Leveling the Playing Field July 7, 2014

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Happy 4
th
of July and I hope everyones fingers are still intact. Before we dig into this
weeks newsletter, we have a breaking story from the No, Seriously File: Barclays
Bank, of infamous LIBOR rigging scandal, started a Compliance Career Academy in
conjunction with Cambridge University.

The big data headliner was that the Dow hit 17,000 for the first time ever while the S&P
is closing in on 2k. Thank you QE! Bernanke et al have done in 5 years what had
previously taken 74 years. This free money stuff is fun and in no way could this be
creating another bubble!


















The Good

Fridays job report showed that employers added 288,000 jobs last month against a
forecasted gain of 215k. This brings the Q2 average to 272k, which compares favorably
to the prior 12 month average of 201k. The current 12 month average NFP gain is 208k,
the best since March 2006. April and May NFPs were also revised higher.

The Unemployment Rate was down to 6.1% vs 6.3% last month, which is the lowest
since September 2008. The national employment rate dropped to 6.1% in June, its lowest
level since September 2008. Real unemployment, or the U-6, dropped to 12.1%, its
lowest level since October 2008.

Long-term unemployment fell as well, down from 34.6% to 32.8%. Over the past year,
the number of long term unemployed Americans has dropped by 1.2mm. Additionally,
the median duration was down from 14.6 weeks to 13.1 weeks.

The gains were spread across 11 of 13 sectors, with retailers leading the way once again
(+40k). But even the government is hiring again, with a gain of 26k jobs last month.



But

The UR is down to 6.2%, butthe labor force participation rate remained near a 30-
year low at 62.8%

Long term unemployment is down, but..there are still 3.1mm Americans that have been
out of work for more than six months.

The economy added 288k jobs last month, butaverage hourly wages are barely
keeping up with inflation. YoY wage growth is 2%.

The UR dropped by 0.2%, but.according to the Household Survey, 500k full time jobs
were lost while 799k part-time positions were gained, the most since 1993. Im sure that
has nothing to do with Obamacare. The U-6 only dropped by 0.1% and remains north of
12%, suggesting that job seekers are taking jobs with fewer hours and less pay than
otherwise desired. Labor slack is taking its sweet ole time






Takeaways (not conclusions)
Labor markets are improving, but with a focus on quantity rather than quality. If we
continue to receive strong job gains, there may be a growing consortium of hawks
clamoring for a rate hike, led by CNBC and the like. And with JPM moving forward its
first rate hike to Q3 next year, other banks could be following. This could translate into a
jittery bond market, with traders and investors looking to sell bond holdings ahead of the
move, pushing yields higher.
All the data continues to suggest Yellens commitment to patience is warranted. She has
continually referenced wage growth as a factor being closely watched by the Fed, leading
us to believe there is less internal pressure on the FOMC to begin hiking rates.
The FOMC continues to be faced with an improving job market juxtapose sluggish GDP.
We are buying the weather story and think GDP will pick up over the second half given
the strong consumer and business confidence numbers in recent surveys.
Wage inflation, the historical driver behind headline CPI data, is almost non-existent;
however, as anyone that drove to the store to buy burgers this weekend for the cookout
can tell you, food and gas prices are definitely up (gas at the highest since 2008 for the
holiday weekend). Economists call this cost-push inflation and dont be surprised if we
start hearing more about it in the coming months. Inflation is ramping up, even if wages
dont reflect that.

This Week

Pretty light week for economic data, but Wednesday afternoon we receive the minutes
from the most recent FOMC meeting. This is always parsed for any hints of rate
projections, but the Fed knows this and it is unlikely to result in any earth shattering
news. There are five scheduled Fed speeches and the members will use this to reinforce
its recent message: modest growth + elevated inflation + low wage growth = patience.






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Economic Data
Day Time Report Forecast Previous
Tuesday 7:30AM NFIB Small Business Optimism 96.6
10:00AM JOLTS Job Openings 4455
3:00PM Consumer Credit $19.050B $26.847B
Wednesday 7:00AM MBA Mortgage Applications -0.2%
2:00PM Fed releases Minutes from June FOMC Meeting
Thursday 8:30AM Initial Jobless Claims 315k
8:30AM Continuing Claims 2579k
10:00AM Wholesale Inventories (MoM) 0.6% 1.1%
10:00AM Wholesale Trade Sales (MoM) 1.3%
Friday 2:00PM Monthly Budget Statement $100.0B
Speeches and Events
Day Time Place
Tuesday 1:00PM Fed's Lacker speaks on Economy Charlotte, NC
1:45PM Fed's Kocherlakota speaks on Monetary Policy Minneapolis, MN
Wednesday 2:00PM Fed releases Minutes from June FOMC Meeting
Thursday 1:15PM Fed's George speaks on Economy Shawnee, OK
Friday 2:45PM Fed's Lockhart, Evans speak on Economy Jackson Hole, WY
Treasury Auctions

Day Time Size
Tuesday 1:00PM 3-year Treasury Auction
Wednesday 1:00PM 10-year Treasury Auction
Thursday 1:00PM 30-year Treasury Auction
Report
Report