Will the jobs data support an increase???

* Waiting on May’s Jobs report.
* Dollar drifts higher.
* AUD & NZD look for weekly gain…
* Metals prices remain in a narrow range…

And Now, Today’s A Pfennig For Your Thoughts.

Good morning and happy Friday. As is the custom when we pfill in for Chuck on the Pfennig, Frank has sent me an excellent introduction to today’s newsletter – so take it away Frank:

A few weeks ago in the Sunday Pfennig I talked about straight lines, and changing course. I recall from my summers working on the farm that straight lines are the most efficient when mowing a pasture or doing anything else involving tractors – the less turns the better. As I was walking in to work Thursday I thought of that too. There are many possible routes I could use, several somewhat shorter than the one I take. But straight lines come into play again – the route that is close to the shortest but where I can have the longest stretches with straight lines uninterrupted by street crossings or other barriers is the fastest. It also was and is my view that the straight line that was the strong US dollar has changed to one that will trace a decline over the next several years.

I’ve been doing all this walking since I am still on the DL from shoulder surgery. I am also trying to train for something fun coming up. EverBank is a sponsoring partner of the Vail Valley Foundation and as a result we are excited to be part of the GoPro Mountain Games in Vail, Colorado June 9th – 12th (http://www.mountaingames.com/summer). If you are in the neighborhood we’d love for you to stop by – reply to this email and let us know you might be there. The Games have many fun things you can participate in, and others where it will be great to watch the pro’s. We are directly involved in the EverBank XC Mountain Bike event and the EverBank Half Marathon. World Markets President Chris Gaffney will be running as a competitor (https://www.youtube.com/embed/fXTg0ek5g9A?autoplay=1). I’ll be walking and simply trying to finish before they clear the course barriers away, The course heads uphill about 2,800 feet to 10,600 feet above sea level so I am not at all sure how w
alking around St. Louis at 650 feet will help but we have to work with what we have.

Looking forward to being in and around Vail makes me think about wealth and income in America. It’s a big part of the political discourse this year. If it’s a topic that interests you check out the Sunday Pfennig this weekend. I take a look at the numbers behind wealth in the US and hopefully provide you with a few things to think about. The facts aren’t as obvious as they are sometimes laid out in speeches – what a surprise – but politicians as always want to “fix” something so think about it as the election year moves along. But right now it’s time to consider the markets as Chris takes back over.

Thanks to Frank for getting us started this Friday morning, and for sharing that wonderful video (not). The markets were stuck in a range on Thursday as investors waited to see what Friday’s job report would bring. Data yesterday was fairly limited, with most of it concentrated on the job market, but the main takeaway is continued support for stable labor conditions in the second quarter. The ADP employment change report, which is a broad measure of private employers, came in as expected by rising to 173k in May and was higher than April’s upward revision to 166k. We’ve seen a bit of a pullback in the last couple of months, but the 12 month moving average remains in a healthy range of just over 200k. The weekly jobs reports came in as expected and layoffs in the energy sector continue to slow, so the string of consecutive weeks below 300k is extended to 65.

We also had a couple bits of second tier data by way of a consumer comfort gauge, which didn’t show much of a change, as well as the ISM New York purchase managers index. While the ISM New York report was largely overlooked, it did show quite a drop. In fact, it fell to the lowest level since April 2009 and it was the biggest monthly drop since May 2007, but these regional reports can be quite volatile from time to time. Switching gears into today’s data, it should be a busy one as we have several market moving reports.

Janet Yellen has repeatedly stated that the Fed will be data dependent – and considering her dovish history I have to believe the Chair will need to be ‘forced’ into the next rate increase. An increase in earnings combined with a continued improvement in the general labor market is exactly what could trigger another .25% increase. The experts are looking for 160k jobs to be added in May, so anything that exceeds the initial estimates should keep the heat on a June/July rate hike and feed a knee jerk reaction for a stronger dollar. There is some uncertainty heading into this report as the Verizon strike in May could have a negative impact, but I would have to think a disappointing result would send the dollar lower right out of the gate. While the headline numbers will grab the spotlight, I will be focusing on the Average Earnings, Average Workweek and US Labor Force participation. These three data points give an indication of just how ‘tight’ the labor market has become and can be used to gauge just how much pressure employers will be under to increase wages. Again, this is what I believe we will need to see in order for the FOMC to really put June or July back on the table. But if we don’t see any indication of wage pressure then I think investors sell the dollar as they decrease their bets of an imminent US rate increase.

