Let’s admit that the monthly non-farm payroll report is among the most difficult for economists to forecast.  There are not many reliable inputs as it is the first piece of real sector data for a new month. 

Nevertheless, it is an important piece of economic data, and which, as we saw earlier in the year, a significant downside miss could freeze the Fed.  

Let’s admit that the monthly non-farm payroll report is among the most difficult for economists to forecast.  There are not many reliable inputs as it is the first piece of real sector data for a new month. 

Nevertheless, it is an important piece of economic data, and which, as we saw earlier in the year, a significant downside miss could freeze the Fed.  

There are four data points that suggest that a strong September jobs report, to be released on October 7. 

1.  Weekly initial jobless claims have fallen about 10k whether using a four-week moving average or comparing the survey weeks. 

2.  There were about 50k more people than average who missed work in August due to the weather.  The lion’s share will likely have returned. 

3.  The Conference Board’s measure of consumer confidence showed the gap between jobs plentiful and hard to get rose to 6.3 (from 4.0) and is the highest since August 2007. 

4.  Income tax withholding in September is running almost 6% on average higher than in August. 

Some other details of the jobs report may also be constructive.  The average weekly hour’s works are expected to rise by 6 minutes, which does not sound like a lot, but when there are 157 mln workers, it turns out to be 457k full-time equivalents.  Average hourly earnings are expected to rise 0.2% for a 2.6% year–over-year rate, which is the upper end of the where it has been since 2010. 

The under-employment rate has steadied around 9.7%.  It remains well above pre-crisis levels when it was closer to 8%.  There does appear to be a structural shift in the economy, not just in the US but globally.  Less educated and less skilled workers are at a clear disadvantage.  There are various reasons why this might be the case, including global competition and technology.

Consider that unemployment for those with a college degree in the US stands at 2.5%.  With a high school degree, but no college, the unemployment rate is more than double at 5.5%.  Those without a high school diploma, the unemployment rate are more than three-fold higher than for college-educated (7.7%). 

We read the recent FOMC statement and the dot plot to mean that the bar to a December rate hike is low.  The data does not have to improve much for the Fed to act.  Our back of the envelope calculation suggests the US economy created a little more than 200k jobs in September.  The jobs report we expect will be more than sufficient for the Fed to hike rates this year.   

That said, we think the odds of a November hike are next to nothing, even though Bloomberg calculation puts it at 17% today.  There is no precedent for a rate hike a week before a national election.  We think that the partisan claims that the Fed has not raised interest rates because of its politics are wide of the mark.  The arguments offered by Governors Brainard and Tarullo and Chicago Fed President Evans for even more caution than the Federal Reserve has shown are based purely on economic analysis.

Quick Look at Why the September Jobs Data will Likely Be Strong is republished with permission from Marc to Market

The post Remember September (for Jobs Data) appeared first on Economy Watch.

The US dollar has firmer against most major and emerging market currencies.  It remains well within its well-worn ranges, which continue to be narrow.  A notable exception today is the yen’s weakness. 

The US dollar has firmer against most major and emerging market currencies.  It remains well within its well-worn ranges, which continue to be narrow.  A notable exception today is the yen’s weakness. 

While the majors are mostly off marginally and now more than 0.3%, the yen is 0.75% lower.  That puts the greenback at a six-day high (~JPY101.75) at its best. Yesterday’s sharp rally in oil prices, the backing up of global yields, and rising equities encouraged yen selling, especially given that the dollar’s downside momentum had stalled in front of the psychologically important JPY100 level. 

In addition, the Japanese data were poor.  Retail sales fell twice as much as expected in August (-1.1%), which brought the year-over-year rate to -2.1% from -00.2% in July.  Poor weather and payback from the 1.4% monthly increase in July were important considerations.  Nevertheless, it warns of downside risks to tomorrow’s more comprehensive measure of consumption (overall household spending).  Japan also reports industrial output, employment, and CPI tomorrow. 

Separately, we note the MOF weekly portfolio flow report showed foreign investors sold a JPY2.8 trillion of Japanese bonds last week.  This appears to be a record amount.  It was the second consecutive week of sales.  We’ll be watching the time series closely in the coming weeks.  It is possible that it reflects quarter-end portfolio adjustments, but it reflects a change in assessment post-BOJ shift from targeting the monetary base to targeting the yield curve.

