The latest data just released from the IMF.
We have updated the 2018 and 2019 annual GDP forecasts of the world’s country GDPs in our ginormous table below. The data are from the recent release of the October 2018 IMF’s World Economic Outlook.
Let’s begin by first checking out the G20 data.
After Friday’s jobs report, we thought it is time to dig deeper into employment growth in the manufacturing sector.
Manufacturing Jobs Matching Growth In Total Nonfarm Payrolls
Contrary to popular belief, the data show that job gains in the manufacturing sector are not experiencing outsized growth. Employment in the industry has grown at about same pace as private nonfarm payrolls since January 2017, just a little over 3 percent. Manufacturing employment has, however, recovered smartly under President Trump, after a period of almost zero growth during the last 20 months of President Obama’s administration.
The bulk of manufacturing employment growth has occurred in food manufacturing, fabricated metals, and machinery.
Job Growth Still Lagging in The “Poster Children” – Steel and Autos
Job growth in the sector’s “poster children” — steel production and auto manufacturing — remains tepid, at best.
Employment in the steel industry (highlighted in red) has yet to match the spike in steel prices and profits, which have skyrocketed after the implementation of President Trump’s tariffs.
CLAIRTON, Pa. — When President Trump imposed tariffs on steel imports in June, Richard Lattanzi thought of dozens of his fellow steelworkers who have for years put off badly needed repairs of their cars and homes.
“There was a lot of excitement here; there were a lot of us saying, ‘It’s about time someone is looking out for us,’ ” said Lattanzi, the mayor of this town of 7,000 and a safety inspector at the U.S. Steel plant in nearby West Mifflin. “A lot of people around here were saying, ‘We’re going to be okay.’ ”
Four months later, Lattanzi is less optimistic. Production at U.S. Steel’s facilities have ramped up, and the company announced this summer that, thanks in part to the tariffs, its profits will surge. But in interviews in recent weeks, Lattanzi and other steelworkers said they’re no longer confident they’ll take part in the tariff bounty. – Washington Post, October 3rd
Auto manufacturing jobs continue to decline, down 8,000 since the beginning of President Trump’s term.
Mining Employment And Oil Prices
Finally, where employment growth is experiencing outsized gains is in the mining sector, up over 16 percent, which is almost entirely the result of the recovery in oil prices. The crude price collapsed over 70 percent before bottoming at around $30 bbl in early 2016, forcing mass layoffs in the oil patch, which are now being recovered.
Coal mining jobs, for example, have only increased by a little less than 2,000, but it does represent a reversal in the decline under President Obama.
Construction jobs are also growing smartly
Summary
Commentary: All eyes on long-term interest rates this week. If the bond sell-off accelerates, expect a big risk-off move this week. Rising rates are not good for the now heavily indebted AE sovereign sector. Potential doom loops ahead: rising interest rates = interest payments = rising deficits = rising interest rates = rising interest payments = rising deficits = rising interest rates. The U.S. bond market seems oversold and should, at least, generate and dead cat bound here. If not, GULP!
10-year Treasury Note Yields
Source: Jesse Colombo @TheBubbleBubble
Looks like off to Round II — October 28th — as no candidate set to receive 50 percent of the first round vote, with Brazil’s Trump fanboy securing around 45 percent of the vote.
Note, Brazil’s similar gender divide in support of Bolsonaro as American women have with President Trump.
An interesting thing to keep an eye on as results come out are the breakdown of votes along gender lines.
Though he is in the lead, Bolsonaro is the candidate with the biggest discrepancy between his male and female vote, not only in this election, but in the history of Brazil.
Polls from a month ago showed that 49% of women in Brazil oppose Bolsonaro’s candidacy, compared with just 37% of men and in some states Bolsonaro has 75% less support among women than men.
This could be related to the fact that the far-right candidate has previously called women idiots, tramps and unworthy of rape. – The Guardian
Today’s nonfarm payrolls miss, 134k total jobs created in September, sealed the deal on the job creation political debate before the November midterms. That is all things being equal — during President Trump’s first 20 employment reports versus President Obama’s last 20 — the Trump economy created 347k fewer total nonfarm payroll jobs, and 137k fewer private sector jobs, than President Obama’s economy.
