E-piphany

The day before Employment is often a quiet day, and today it also happened to be the Yankees’ home opener.[1] Had it not been quarter-end then the markets might as well have been shut. At 3:58ET, only 650mm shares had traded on the NYSE (the final tally, however, was 1.01bln due to rebalancing flows).

Scheduled economic releases were not earth-shattering: Initial Claims was a smidge weaker than expected at 388k (expected: 380k) and the Chicago Purchasing Managers’ Report was slightly stronger-than-expected at 70.6 (expected: 69.9).

Now, all was not quiet everywhere. The Libyans, who are notoriously uninterested in Yankee baseball (rumor has it they’re Phillies fans), insisted on continuing to fight; the ebb and flow of Gaddafi’s forces were on the “flow” side today and there was considerable fighting around one of the oil ports and another oil hub. This pushed oil higher, and today’s $106.68 close for front Crude on the NYMEX was the highest close to date.

The Irish, who probably see baseball as being a sissy sport (have you seen the sport of hurling played?), also showed little respect for Opening Day as banking regulators ordered four domestic banks to raise €24bln in capital after a stress test showed that they were (shocker!) undercapitalized. This may prove difficult. Consider Allied Irish, the biggest of the four. The Irish central bank says they need €13.3bln; meanwhile, its market cap is, um, €0.3bln.

JP Morgan Chase President Jamie Dimon (who is probably more of the horsey set, but these comments were made late Wednesday so we’ll give him a pass) remarked on the future of banking in the U.S., noting that clients will prefer to deal with banks in countries that have lower costs and therefore can offer better prices. “We’re starting to add up a whole bunch of things which are negative for America…if we have higher capital limits than the rest of the world, now you’re just starting to put nails in the coffin.” These comments may be surprising to those of us who have already buried the banks because lower volumes, tighter spreads on vanilla product that is being pushed to exchanges, and lower leverage should combine to lower the return on equity of a banking institution quite considerably. However, I do agree with his remark that the derivatives laws in Dodd-Frank represent some of the most “irrational” legislation he has ever seen. Dimon is not exactly trying to win friends on Capitol Hill right now (which I guess is one sign that he figures the worst is past); he also said that banks would not even consider writing down mortgages for homeowners who are able to make payments. Well, I also agree with him there – borrowing is a moral obligation as well as a financial obligation, fraud aside – but wonder at his reasons for making the comment.

Turning to the story which is increasingly on people’s minds (and high time, I would say; have I mentioned recently that my company consults on inflation-related topics and investments?), a friend sent me a link to a USA Today story entitled “Wal-Mart CEO Bill Simon expects inflation.” It turns out that he sees “serious” inflation ahead. “We’re seeing cost increases starting to come through at a pretty rapid rate.” When someone who is sitting in the crow’s nest hollers “iceberg, dead ahead!” it pays to listen and to take evasive action, even if you can’t yet see the iceberg.

But it’s baseball season, there’s new grass on the field, and hope is everywhere…which is, I suppose, why stocks just registered another 5% quarter.

Many hopes have been dashed, though, on Employment Friday, and it happens that Q2 kicks off tomorrow with just such a day. The consensus estimate for Payrolls is another +190k figure (last month was +192), with the Unemployment Rate holding steady at 8.9%. Given the way the ‘Rate has been plunging, remaining unchanged would almost seem to be bad news, but as I’ve noted before (and which hasn’t gone unnoticed elsewhere) the declining labor force participation rate has been largely responsible for that plunge. I want to see the ‘Rate decline, but almost more important at this point is that I want to see the participation rate rise.

Surveys of labor market conditions over the last month continue to show that if the employment situation is improving, the man on the street isn’t yet feeling it. The “Jobs Hard to Get” index in the Consumer Confidence report is still up around 45. And the JOLTS survey of job openings declined slightly in December and January (see Chart). That survey is volatile, and is released with a big delay so it isn’t very helpful to us in forecasting this release, but do notice on the chart that the number of job openings still hasn’t risen to equal the lowest level reached in the last recession. So it wouldn’t shock me to see the Unemployment Rate rise.

Job openings still aren't as widespread as they were in the depths of the last recession.

Also scheduled for tomorrow is the ISM Manufacturing survey (Consensus: 61.0 from 61.4), which is unlikely to be a market-mover, and monthly car sales for March.

Bonds (the 10y note at 3.47%) remain in a holding pattern, and inflation swaps are still waiting for an excuse to break to new highs or to retreat from their current levels (about 2.46% on the 5y and 2.74% on the 10y). Both are unlikely to find that excuse tomorrow. For what it’s worth, I still expect the next major move in rates to be higher (in rate), rather than lower, even if I am skeptical that the recovery is robust enough to warrant equity prices where they are.