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DOW – 10 = 17,540
SPX + 6 = 2099
NAS + 34 = 5139
10 YR YLD + .06 = 2.27%
OIL – .59 = 45.15
GOLD – 3.00 = 1085.50
SILV + .02 = 14.69
Private-sector hiring slowed in July. Employers added 185,000 private-sector jobs in July, down from 229,000 jobs in June, and below the average pace for the past six months. Gains slowed across all size-firms except large firms in July. Manufacturing employment has slowed sharply since the beginning of the year. The ADP report sometimes offers a hint of what we might expect from the monthly government report on jobs, which will be released Friday. Strength or weakness in the labor market is thought to be a key factor in the Federal Reserve's decision to possibly hike interest rates in September.
The Institute for Supply Management said its services index surged to 60.3% from a 56% reading in June. Any reading above 50% indicates expansion. It was the highest reading since 2005. The business activity and new orders components both were over 60%, and the employment index increased 6.9 percentage points to 59.6%. We'll have more details on the ISM report in our next segment.
Atlanta Fed President Dennis Lockhart said it would take “significant deterioration” in the U.S. economy for him to not support a rate hike in September. Lockhart's opinion is notable because he's considered a centrist on the FOMC whose views typically mirror the consensus.
The Fed has kept the federal funds rate hovering at historic, near-zero lows for more than six years. But that's all about to change. Maybe September, maybe December, but sooner rather than later. The cumulative effect of what could be a series of rate hikes over an 18 to 24 month period will ripple across U.S. economy and weigh on America wallets and pocketbooks. For most people the response is to just apply some good old common sense: pay down outstanding debt (the cost to service debt will go up), snag zero percent credit card offers (they will go away), refinance your mortgage (rates will probably rise), and remember that when rates rise bond prices go down.
According to a new IMF report, more “significant work” in analyzing data is needed before deciding whether to grant the renminbi reserve currency status. IMF staff members also suggested that a decision could be postponed by nine months, until September 2016. Since a rejection five years ago, China has been pushing for the yuan to join a list of currencies, including the dollar, pound, euro and yen, which make up the lender's Special Drawing Rights basket.
The United States in June posted a record trade deficit with the European Union. The overall US trade deficit, which includes services, climbed 7.1% to a seasonally adjusted $43.8 billion in June. The upturn largely reflected an all-time high in imports such as autos, drugs and commercial aircraft from Europe, whose goods are cheaper to buy because of a weakened currency. The flip side of a stronger US economy compared to the rest of the world is a sharp increase in the value of the dollar that's made American goods and services more expensive in Europe and elsewhere, cutting into exports. Sales of US-made goods and service abroad fell 0.1% in June to a seasonally adjusted $188 billion.
More fallout from the closure of Export-Import Bank. You may recall the Ex-Im Bank charter was allowed to expire when Congress refused to vote on extending the charter, even though the Bank has been around for 80 years. Despite the name, Ex-Im doesn't offer import assistance in the US; it is all about exporting. It provides loan guarantees, loans and insurance to help foreign companies buy US-made goods when private banks can't or won't make loans in industries including aerospace, energy and manufacturing.
Over the years, Ex-Im helped bankroll projects ranging from the Pan American Highway to insurance waivers that kept airlines flying after the Sept. 11 terrorist attacks. For decades, Congress reauthorized the bank with little or no debate and didn't even bother with a roll call in either chamber for its extension in 2006. The Export-Import Bank backed $27.5 billion in exports in fiscal 2014, just under 2 percent of the US total, and supported 164,000 American jobs, mainly in manufacturing companies both large and small; and it is not subsidized; it actually paid $675 million to the Treasury last year.
Boeing says it is now scrambling to find alternate financing for a satellite contract worth “several hundred million dollars” that was scuttled by the federal credit agency's uncertain future. Commercial satellite provider ABS is said to have terminated the satellite order in mid-July, given the absence of U.S. export financing. Jim McNerney, the chairman of Boeing, noting that the Ex-Im Bank helps keep manufacturing jobs in America, wrote recently, “I never thought I'd see the day that U.S. companies would, in effect, be penalized by their own government for not setting up shop overseas and, in the case of Boeing, expanding our domestic production and work force by billions of dollars and thousands of jobs.”