The differential will move even more against President Trump when October nonfarm payrolls are reported, the Friday before the election, as the May 2015 326k jobs comp will be a bar too high to conquer.
These are the facts, spin them as you wish.
On the eve of the midterm elections it is very likely the Democrats will be able to argue that President Obama’s economy created 500k more jobs than President Trump’s economy over a similar period. Reality clashes with virtual reality and bombastic rhetoric.
Perspective
However, all things are never equal. The Trump economy is running up against labor constraints with shortages breaking out almost everywhere, which is reflected in today’s 3.7 percent unemployment rate print, a 49-year low. It’s difficult to create the marginal job on this side of the inelastic labor supply curve.
Data should always be placed in the proper context. But, hey, we are talking politics here, which almost always surrenders to spin and is rarely about rational discourse. Moreover, “politics ain’t beanbag,” folks.
Other Notables
As Julius Caesar crossed the Rubicon River with the 13th legion into Italy to march on Rome, he turned to one of his deputies, quite possibly, Marc Antony, and made the famous remark, “alea iacta est.” Historians translate this as “the die is cast,” the decision is made, there is no going back.
Yields Cross The Rubicon
Today the U.S. bond market crossed the Rubicon with the 10-year yield breaching major resistance at, let’s call it, 3.12 percent, a high that hasn’t been seen since July 2011, ironically the month named in honor of Julius Caesar.
July 2011 was also just before or in anticipation of “Operation Twist,” the Fed’s program to manipulate longer-term rates lower.
You know what we think about the Treasury market.
We laid out all the reasons why the structural factors that have kept long-term interest rates low and risk premia suppressed are fading in our September 23rd beast of a post, The Gathering Storm In The Treasury Market 2.0.
Also, have a look at our Monday piece on the massive short build in 10-year note futures.
Though it’s too early to tell, the move in the 10-year yield today may be the signal that global bond yields are awakening from their QE-induced slumber. The flow of long-term notes and bonds is rising, as the Treasury issues more securities to finance larger budget deficits, but the big short in 10-year note futures remains, and the relative stock/float of long-term Treasuries is still low.
It may take a few days of trading above the breached resistance level to bolster the confidence of the bond bears.
Nevertheless, a more “normal” long-term yield would be closer to a 3 percent real rate, which is more than a chip shot from here, and, at the very least, two drivers away from today’s 3.16 percent close. We expect the first drive to hit the the 4.25 to 4.40 percent range, which is a measured move of the inverse head and shoulders pattern in the above chart, probably sooner rather than later.
Even the 10-year Japanese bond yield is pressing up against two-year highs, albeit at a poultry 15 bps.
QE Induced Asset Market Psychosis
Supply shortages, induced mainly by central bank quantitative easing have been a major factor driving asset markets, in our opinion. Not all, but a big part.
Risk-free bonds have been in short supply as central banks have hoovered up their home country government bonds with quantitative easing.
Equity Float Shrinkage
The float of total U.S. equities has shrunk dramatically, in part, due to cheap financing to fund share buybacks. The technical shortage of stocks have helped boost U.S. equity markets and killed off the most of the bears and short sellers.
We have no idea if short sellers can push the market lower on a sustained basis as rates rise, forcing some real selling in the near term. Probably not, if we define near term, say, as in the next month.
It’s possible, but our recency bias tells us no, unless rates move to our target range more rapidly than we even expect. Today’s increase in yields did cause selling into the close.
Source: Yardeni Research
Housing Market
Even the housing market suffers a dearth of supply.
Private equity, now the largest single holder of single-family residential real estate, has taken a massive supply of homes off the market and converted them to rentals, partly due to the lower cost of capital caused by the manipulation of the Treasury yield curve. Will these investors start to sell down their inventory as rates move higher, or just continue to raise rents, which could create a real political problem?