We’ll also see some attention around the April Factory Orders, Capital Goods, and Durable Goods so it’s shaping up to be a busy end to this short week.

Expectations of an ‘imminent’ rate increase have propelled the dollar higher pretty much across the board as investors have raised the chances of a July FOMC move to over 60% according to one of the stories I read this morning. I’m still thinking the data won’t be enough to force the hand of the Fed, but we will just have to wait and see. The overseas markets are all in a holding pattern waiting for the job numbers to be released here. The euro is up just slightly this morning and the pound is also recovering a bit after a tough week of BREXIT talk. Oddsmakers are still only giving the BREXIT camp a 28% probability, but polls have shown British voters are more evenly split so this is what has been causing all of the nervousness in the currency markets.

Asian currencies were also slightly higher overnight, recovering some of their weekly losses. China has continued to set the fixing rate of the renminbi lower – and the currency hit a five year low vs. the US$ earlier this week. The moves are certainly aimed at stimulating the Chinese manufacturing sector which has been struggling to maintain momentum. A weaker renminbi is thought to boost exports and support the massive manufacturing sector in China.

Gold is holding steady just above $1,210 and seems to be locked into a fairly tight range established over the past couple of weeks. The precious metals all continue to fight against the headwinds of FOMC interest rate expectations with Silver, Palladium, and Platinum posting even larger 30 day losses than Gold. Palladium has been hit the hardest over the past month, dropping over 10.5% in the month of May. Like the currencies, the metals could see a good rebound if/when the jobs report comes in weaker than expected. But a strong job number could lead to another step down for the price of the precious metals as bets of an imminent interest rate increase in the US rise again.

And I’ll close out today’s Pfennig with a note Chuck sent me last night in a ‘moment of clarity’ after sitting through another infusion yesterday morning:

A dear reader sent me a note yesterday, and forwarded a message from the CNBC group, and the Pacific Financial Advisors who sent it to him. Now, longtime readers know that I’ve been banging on the car loans for some time now. When I last spoke in Vancouver, 2 years ago, I pointed out how the car loans were extending the loan periods, and that subprime loans were beginning to grow. Just the other day I also mentioned this right here in the Pfennig. Well, guess who’s ringing my alarm bell on this now? JPMorgan Chase CEO, Jamie Dimon, that’s who! Dimon who was speaking at the AllianceBerstein Strategic Decisions Conference in NYC, said, “Auto is clearly a little stretched, in my opinion. Someone is going to get hurt.”

And then the CNBC piece gave us some data to look at, and here it is. The average size of new auto loans is rising, as is the average payment size, according to research from Experian released Thursday morning.

In May, the total amount of auto loans cracked the $1 trillion mark for the first time, marking a 10 percent increase. It comes as auto sales have hovered around record highs.

At more than $30,000, the average auto loan for a new car is also at an all-time high, according to Experian. Also, at more than $500, the average monthly auto loan payment is at a record.

The Experian research also noted that more subprime borrowers are borrowing for new auto purchases.

Chuck again. A $30,000 average auto loan? Really? Hey, there’s a lot of Chevy Cruze cars in that total and they surely don’t go for $30,000! I’m waving the “everybody run for cover flag” because this has the potential to get ugly folks.

Currencies today 6/3/16. American Style: A$ .7242, kiwi .6845, C$ .7639, euro 1.1142, sterling 1.4415, Swiss $1.004. European Style: rand 15.5716, krone 8.3284, SEK 8.3056, forint 280.06, zloty 3.9331, koruna 24.227, RUB 67.08, yen 108.85, sing 1.3761, HKD 7.7709, INR 67.2302, China 6.5793, pesos 18.6908, BRL 3.5905, Dollar Index 95.592, Oil $49.05, 10-year 1.795%, Silver $16.09, Platinum $958.50, Palladium $537.13, and Gold $1,211.85

That’s it for today, and for the what ended up to be a quick week. I’ve been a ‘day off’ all week with Memorial Day starting us off so the weekend kind of snuck up on me. Thanks to Frank, Chuck and Mike for writing a majority of today’s Pfennig, my job was more of an editor instead of a writer. I think we are supposed to get some spot showers this weekend, but hopefully we will see enough sun to enable me to get to some of the yard work which the weather has allowed me to push off. I’ll hit the send button now and get ready to dissect the big jobs report – I’m still betting on no rate hike until the fall, but we will have to see what this report shows. Thanks for reading the Pfenning, and I how you all have a Fantastic Friday and a Wonderful Weekend!!

Chris Gaffney, CFA
EverBank World Markets