman, Ph.D.

A week ago, the Federal Reserve initiated a new program of "quantitative easing" (QE), with the Fed purchasing U.S. Treasury securities and paying for those securities by creating billions of dollars in new monetary base. Treasury bond prices surged on the action. With the U.S. economy predictably weakening, this second round of quantitative easing appears likely to continue. Unfortunately, the unintended side effect of this policy shift is likely to be an abrupt collapse in the foreign exchange value of the U.S. dollar.

--30--

A reminder to all of us: Taking your own views very, very seriously...well, let's just say we can all be wrong.

There was a moderate decline of the Us dollar coincident to QE. But the US dollar is now as high as it has been (trade weighted) since 2003, and far higher than before 2008. Probably, we need more QE.

In general, Scott Grannis' soothsaying has been right these many years. A little off on interest rates, but...there have been many with far worse crystal balls than Scott. See Hussman.

William McKibbin said...

The recently concluded Fed-sponsored bailout of the fracking industry will soon be joined by what is expected to be a bazooka blast of EE by the ECB -- said another way, the Fed and ECB central banks are once again leading Western economies back to prosperity (or not) -- I have to go with my gut and stay on the sidelines -- I need to see improved earnings first -- but, that's just my opinion...

William McKibbin said...

EE = QE

William McKibbin said...

PS: I just took some profits -- I remain very nervous...

Johnny Bee Dawg said...

Draghi cuts rates and quadruples monthly QE.
US stocks up 0.3% this am.
Gold miners up nearly 3% this am.

It's early. Only 15 minutes of trading. Just an observation.

mmanagedaccounts said...

The initial reaction to these monetary moves don't usually last. Investors and analysts have time to assess and often react differently. That's not to say stock prices won't move higher but it they do it won't be directly related to the ECB.

Stocks are in a very precarious position right now. The probability of a serious decline has increased. Unlike William, I am 100% long. BUT I am prepared to go 100% short or neutral if certain tenuous events take place.

I am optimistic with a highly sensitive cautious eye.

Scott Grannis provides excellent, timely analysis. Thank you, Scott.

Johnny Bee Dawg said...

OK. Now end of trading on day one of Draghi Bazooka. Stocks up 0% and Gold Miners up 4.5%.

Benjamin Cole said...

If central banks can monetize national debts without results...then why not?

Scott Grannis said...

The Fed cannot monetize the federal debt, because the Fed can't create money. It can swap bank reserves for federal debt however, but that is not "monetizing" the debt. Banks could effectively monetize a good portion of the debt if they chose to expand their lending by an order of magnitude.