In Europe, both Spain and Germany are reporting preliminary September inflation data.  Both show deflationary forces ebbing.  In fact, Spain’s harmonized measure of CPI rose to 0.1% from minus 0.3%.  This is the first reading above zero in two years.  German states have reported an increased in the year-over-year rates, and this leaves the countrywide report, due shortly poised to rise to 0.5% from 0.3%.   The Eurozone aggregate flash reading will be released tomorrow and is expected to double to 0.4% from 0.2%.  That would match the year’s high, and it has not been higher since mid-2014.  The core rate is also expected to tick higher (0.9% from 0.8%). 

Price pressures remain modest but moving in the right direction.  The real sector data has been mostly stable, though today’s data suggests that both Germany and Spain may be slowing.   Spain reported August retail sales rose 3.4% year-over-year (seasonally adjusted) down from 5.1% and the second consecutive month of slowing.  Germany unexpectedly reported a 1k increase.  The median expectation was for a 5k decline.  It is the first increase since June 2014.  Recall last week; the German PMI also pointed to the loss of economic momentum, and the Bundesbank recently warned that the economy slowed in Q3. 

There are two other main talking points today.  First is the OPEC deal.  Most, like us, seem skeptical.  It is a bit like Woody Allen’s complaint about the poor restaurant, where the food wasn’t good, and the portions were small.  The supposed cut to 32.5-33.0 mln barrels is a drop in the bucket, so to speak, given that August output was estimated at 33.24 mln barrels.  In addition, how the “cuts” will be distributed will not be decided for two months, leaving current production unaffected by the decision.

Moreover, there is not an agreement on the output figures to use and shifting from one calculation to another, could account for the proposed cut in output.  In addition, Saudi Arabia, who is one of the few countries that burns oil for electricity, typically trims that summer output increase, which could also account for most of the anticipated fall in output. 

The other talking point is Germany’s largest bank.  Deutsche Bank shares are off (~0.7%) today after advancing 3.2% yesterday and 0.65% on Tuesday.  There is much talk about the need the bank to raise capital and the possibility of some role for the state.  However, the rules for state aid have changed since the 2008-2009 government support efforts.  The controlling document is the Bank Recovery and Resolution Directive (BRRD).   

The same set of rules limited what Italy could do for its banks.  There are, of course, nuances and exceptions, but in general, two principles stand out.  First, most use of taxpayers’ money (government aid) requires participation by shareholders and junior creditors.  Second, a government stake, which was speculated about yesterday is possible under certain conditions, but cannot be done on discriminatory terms that give the state an advantage of show preferential treatment for the bank. 

There are several US economic reports today.  For Q3 GDP purposes, the advance look at the August merchandise trade balance and wholesale inventories are the most important.  For the real time read on the labor market, ahead of next week’s national report, the weekly jobless claims will attract attention.  The four-week moving average slipped below 260k for the first time in nearly two months last week.  The US also provides a revision to Q2 GDP.  It is expected to rise to a still disappointing 1.3% annualized rate from 1.1%.   

No fewer than five Fed officials are on tap for today.  Harker has spoken already today from Dublin, leaving four for the North American session.  Yellen speaks after the markets close.  In terms of policy, yesterday, Yellen simply confirmed the dot plot saying that a majority of officials anticipate one hike this year. 

The euro remains quiet; well within the one-cent range see this week.  Sterling initially advanced to almost $1.3060 but has been unable to sustain even modest upticks and has returned to straddled $1.30.  The dollar’s upside momentum against the yen faded in the European morning.  Intraday support is seen in the JPY101.00-JPY101.20 range.  The dollar-bloc currencies are heavy.  The Australian dollar poked through $0.7700 but met a wall of offers.  It looks set to challenge yesterday’s low near $0.7745.  A close below yesterday’s low would suggest a near-term high is in place.  The US dollar extended yesterday’s losses against the Canadian dollar, falling to CAD1.3050.  It has recovered to CAD1.3100, where the better two-way action is seen.

Dollar Quietly Bid, while Market is Skeptical of OPEC Deal is republished with permission from Marc to Market

The post Thursday Headlines: OPEC, Deutsche Bank and Many Fed Speakers appeared first on Economy Watch.

During this year’s G7 summit, Japan announced its vision of creating a LNG market to meet increasing energy demand. Natural resource markets are a foundation for trade and economic development. What is less well known is the close link between the natural resource markets and the currency markets.

During this year’s G7 summit, Japan announced its vision of creating a LNG market to meet increasing energy demand. Natural resource markets are a foundation for trade and economic development. What is less well known is the close link between the natural resource markets and the currency markets.

LNG was first imported to Japan by the Tokyo Electric Power Company and Tokyo Gas in 1969. Since then, the market has grown substantially and financing large LNG projects has become possible. However, the LNG market is much smaller and geographically dispersed than the crude oil market. Developing the market further requires a spot market, and there are three main requirements that need to be overcome to make the most of this opportunity.

