Here’s What Metals Are Telling Us About The Job Market
From an economic point of view, one of the missing components needed for the
current recovery to gain momentum is job growth. But recent data suggest that
this integral component of the American economy may now be improving along with
everything else.Â
Today, Initial jobless claims for the week fell by 3,000 to 390,000 from the
week before. The four week moving average, which smoothes out distortions, also
fell to 397,250 and is now below the critical 400,000 mark for the first time in
over five months–as you know, numbers below 400K are associated with job
growth. Although July/Augusts jobless numbers are sometimes distorted by
seasonal factors, this improvement is consistent with positive trends in other
data and markets, which, in my view, makes the readings more credible.
Confirmation in the commodity markets
A few weeks ago, I brought to reader’s attention the fact that the Journal Of
Commerce Industrial Metal Price Index (JOC index) was performing quite smartly.
Well, the index has since continued its ascent and is now at its highest level
since the beginning of 2001. Industrial metals prices are usually a good measure
of the level of industrial activity, as these metals are used to produce
electronics, machinery, houses, building, cars, etc. It is therefore safe to
assume that higher metal prices usually mean that manufacturing activity is
picking up, or at least, is expected to pick up. This, in turn, means that more
workers will be needed to manufacture these goods. A good illustration of this
relationship can be seen in the chart below.  Â
Confirmation in the economic data
The improvement in the commodities prices and jobless claims is also
consistent with the recent increase in factory orders (which rose by $5.5
billion, or 1.7%, in June) and most recent ISM orders reading of 56.60 (anything
above 50 signals expansion).
Keeping an eye on junk bonds
As some of you may recall, on Monday, I recommended that readers focus on the
performance of the junk bond spread over Treasuries in order to gauge whether or
not the recent bond sell-off is spilling over into the equity markets. By
spilling over, I mean that certain financial institutions have in fact been very
exposed to the move in the bond market, whether through mortgage backed
securities or various “carry” style strategies, and as a result, have been
losing money. At this time, however, it is anybody’s guess how much money has
been lost and by whom. One of the best ways to measure trouble in the financial
markets is by looking at the performance of any instrument with a high
sensitivity to the performance of the financial markets and the economy as a
whole, such as high yield bonds.
As of yesterday’s close, the S&P speculative grade (junk) index has widened
by 2.4%–investors want the spread to narrow. Although these levels are not yet
signaling that there is anything to panic about, investors need to keep watching
this market until we can determine what effects the Treasury sell-off has had on
the institutional investor community. Again, so far I am not detecting any sign
of panic from the credit markets, but I’ll continue to report any development to
readers.Â