Greetings,

This morning we start with Friday's US employment report which showed continuing improvements in the nation's labor markets. Here are some highlights.

Labor force participation and employment-to-population ratio rose as more Americans reentered the jobs market.

 

Growth in US labor force finally exceeded the population growth.

With more people now looking for work, the unemployment rate actually rose slightly.

As additional workers enter the labor force, wage growth remains tepid. So far there is little evidence of broad wage pressures, allowing the Fed to stay put for a while longer.

Here are several other items from the payrolls report.

1. US manufacturing payrolls saw a sharp decline, missing forecasts. This was confirmed by the manufacturing PMI measures discussed below.

2. Government hiring is now contributing to job growth in the US. Here is the year-over-year growth in government payrolls.

3. US oil & gas payrolls have fallen sharply on a year-over-year basis. This is the worst decline since the mid-80s.

4. Long-term unemployment in the US remains elevated. Anecdotally those who have been unemployed the longest have the toughest time finding work.

5. Here is the latest comparison between full-time an part-time employment changes since the start of the Great Recession.

Source:  @WSJ, h/t Ed Bozaan 

6. The final item on the labor markets comes from Pew Research showing continuing improvements in job availability.

Source: @FactTank 

The combination of the payrolls report (above) and other economic data on Friday raised the implied probability of rate hikes in 2016 by nearly 10%.

Source: @adamsamson, @mamtabadkar 

Another important economic report that came out on Friday was the ISM Manufacturing PMI. The headline measure was better than expected and showed US manufacturing back in (slight) growth mode (PMI > 50). 

While manufacturing employment showed contraction, the ISM new manufacturing orders index recovered.

Even export orders stabilized.

It's important to point out that much of this improvement in ISM PMI came at the expense of gutted inventories and tightened margins.

An alternative US manufacturing index from Markit showed little improvement (note that the markets tend to assign much more weight to the ISM report). Here are the highlights.

Source: @MarkitEconomics

Source: @MarkitEconomics

Continuing with the US economy, here are several other developments.

1. US construction spending was weaker than expected - with the weakness driven by commercial and public construction. Residential construction spending on the other hand continues to climb.

 

Source: @abcnews

2. US auto sales disappointed. It feels as though the industry is "stretching" a bit to keep up sales. Here is a quote from the WSJ. 

Source: @WSJ

The next two charts show total vehicles sales as well as only car sales (excluding trucks). 

 

3. The latest Atlanta Fed GDP tracker for Q1 (second chart below) projects 0.7% growth.

Source:  ‏@AtlantaFed 

4. However, the ECRI US index of leading indicators has risen sharply in recent weeks, suggesting that Q2 GDP growth may see an improvement over Q1. 

Source: ECRI

5. It's worth showing this next chart again. The FOMC now doesn't believe the US economy will grow faster than 2% over the long run. The Committee has been continuously downgrading their view on how fast the GDP can grow in years to come. What does this say about long-term interest rates and the demand for yield?

Canadian manufacturing returned to growth in March after a significant slowdown in recent months. Stronger US orders helped boost the nation's manufacturing activity. Economists remain relatively positive on Canadian manufacturing going forward as a result of stronger US demand.

Turning to the Eurozone, here are a few updates.

1. The Investing.com euro index (against a basket of currencies) shows the euro at the strongest levels since last October. Mr. Draghi must find this highly frustrating, with the euro strength effectively tightening financial conditions in the euro area.

2. Here is the Italian 5yr government bond yield showing the impact of the ECB's QE expansion.

3. The 5yr French government bond yield is now firmly in the red.

4. While the employment picture across the Eurozone has been improving, French (discussed here) and Italian labor markets have stalled. The unemployment rate in Italy is unexpectedly rising again. This has to be another frustrating development for the ECB. 

5. Demand for the ECB's TLTRO (cheap multi-year loans for banks who lend to smaller firms and to the consumer) continues to fall. Soon some banks will be able to borrow from the central bank at negative rates. In effect, the ECB will be providing capital AND paying banks to lend. It will be interesting to see how this plays out politically.

Source: BAML

Next, we have a few observations on other developments in Europe.

1. Given Sweden's strong economic performance recently, is the central bank about to begin tightening? Goldman says yes. Perhaps.

Source: Goldman Sachs

2. Norway's economy continues to struggle as a result of weak oil prices. The manufacturing PMI report as well as credit growth both disappointed.

 

3. The UK's housing shortage has reaccelerated house price appreciation. Just like in the US, house price growth over 5% is significantly above the nation's wage growth.

Switching to Japan, speculative accounts' net long yen positions remain elevated. So far this trade is working.