The SEC had a couple of important votes today on Dodd-Frank legislation. The first vote, which passed 3-2, dealt with a proposed new federal rule to would require public companies to list their chief executives' total annual compensation as a ratio to the their workers' median pay. The rule would not apply to companies with less than $1 billion in annual gross revenue. The rule will take effect for companies' first fiscal year starting on or after Jan. 1, 2017. More than 280,000 public comments supporting the pay ratio rule were submitted to the SEC. Fifty years ago, chief executives were paid roughly 20 times as much as their employees, compared with 331 times as much in 2013. Opponents of the measure claim it was motivated by a desire to shame companies into paying their chief executives less. As always, sunlight is the best disinfectant.
In a separate vote, the SEC considered when to discipline banks' swaps-dealing units. It has become standard operating procedure to grant an exemption waiver to banks, even when they commit multiple violations for offenses such as selling toxic mortgage securities and manipulating benchmark interest rates. Banks could be barred from managing mutual funds or raising money for hedge funds if they don't get the exemptions after settling a case; but the exemptions have become routine, even for repeat offenders. So, now the SEC voted to establish a policy that requires SEC commissioners to vote on individual waivers sought by financial firms. Companies would have six months to persuade the SEC to give them a waiver and if they didn't get it during that time period they would be denied the exemption. Also, in a separate vote banks are now required to register as dealers of security-based swaps.
JPMorgan Chase (JPM) is loosening its criteria for underwriting big mortgages; that follows similar moves by Bank of America (BAC) and others trying to grab market share in the high-end housing market for jumbo mortgages, typically loans above $417,000. In the second quarter, overall jumbo originations rose to an eight-year high of $93 billion, up 58% from a year ago. By dollar volume, jumbo mortgages given out by lenders last year accounted for about 20% of all first-lien mortgages.
A failure of JPMorgan Chase poses the greatest risk to the international financial system, even when compared with banks in Europe and Asia. According to a new government study from the Office of Financial Research, the House of Morgan was given a “systemic importance score” of 5% in a report that measures the threat to global financial stability should any one of the world's 30 largest and most-interconnected banks fail.
U.S. banks dominated the top 10 list of risky global banks, including JPMorgan at No. 1, Citigroup (C) at No. 3 with a score of 4.3%, Bank of America at No. 7, Morgan Stanley (MS) at No. 9 and Goldman Sachs (GS) at No. 10 with a 2.5% risk assessment; Wells Fargo (WFC) scored No. 18. In July, the Federal Reserve released stricter rules for determining how much capital the nation's 8 largest banks must hold to protect against future calamities. Under the new rules, the Fed imposed a new “risk-based capital surcharge” for banks with at least $250 billion in total assets.
Netflix (NFLX) plans to start offering employees “unlimited” maternity and paternity leave through the first year after a child's birth or adoption. Employees will be entitled to their normal salary during their time off. Meanwhile, Netflix shares surged 7.6% yesterday to an all-time record high, after the company announced it would offer service in Japan starting on September 2.
Following on the heels of the Netflix announcement, Microsoft (MSFT) said it will offer 12 weeks of paid time off to all new parents, improving its policy as the issues of gender equity and family balance gain greater prominence in the technology industry. Combined with the previously available leave of eight weeks for maternity disability, that means new mothers can now take a total of 20 weeks of leave fully paid.
Only 12 percent of U.S. private-sector employees have access to any paid family leave through their jobs, according to the U.S. Department of Labor. The U.S. is the only nation in the developed world that doesn't mandate maternity leave with pay.
Be on the lookout for ticker “NMG”. After more than a decade under private equity ownership, Neiman Marcus has filed for a $100M initial public offering. It wouldn't be the first time the department store chain prepared to head back to the stock market. Warburg Pincus and TPG filed for an IPO of the company in 2013. And this raises a question; will they offer the stock in their Christmas catalog? Do they still have a Christmas catalog?
