Covenant Weekly Market Synopsis as of June 10, 2016

June 12, 2016

What began as a promising week for risk assets, ended up rather mixed with most developed market equity indices declining while emerging and frontier markets rose in spite of a stronger US dollar. In fact, this chart of the MSCI All Country World Index gives visual meaning to the term “Hump Day” as equity markets rallied through Wednesday, only to give back those gains and more Thursday and Friday.


Source: Bloomberg

As equity markets ebbed and flowed, yields on US Treasury bonds grinded lower. In fact, the 10-year UST closed Friday with a yield of 1.64%, a low level not seen since May 2013. Meanwhile, the annual yield on the 10-year German Bund declined to 0.2% and Japan’s 10-year bond is yielding -0.2%. In spite of the already low rates here in the U.S., it is possible for them to move lower still given the backdrop of increasing negative interest rates globally.

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Labor Market Wobbles: The April JOLTS (Job Openings and Labor Turnover Survey) revealed a still healthy labor market (at least as of one month ago), particularly as it related to job openings. Many took this as a sign of future labor market strength because as the chart below highlights, job openings (the solid blue area) tend to be a fairly reliable leading indicator for hiring (as specified by the yellow total Nonfarm Payroll level).


Sources: Bloomberg and Covenant Investment Research

However, at this point in the cycle the number of job openings is likely not as predictive of future hiring. In fact, the May Nonfarm Payrolls report showed that hiring has slowed considerably. So why is there a high number of openings and not much hiring? Two potential explanations:

  • Hiring has slowed because of a lack of qualified applicants for the open positions. We’ve discussed this dilemma in our “Quarterly Economic Review & Outlook”, but to recap: we believe the dearth of skilled labor is a vestige of the Financial Crisis which forced a large swath of the labor force out of the market. Not only did people lose their jobs, but because hiring was slow to recover, job skills atrophied creating a positive feedback loop which has made it increasingly difficult for previously skilled workers to get rehired.
  • As difficult as that scenario is, a more problematic scenario for the economy is that companies simply are not hiring (witness the disappointing May Nonfarm Payrolls report, which added only about 70,000 jobs when adding back the workers affected by the Verizon strike). As our Investment Committee economist and author of Foleynomics points out “It seems logical (and corporate experience confirms) that firms will stop hiring before they start firing. Human Resources departments can post whatever jobs they want, but the buck stops at the CFO’s desk. So we got an awful employment report, high job openings, and low jobless claims.”

You can expect that the May JOLTS report (available in June) will reflect the weakness of the recent Nonfarm Payrolls report, which is consistent with our working thesis that the best labor market data is likely behind us at this point in the business cycle. The June Nonfarm Payrolls report will be critically important in determining if May was an anomalous reading or if hiring is rapidly decelerating.

Debt and more debt: This note is already long so I won’t elaborate here, but if you are interested in subjects such as total global debt levels, country-specific debt levels, debt per capita, debt as a % of GDP, etc. The Economist’s Global Debt Clock is a very cool website.

Be well and Godspeed,