First, storage capacity must grow. The storability of crude oil makes adjusting supply possible — essential for a spot market. Likewise, more LNG tanks must be built so that supply can respond to price changes. It is commonly assumed that storing LNG is difficult due to extreme temperature requirements. However, just like crude oil, LNG storage is feasible if investment in suitable infrastructure is made.

Second, producers and suppliers must be able to trade LNG. The clauses restricting destinations that can be delivered to should be abolished or at least made more flexible. Transportation infrastructure should also expand to allow for changing demand.

Lastly, financial institutions must provide liquidity to facilitate transactions and a means to hedge risks. The construction of a LNG production base requires large investments and most LNG trade is based on a long-term contract with the oil price as a benchmark. The involvement of major electricity and gas companies made financing big LNG related investment possible. When the oil price was high, many new projects began. Therefore, the rising oil price was the major impetus for the expansion of the LNG production. However, the expansion of the market calls for the creation of a LNG price index, which reflects demand and supply globally.

The companies dominating the oil industry predominantly use the US dollar and changing the trading currency would require an appropriate market for risk hedging. LNG sales contracts are linked with the oil price and have served the industry well as the US dollar and the oil price are negatively correlated, providing a natural hedge. However, the current low oil price creates a huge gap between the future forecasts of sellers and buyers. Sellers typically anticipate the low price to continue but buyers do not. So contract negotiations based on the link to oil have become harder to conclude.

Delinking LNG from oil will be useful for new projects and will result in delinking from the US dollar. Multiple currencies should be used since contractors and oil companies are exposed to foreign exchange risk from construction activities. If the revenue stream can be matched with its underlying cost, risks can be further mitigated.

Natural gas is typically found in rural areas. To avoid the abundance of resources hindering industrial development — the so called ‘resource curse’ — governments must solve problems associated with oligopoly and diversify the industrial base by global value chain upgrading. Such initiatives require large infrastructure projects with long life cycles, and infrastructure finance is often a bottleneck for sustainable development.

For this reason, most countries welcome foreign capital. LNG exporters can secure the revenue flow for foreign loan repayment. Given that Japan, South Korea and China are the major LNG importers, the Japanese yen, South Korean won and Chinese yuan should play a bigger role in matching the demands for infrastructure investment and LNG trade.

US consumption has contributed to world economic growth for decades. However, the US growth engine has relied on the reserve currency status of the US dollar and a current account deficit supported by US Treasury bond investors such as China, Japan and South Korea. As they transition to more consumption-driven economies and serve as a new engine of growth for the world economy, their currencies must also gain reserve currency status.

Japan, China and South Korea have a common interest, and responsibility, to establish a LNG spot market to meet future energy demand. In doing so, they may also contribute to sustainable industrial development through infrastructure investment in many parts of the world and ensure future growth for the world economy.

Is LNG the new fuel for the global economy? is republished with permission from East Asia Forum

The post Move Over Oil, It’s LNG appeared first on Economy Watch.

A wave of political activism has animated East Asian politics: Taiwan’s Sunflower Student Movement in 2014, South Korean 2015 street protests against President Park’s new labour law, and protests in Japan in 2015 against Prime Minister Abe’s security bills. Youth activism was common to all these movements. Facing challenges in a stagnating economy, the younger generations have developed a deeper political awareness from a sense of marginalisation from political decision-making processes.

A wave of political activism has animated East Asian politics: Taiwan’s Sunflower Student Movement in 2014, South Korean 2015 street protests against President Park’s new labour law, and protests in Japan in 2015 against Prime Minister Abe’s security bills. Youth activism was common to all these movements. Facing challenges in a stagnating economy, the younger generations have developed a deeper political awareness from a sense of marginalisation from political decision-making processes.

Despite common elements, the outcomes of these street protests have differed greatly. Protests in Taiwan and South Korea delivered a serious blow to the ruling parties electorally, but in the 2016 July upper house elections in Japan, the majority voted to support the ruling Liberal Democratic Party (LDP). At this point street demonstrations in Japan haven’t had the same impact.

One of the characteristics of political participation by the youth in Japan is the contrast between a growing interest in politics and low participation on Election Day. The CEO of Niwango, who manages Niconico — a Japanese social media giant — argues that its monthly political opinion poll consistently attracts 30,000 replies in just 15 minutes, far more than major television channels or newspapers. This suggests a strong interest in politics among the younger generation, despite claims to the contrary.

The big question is — if young people are interested in politics, why don’t they vote? There is still no definitive answer, but what is clear is that there is a representation gap. This gap derives from the ageing population engendering feelings of disempowerment among the youth in a ‘silver democracy’.

