Hollow non farms and macro tensions

288,000 jobs were added to the US work force in the month of April - the largest print since June 2010. 

This saw the unemployment rate fall below the 6.5% threshold to 6.3% for the first time since October 2009.

The headline figures looked brilliant, with the mass beat on consensus and a picture of an economy firing. However, underneath the headline read the results were rather hollow. Average hourly earnings month-on-month saw no growth at all, meaning inflation is still struggling to get a foothold and could be a little vexing for the Fed, who needs to see inflation increasing. The results also saw participation rates drop to 62.8% as 800,000 workers fell out of the work force; this is the weakest read in participation since 1978.

This issue is a growing global phenomenon; the developed world is seeing the aging population issue approaching faster than most economies are prepared for. This will be an underlying issue of all employment numbers going forward and will be a major political headache around the world and one that is going to hollow out employment prints for a while to come.

What is clear from the print on Friday is the USD was correctly positioned. Despite the auto-pilot unwind of the asset purchase plan, a strong ADP read and ISM PMI employment component suggesting positive employment news, the USD couldn’t find the support and has lost ground over the weekend as the EUR heads to 1.39 and the AUD moves back to 93 cents.

With May now well upon us, and US earnings season as good as finished,  is the old adage ‘sell in May, go away’ about to begin? The Dow and S&P are touching record highs, the Ukraine situation is simmering, growth is benign and data is indifferent - this is almost a textbook situation for a pull-back.

Westpac released its first-half numbers this morning; expectations for its east coast exposure see it as a stand out of the four over the past 12 months, as the housing recovery has taken off, which has seen three key themes for WBC:

  1. East coast lending growth – particularly retail housing, which grow by about 5% in the first half and was ahead of estimates.
  2. Possible positive margins growth – which was expected to buck the trend in the big four as competition has driven this down on most. However, this has not eventuated; WBC has seen net interest margins falling eight basis points to 2.11% versus a consensus of around 2.14%.
  3. A strong capital position and positive asset integration – this is certainly one area of improvement; cost growth was been benign, the balance sheet continues to show good signs of improvement and operation income was a beat. 

Consensus forecasts saw cash earnings hit A$3.636 billion; this is a 5.5% jump on the same period last year, and the final print of $3.77 billion is an 8% jump on last year. In years past, the build-up of franking credits on WBC’s balance sheet has seen special dividends which have been stripped out this time, which saw a consensus read for WBC’s interim dividend of 90 cents - which has been delivered. The real positive for WBC is the financial services space like CBA; wealth management has seen major double-digit growth as retail and business banking continues to be strong. The results on the headlines looks very solid, however the detail is likely to see WBC coming in under stellar, which may see it losing ground.

With China back on deck after the Labour Day holidays, markets may react to the official PMI numbers. It will also get a final print from HSBC on the PMI print from 23May, which could spell a further drag on the market. Saturday’s close of the futures market suggests a positive print this morning, however with the RBA meeting tomorrow and employment data on Thursday, we may see positioning rather than positive trading.

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