The yen has been strengthening (chart shows US dollar falling against the yen), which is hammering Japanese shares (the second chart shows the Nikkei 225 index)..

Source: barchart

Source: barchart

On a separate note, the BoJ's holdings of JGBs hit ¥300 trillion. That's roughly 60% of GDP (note, that excludes other types of assets held by the BoJ). 

Source: BOJ

Following up to last week's note on China's manufacturing indices, here is a good summary from Credit Suisse.

Source: Credit Suisse

Source: Credit Suisse

Here is the latest Markit manufacturing PMI report summary for Brazil. Is the weak real helping Brazil's economy turn the corner? Perhaps. 

Source: @MarkitEconomics

The Saudis want to diversify away from oil by creating a massive investment fund. This will focus on both domestic and international assets.

Source: ‏@sobata416, @business 

We now turn to the energy markets where ...

1. ... crude oil is once again under pressure - giving up 1% in Sunday open.

Source: barchart

2. Note that the latest rally was not driven by rising demand.

Source:  ‏@sobata416

3. US rig count continues to fall.

4. Deutsche Bank points out that crude oil inventories should start declining this year as production slows. However, the pace of declines will depend on crude import levels.

Source: Deutsche Bank

5. Goldman's economic model that looks at 3 trajectories for crude oil prices shows a surprising result. A $70/bbl oil price will result in stronger near-term US growth than if crude oil falls to $30/bbl.

Source: Goldman Sachs, h/t @NickatFP

In the $70/bbl scenario, consumption takes a hit but energy CAPEX and gasoline/jet fuel exports more than compensate. This is not what many economists have been projecting.

Source: Goldman Sachs, h/t @NickatFP

6. We've had the second warmest heating season on record in the US. This (in addition to strong supply dynamics) has been putting pressure on natural gas prices.

Source: Deutsche Bank

Source: barchart

In credit markets, we see US investment-grade corporate debt fund flows remaining quite strong. Credit has been back in favor.

Source: BAML

Extraordinarily low rates and demand for corporate bonds in recent years has allowed corporations to extend debt maturities. Long-term debt is now the bulk of corporate liabilities. 

Source: Deutsche Bank

In the equity markets, ...

1. ... some are pointing to the recent deleveraging trend, as margin debt levels decline. This could clearly create some headwinds for the market. However claiming (as many have) that this will create a massive bear market in the US may be unwarranted.

Source: The Felder Report, h/t Scott

Source: ‏The Felder Report, h/t Scott

2. Analysts are also concerned about this next trend showing GAAP vs. non-GAAP margin of large US corporations. This is clearly a concern, but at least a portion of the trend is due to the recent spike in M&A activity which causes all sorts of Pro-forma adjustments.

Source: Deutsche Bank 

3. After Metlife won its battle against the Fed and avoided being classified as a systemically important financial institution (SIFI), GE is trying the same. It has a good case after having shed GE Capital (chart below). Will the other non-bank financial firms follow?

Source: ‏@valuewalk

4. Below we have VIX vs. VDAX (German VIX-equivalent) YTD relative (%) moves. Is the strengthening euro holding VDAX elevated? 

In money markets, we've had a decent spike in the TED spread. Some of this has to do with sudden (technical) movements in treasury bills rather that any sort of tightening in financial conditions. Nevertheless it's worth keeping an eye on this indicator.

Source: @SoberLook

3. Finally, here are the strategies hedge fund of funds are looking for these days.

Source: @Preqin 

Turning to Food for Thought, we have 3 items this morning:

1. Shoplifting among Japan's elderly continues to rise. Apparently some prefer prison in order to get free food - especially as imported food prices have risen. Very sad.

h/t Paul Cuatrecasas 

2. Do employees trust the firms they work for? Here is the breakdown for major economies.

Source: @wef

3. Net favorability of US politicians in each election between 1984 and 2016.

Source:  @FactTank, @nytimes

Finally, we have a letter to the editor from a Daily Shot reader (Michael) in reference to the discussion on US credit risk.

I just wanted to comment on the graph below and a similar one in today’s email on Corporate Debt/GDP suggesting a potential default cycle.  Leaving Energy aside, I think it’s hard to make the argument that US corporate debt has the same relationship/correlation to US GDP that it had 25 years ago.

It’s a global world.  When KO or GE or SBUX borrow money, they are generally investing it in places other than the US.  So if KO invests $300mm opening a plant in Vietnam to produce beverages for SE Asia, how would that be reflected in US GDP??  How do we accurately adjust for this?

Source: Deutsche Bank