This gap between political awareness and the sense of marginalisation among certain subsets of the population is the driving force behind changes in political participation in Japan. Two other forces carry weight.

First is the top-down adjustment of the voting age to accommodate teenage voters. The July upper house election was the first national election after the Japanese government lowered the voting age to 18. Since then high schools have become the core institutions in teaching political participation strictly in terms of electoral participation.

The majority of teenage voters voted for the LDP. According to a survey by the Ministry of Internal Affairs and Communications, 51 percent of 18-year-olds turned out to vote, a substantially higher percentage than for 20-year-olds. From the perspective of the ruling party, the top-down accommodation of youth successfully strengthened its voter platform.

The fact that 18- and 19-year-olds were granted the vote because of top-down reform, rather than as a hard-fought political concession, will likely shape their voting behaviour in the longer term. They will likely be less motivated to campaign for change than if this voting reform had been the result of sustained political action by Japan’s youth. For most young Japanese, their initial experience was not a vote for change, but rather to learn and to comply with the current political system. It remains to be seen how well this modified electoral system will provide a voice for those youth who do desire change and to what extent it maintains political stability.

The second new force in Japanese politics is the increasing importance of gender. Discussions about and by women in politics have accelerated through internet blogs and via Twitter. In February, a hard-hitting political phrase, Nihon shine — ‘Go to hell, Japan’ — went viral. The phrase originated from a blogpost by an anonymous working mother decrying the fact that her one-year-old child had been denied a place at nursery school — ‘My child was denied enrolment in nursery school, go to hell Japan’. The woman was driven to the verge of giving up her job.

The blog post attacked Abe’s womenomics agenda — which includes policies to promote ‘dynamic engagement of all citizens’, ‘countermeasures to the falling birth-rate’ and a ‘child allowance’ — as useless. The now-popular phrase ‘Go to hell’ crystallised the underlying frustration shared by women across age groups. As womenomics was a key pillar of Abe’s electoral platform and his policy to revitalise Japanese economy, the voice of this woman spoke to a core political concern of the government.

While the phrase ‘Go to hell, Japan’ was, unsurprisingly, severely criticised, it perfectly captured the frustration many Japanese women feel at being asked to work more and raise more children without effective government policies to support them. The phrase inadvertently set an example on how to delegitimise a major political platform of government.

The blog was picked up by a parliamentarian from the Democratic Party, the main opposition party, and was debated at a Diet session. Prime Minister Abe reacted by pointing out the anonymous character of the blog and questioning the existence of such a woman. His comment that ‘we cannot verify this’ only increased public attention, with numerous women stating that they identified with the blogger. Since then, the issue of nursery schools has become one of the top political agendas.

While opposition parties in Japan continue to be weak, the ruling party is tempted to keep its pre-election promises vague. Now, the frustrated public is increasingly using the internet as a tool by which marginalised groups — be they women, teenagers or high school students — can influence the political agenda from outside the electoral process.

Japanese leaders and political parties will be tested more by how they respond to online activism, rather than activism on the streets. The integrity of political leaders will be critically tested by their commitment to upholding freedom of speech and information. The challenge for Japanese democracy now will be to secure this emerging political space for women and young people beyond the polling stations.

Accommodating Japan’s youth and women in a silver democracy is republished with permission from East Asia Forum

The post Does Japan’s Democracy Have Room for Women and Children? appeared first on Economy Watch.

Upward pressure on US consumer prices is stemming from two elements.  Rents and medical services.   Due to the differences in the composition of the basket of goods and services that are used, the core personal consumption deflator, which the Fed targets, typically lags behind core CPI. 

Upward pressure on US consumer prices is stemming from two elements.  Rents and medical services.   Due to the differences in the composition of the basket of goods and services that are used, the core personal consumption deflator, which the Fed targets, typically lags behind core CPI. 

At is time of year; the concern tends to be on health care costs and premiums.  Many US employees are given “open enrollment” when they can change their health care benefits.

This Great Graphic comes from Kaiser Family Foundation’s Employer Health Benefit Survey.  It shows three five-year periods.  The amber bar is the cumulative increase in for employer-provided health care premium.  The dark blue bar is the cumulative increase in inflation, while the lighter blue bar is the cumulative growth in employee earnings. 

What chart shows is that the increase in premiums has slowed, though it is still easily outpacing overall inflation and the increase in our earnings.  In 2001-2006, premiums rose a cumulative 63%.  The pace was halved in the next five year-period.  From 2011 through this year, premiums rose 20%.   Cumulative wage growth was 15%, 16% and most recently 11%.  The cumulative increase in prices was 14%, 12% and 6% for the three periods respectively. 

