De Groote Financial Group October 10, 2016 No Comments

 The U.S. Created 156,000 Jobs in September, the Unemployment Rate Ticked up to 5.0%…

Labor force participation increased slightly, pushing up the number of unemployed.
What it means – Two things. First, more Americans came off the sideline and started looking for work. Second, not very exciting. The numbers weren’t high enough to require a rate hike in November, and weren’t low enough to put the December rate hike in question. Nothing in this release changed anyone’s mind about what happens next.

There was an interesting tidbit in the details – the birth/death adjustment reduced the employment figures by 57,000. Typically negative adjustments are 5,000 to 10,000, not in the tens of thousands. The only major adjustment happens every February when the Bureau of Labor Statistics eliminates its guesswork and realigns its monthly data with hard annual payroll numbers. Without the adjustment, we’d have 213,000 jobs. That’s still not enough to move the Fed’s needle, so maybe the BLS saw an opportunity to adjust its data in an inconsequential month.

U.S. Factory Orders Up 0.2% in August, Down 0.2% over Last Year…

This marks 22 months in a row of falling year-over-year orders.
What it means – Drilling down to orders excluding transportation and defense, which is a proxy for business spending, orders increased 0.9% after growing in both June and July. That’s good news down the road, but orders and shipments are two different things. Shipments fell again in August, so expect third-quarter GDP to be sluggish at best.

U.S. Restaurant Performance Index (RPI) Drops Into Contraction Territory…

The index, composed of current sales data and expectations, dropped decidedly below 100 for the first time since 2012.
What it means – Restaurants are a great indicator of how consumers feel. If we’re in a good mood, we go out to eat. If not, more of us stay home.

U.S. Government Fiscal Year Ended September 30, With U.S. Debt at $19.5 trillion…

There’s no government plan to end deficits or pay off the U.S. debt.
What it means – The annual deficit and total debt are conspicuously missing from this presidential campaign, and there’s only one reason – low interest rates. If issuing debt cost something, both sides would at least give the topic some attention.

Of course, ignoring massive debt because of easy repayment terms never works out well. When rates move higher, servicing the debt will crowd out other spending. This will cause a lot of pain for Americans that rely on U.S. government payments.

Italy Announces 50-Year Government Bond at 2.85%; Deal is Four Times Oversubscribed…

It’s possible the Italian government will lower the yield, given the amount of interest in the bonds.
What it means – If investors are willing to give the Italian government money in exchange for a paltry 2.85% per year, they must be desperate for anything with a positive return. But a long maturity with such a low yield carries high risk. It’s like pedaling a bike in a high gear. Your feet might not move very far, but the wheel covers a lot of ground. If yields increase by 0.50%, these bondholders will lose 10% of their money. If yields go up 1%, they lose 22%.

Investors probably aren’t thinking about losses. With the European Central Bank buying every bond in sight, yields are falling while prices move higher. Spain sold a 50-year bond in May at 3.49%. Today that bond yields 2.55%. Those bond investors bagged a 27% gain in just four months. That’s not bad, as long as yields don’t go back up.

ECB Reportedly Discussing Buying Fewer Bonds…

Several news outlets reported that a European Central Bank committee considered decreasing their monthly bond purchases ahead of their program’s end date of March next year. An ECB spokesman denied the rumor.
What it means – The reaction was swift and brutal. Yields shot up across the board and equity markets rolled over. This proves the power and position of central banks. If they take their collective foot off the gas, the markets will stall. This isn’t necessarily a bad thing, but it can’t be what bankers and governments want to happen.

The ECB released the minutes from its latest meeting, which reflected the board’s commitment to the bond-buying target at least through March of 2017, if not beyond. This dispelled some of the rumors, but yields still crept higher.

Italian Government Launches Cultural Bonus, Will Give 500 euros to Every Person When They Reach 18…

The money is meant to be spent on theater, museums, etc.
What it means – Sure, the government is broke and can’t pay for pensions or healthcare, but hey, they’ve got to keep the young people up on the latest musicals, right? It’s hard to tell if this is meant as a shadow helicopter money program, or a sly government dating initiative. Either way, the Italian deficit will grow, and money will be spent on consumption, not investment. Brilliant!

Doug De Groote, CFP®, MBA, CTC
Managing Director

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