There are two recent headlines in the Wall Street Journal that I feel describe the same phenomena: “U.S. Firms Emerge Stronger,” which shows that big companies post-recession are more productive (output per worker), profitable, and financially healthy (less debt more cash) than they were; and “U.S. Labor Market Slows its Stride,” describing March’s 120,000 new jobs payroll number which snapped a 3-month streak of 200,000+ monthly jobs growth. The two occurrences are probably related. The unusually large employment reductions during the Great Recession have left companies very lean with respect to employees and thus very healthy with respect to profits and productivity during the recovery. But as the economy expanded last year it forced the leanest to expand payrolls. This above-consensus hiring was probably compensating for the above-average payroll reductions of 2007-09. In other words, a temporary shift upwards in the hiring trend rather than a permanent shift. So payroll growth should start to slow, but remain positive. Of course, this is probably reading too much into a single monthly number, but I think it might explain some of what we are seeing in the labor market.
China’s central bank Governor (Zhou Xiaochuan) and Chinese Premier Wen Jiabao made statements last week regarding China’s need and intention to reform and liberalize its state-run “oligopoly” banking system (there is a “big four” of state banks in China). This is another step towards “being like us,” to use Tony Blair’s phraseology. China’s banking system has been predicted to collapse for years, along of course with the Chinese economy. But the bold public statements by Chinese leaders to force banks to compete for capital there are a good sign. China’s GDP grew 9.2% in 2011. Estimates for first quarter growth will be published on Friday, and expectations are for around 8.4% growth, which is above the downward revised official target of 7.5%. The official target was 8% over the past six years (Financial Times). By the way, the fact the that U.S. waits 3 months after a quarter in order to publish its preliminary GDP estimates, while China only waits 2 weeks, is a big reason why few analysts trust Chinese data.
Spain’s bond prices fell last week following a weaker than expected bond auction. Spain’s stock market has largely missed the year-to-date rally in European stocks, a rally which has trailed slightly the rally in U.S. equities. Investors know that Spain is just getting startedwith implementing the labor market and spending reforms that are supposed to take place there. Interest rates in Spain had briefly touched below 5% following the European Central Bank’s LTRO (long-term refinancing operations), but they have now risen to 5.7% (today). In order to meet EU targets, Spain has to reduce its budget deficit from 8.5% of GDP in 2011 down to 5.3% this year. Officials there are expected this week to accelerate into law an EU-influenced budget act, so I’ll be watching Spanish bond yields. On-going headline risk from Europe is to be expected for the foreseeable future, but I hope and expect to see the overall stock market reactions to the headlines settle down as time goes on.
Posted on Wed, April 11, 2012
by Josie Coiner