Premiums are set to rise again.  In New York State, the insurance providers have petitioned the government all a 17% increase in premiums. 

There is another dimension of the issue.  How should the rising premium be divided between employer and employee?  This is not an economic issue, but of politics and power.  The stronger force will seek to shift the burden to the weaker force. 

Consider 1999.  According to figures from Kaiser’s survey, the premium for all businesses to provide a family with health care benefits was $5790.  This was divided between the employee, who paid $1543 and the employer, who picked up the remaining $4247.  The employee paid 26.6% of the overall premium. 

Fast forward to this year.  Kaiser’s figures suggest it cost $18, 142 to provide health care insurance for a family.  The employee paid $5277 and the employer paid $12, 865.  The employee’s share increased to 29.0%.

This aggregate look, however, conceals, a big difference between small (3-199 employees) and large (200 or more employees) firms.  A small firm may actually experience a smaller overall premium than large firms ($17,546 vs $18,395).  Small business pass a greater share to its employees (37.6%) compared with large businesses (25.6%).

Great Graphic: Growth in Premiums of Employer-Sponsored Health Insurance is republished with permission from Marc to Market

The post Employer Insurance Premium Growth – Still a Problem appeared first on Economy Watch.

Italian Prime Minister has set the date for the constitutional referendum as late as practically possibly.  It will be held on December 4.  The issue is the perfect bicameralism that gives as much power to the Senate as the Chamber of Deputies. 

Italian Prime Minister has set the date for the constitutional referendum as late as practically possibly.  It will be held on December 4.  The issue is the perfect bicameralism that gives as much power to the Senate as the Chamber of Deputies. 

Renzi’s argument is that the political reform is necessary to make Italy governable.  Italy has had 63 governments since the end of WWII.  In order to address the economic challenges the country faces, political reform is necessary. 

The referendum took on extra significance because Renzi had suggested he would resign if the referendum were not approved.  This is significant because his resignation could see the center-left PD replaced by the second largest party in Italy, the 5-Star Movement, which wants drop out of the monetary union. 

Many observers continue to play up this scenario even though Renzi has backed off from this threat/pledge.  He admits that it was a mistake to link the government’s tenure to the referendum, and says he meant to underscore the importance of the political reform.  He has subsequently indicated he would not resign, and that parliamentary elections would take place as scheduled in 2018.  

Walking back the resignation talk is also tactically important.  It increases the chances that the referendum can be held on the merits of the reform rather than on Renzi himself, which the opposition parties seemed to be doing.  There is genuine opposition to the constitutional reform that is based on the concern that it would concentrate too much power in the hands of the prime minister.  There is an underlying fear of another Mussolini, and, arguably, a more immediate antipathy to another Berlusconi. 

All the main opposition parties in Italy are opposed to the referendum, as is the largest trade union.  Other trade unions and the industry association (Confindustria) favors the referendum.  The polls show that it remains a close contest with a large number of undecided voters. 

Setting the referendum late in the year may also increase the chances of success.  First, the 5-Star Movement, vocal in its opposition, may see its own position compromised by the difficulty in transitioning from an opposition party to a governing party.  In local elections earlier this year, it carried the municipal government of Rome and is having a rough time of things, with internal divisions and resignations. 

Second, it allows Renzi to focus on the 2017 budget that is due in a few weeks.  In recent weeks, he has taken on a more antagonistic stance to the EC in general, Merkel, and Hollande in particular.  Given the refugee crisis and the damage from the earthquakes, he is seeking greater fiscal flexibility that the EC may be prepared to grant.  Confronting the EU will cost Renzi no support while stealing some of the thunder of the opposition. 

Today the government will also update its economic forecasts.  Reports suggest the government will forecast 1% growth this year and 1.2% growth next year.  These are in line with the central bank’s forecasts (1.1% and 1.2% respectively); they are about Confindustria’s forecasts of 0.7% and 0.5% growth.  

Third, the later the referendum, the longer Renzi can personally campaign for the referendum.  He is more enthusiastic than the opposition.  Reportedly, he has committed to an extensive grass root campaign. 

The important takeaway that many observers have seemed to play down is that Renzi is no longer talking about resigning if the referendum loses.  This removes much of the disruptive potential of the referendum.  This is not to say that Italy does not have its challenges.  Growth remains poor, and the banking woes have not been convincingly addressed.

Renzi and the Italian Referendum: Disruption Potential Minimized is republished with permission from Marc to Market

The post It’s an Italian Thing appeared first on Economy Watch.