…one-fourth of the country’s single-family rental homes are now owned by institutional investors, with more than 200,000 families paying their rent to just nine giant Wall Street-backed firms. According to a report by the Harvard Joint Center for Housing Studies, the majority share of all U.S. rental units (52.2 percent) are owned by institutional investors, and the investor-owned share of single-family homes increased by nearly 40% from 2001 to 2015.5 – ACCE
We suspect a populist message from a 2020 presidential candidate railing against the “Wall Street firms, who were bailed out then bought your homes in bankruptcy and are now raising your rents” would resonate with the hoi polloi. Even if it’s true, or not.
In California, rent increases by some of the largest Wall Street landlords have been astronomical. For example, Colony Starwood Homes reported that in Northern California rental renewal rates increased by 9-13%, the largest in the nation. This means that if tenants already living in a Colony Starwood home want to continue to rent, they must pay between 9 to 13% more each year. A survey conducted in early 2017 of Los Angeles County tenants renting from Invitation Homes and Colony Starwood shows consistently high rental increases in the Southern California market as well. Of the 100 tenants surveyed, 77% reported rental increases and the average reported increase was 9% or $171 per month. – KCET
Does “truth” even matter today? It’s only true if you believe it to be true in our postmodern Trumpian era.
Vulnerable Markets
The structural factors that have kept U.S. long-term interest rates low are now fading and yields are set to move significantly higher. That is back to normal.
The markets, which look the most vulnerable on a technical basis in the near-term, are those that have seen a significant increase in supply since the financial crisis. Such as emerging market debt and U.S. corporate bonds and debt at the lower end of the investment grade spectrum.
Commercial Real Estate
Also keep the commercial real estate sector on your radar,
With investors acquiring $30.5 billion in industrial assets in the first half of 2018, JLL’s H1 2018 U.S. Investment Outlook report notes that the industrial sector is on pace for a new record year in terms of transaction volume and is expected to surpass the previous high point of $67.8 billion in 2015. That momentum, coupled with $20 billion in large scale transactions that are under contract and set to close in the second half of 2018, serves as evidence of the intensity of investor competition for industrial assets.
As a result, the national average cap rate across all classes of industrial assets has dipped to a record low of 7.0 percent. Average cap rates are even lower in the five industrial markets with the most supply constraints: 4.5 percent in Orange County, Calif.; 5.0 percent in San Francisco; 5.2 percent in Los Angeles; 5.3 percent in the Inland Empire and 5.4 percent in Seattle.
At the peak of the last cycle, the average cap rate for industrial assets was 7.2 percent, according to Chang. But starting with 2010, when the figure reached 8.7 percent, industrial cap rates have continued to drop, driven by economic expansion and growth in e-commerce sales. – National Real Estate Investor
Recall our “Cranes of Dubai” comment after returning from summer break.
Euro Sovereign Bonds
The market to closely monitor now is European sovereign bonds. The ECB’s QE is set to end in December and inflationary pressures are building. The yield spread between U.S bond and German bunds is approaching long-term highs.
Source: Frederik Ducrozet @fwred
Italy is the wild card, but we suspect the government has enough leverage with the EU due to the country’s importance in the euro and the sheer size of its bond market. Though it will upset many Germans, the EU will likely calculate that bigger budget deficits in Rome are not worth blowing up Europe. In other words, lot’s of noise to come.
We expect European interest rates to rise significantly over the next year, reinforcing the global bond bear market.
Upshot
All of the above will take time to unfold, with the usual ebb and flow of markets, providing traders with many profitable opportunities.
Rome wasn’t built in a day. Alea iacta est!
One of Australia’s finest, and best market analyst, Greg McKenna, and more important, our good friend, posits a new exchange rate determination model: PMI differentials.
We cut our teeth as a young economist on Anne Krueger‘s book, Exchange Rate Determination. The book is dated, but we highly recommend it, a good and quick read.
FX traders use many models to justify and fundamentally rationalize trades at any period in time, such as:
FX traders are married to none of the above, and switch back-and-forth between the various FX models, or, at least, they act as if they do.
The key to success in trading is to understand what is the dominant model driving the market at any given time and determining the trend if one exists.
Global Macro Monitor 