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Global Market Wrap-Up - May 5, 2014

Monday, May 5, 2014
Mark Hanna

5 Themes for the Week

1) Massive Dropout Rate in U.S. Labor Force Leads to Larger Drop in Unemployment Rate - On the surface, date that was released Friday would sound bullish - nearly 300K jobs "created" (although many again of the low paying variety) and a huge drop in the unemployment rate to 6.3% from 6.7%. One would have though the U.S. market would be up 3% on such a headline number. Instead, it ended in losses. Meanwhile, one would expect 10 year Treasury yields to surge higher on great economic data - instead they fell below 2.60!! Why? The same reasons we've been highlighting for years here at Euro Pacific; this drop in the unemployment rate was completely due to a massive drop in the U.S. workforce; this month alone was nearly 900,000. That is staggering.

This is called "labor force participation rate" and as each 0.1% of the workforce faded away, the unemployment rate conveniently drops by a nearly like amount. We are seeing nearly 40 year lows in the percent of the workforce actually participating at 62.8%; if it was anything like we saw just 7-8 years ago (3%+ higher in 2007) we'd be talking about an unemployment rate nearer to 9% than 6%.

The number of people coming into the workforce -- by either landing a job or starting a search for work -- plunged to 5.84 million in April, the fewest since November 2008. The 14 percent decrease from the prior month’s 6.79 million was the biggest since 1995. Unemployed workers leaving the workforce last month totaled 2.55 million in April, the most since October. Interesting numbers for such a "robust economy". Meanwhile the first pass of first quarter GDP for the U.S. came in at 0.1% - well below expectations of a measly 1.1%. However, we are told this was mainly due to "weather"; we shall see.

2) HSBC Purchasing Managers Index in China Shows Contraction - Chinese HSBC PMI edged up to 48.1 in April from 48 in March but came in below the flash figure of 48.3. The reading indicates that factory activity contracted for a fourth consecutive month, although the figure contrasts with official data (50.4 reading) that shows slight growth. Numbers below 50 indicate contraction. Please note, in China the government's PMI data focuses on larger / government controlled entities while private bank HSBC does a similar survey for small to medium sized businesses.  

3) Germany Debating Additional Tax Cuts - Austerity has been so "bad" for Germany, the country is now mulling what to do with all its additional revenue. The country reported last week that tax receipts had risen an annual 7.2% in March and 3.7% during the first quarter—faster than the 3.3% rise economists had expected for the full year. Unlike France, for instance, which in recent weeks unveiled a $75 billion package of spending cuts in a bid to cut its spiraling budget deficit, Germany has had a balanced public sector budget since 2012. It also is seeing tax revenue rise thanks to low unemployment, and is aiming to cut its debt from 78.4% of gross domestic product last year to 65% by 2018.

4) European Central Bank and Bank of England Set to Meet; Eyes Focused on ECB - Both banks will meet this week and make policy announcements on Thursday; while the BOE is not expected to change its benchmark rate or change the size of its asset purchase program more focus will be on the ECB. While there is no imminent change expected focus has been on this bank for some sort of policy initiative perhaps coming later this year, perhaps during the summer. Consensus is that the ECB will either take steps such as cutting rates further and/or through more unconventional policies. The banks deposit rate currently sits at zero while the lending rate sits at 0.25%.

5) U.S. Home Ownership Rate the Lowest Since the Mid 1990s - This headline is neither "bad" nor "good"; it is reality. One of the main causes of the housing bubble - aside from a Federal Reserve who provided cheap money far too long - were government policies trying to make nearly everyone a homeowner. Some are just not cut out for it, whether for economic or other reasons. So home ownership rates rose in the country but largely for the wrong reason.

64.8% of American families—about 74.4 million households—owned the homes they lived in during the first quarter of this year, down from 65.2% at the end of 2013, according to the U.S. Census Bureau. That was the lowest level since 1995 and is a significant drop from 2006, when a peak of 76.5 million households, or 68.9%, were owner-occupied.