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Misleading jobs report, Italian referendum keep stocks mixed

Written By | Dec 2, 2016

WASHINGTON, December 2, 2016 – In general, stocks are trading in the neutral zone Friday as Wall Street slowly puts the wrap on another chaotic week of the ongoing Trump-Santa Claus Rally. Continuing in the general post-Thanksgiving mode, the initially fierce post-election rally had become quickly overbought and, over the last week, now seems to be correcting that condition by trading in a narrow range.

Individual sectors have been exceptions, of course. The irrational exuberance that greeted Donald Trump’s presidential victory blasted the long-dead financial sector into the stratosphere, as the new administration (as well as apparent Fed policy) seemed to portend a much friendlier environment in the banking and insurance industries.

Read also: Trading diary: Lying in wait for unpopular, high-yielding CEFs

That move has calmed for now, taken over, at least temporarily, by the oil sector, which received a big boost earlier this week from the surprise OPEC consensus to really, really cap and/or roll back production to put a floor underneath the weakening price of that resource. Oil’s per barrel price leaped over the $50 barrier on the news, weakened a bit this morning, but is now in the plus zone again for both WTI and Brent crude, which are currently sitting at $51.36 and $54.14 bbl. respectively.

Although the price of oil dominated Thursday’s trade, Friday’s nothingburger action seems motivated by the latest U.S. employment numbers—released this morning by the U.S. Bureau of Labor Statistics—and continuing worries about this weekend’s Italian plebiscite.

CNBC offers a numerically accurate but effectively misleading analysis of this morning’s job numbers:

“November’s stunning dip to a 4.6 percent unemployment rate, and the fact the economy is still adding jobs at a healthy clip, should give the Fed the green light to hike interest rates when it meets later this month.

“Unemployment was at its lowest since August 2007, and job gains continued to be strong in November, coming in at 178,000, in line with this year’s average of 180,000. However, wage growth backtracked, with a surprise 0.1 percent drop in average hourly wages, compared with expectations of a 0.2 percent gain.

“‘Average hourly earnings is disappointing. The drop in the unemployment rate — this is the best of the cycle. You had a huge drop in the level of unemployment and an increase in employment. They’re saying things are improving,’ said Ward McCarthy, chief financial economist at Jefferies.”

The problem here is how CNBC is spinning this morning’s job numbers, Ward McCarthy’s refreshingly honest comments notwithstanding. As we’ve been noting since the Great Recession allegedly ended, the government’s wondrously low unemployment figure is based on the misleading but administration-friendly U-3 BLS numbers. U-3 actually excludes large numbers of unemployed and effectively unemployed people on a technical basis.

The U-6 unemployment numbers, also readily available from BLS, paint a grimmer picture. This more broadly-based measure includes the underemployed, those who’ve remained unemployed but have dropped off the unemployment compensation rolls, and those who’ve simply given up looking for work—all population segments that are not counted in U-3.

While the U-3 unemployment figure now stands at what seems to be a wondrous 4.6 percent—almost impossibly low on an historical basis—the more realistic U-6 number finally dropped below 10 percent, though not by much. The comparison between U-3 and U-6 appears in the BLS chart below:

U-3 vs. U-6 unemployment figures, via the U.S. Bureau of Labor Statistics (BLS) as of December 2, 2016. This chart shows the dramatic difference between the government's reported unemployment numbers (U-3) and the real unemployment figure (U-6). The BLS chart cuts off some verbiage in its U-6 legend. The missing phrase is "as a percent of."

U-3 vs. U-6 unemployment figures, via the U.S. Bureau of Labor Statistics (BLS) as of December 2, 2016. This chart shows the dramatic difference between the government’s reported unemployment numbers (U-3) and the real unemployment figure (U-6). The BLS chart cuts off some verbiage in its U-6 legend. The missing phrase is “as a percent of.”

In other words, the U.S. still has one hell of an unemployment problem. But for various reasons, the government still insists on posting that highly misleading U-3 number as the real one—meaning the “stunning” unemployment dip in the government’s latest jobs report is essentially phony and masks what’s really been going on now for the better part of 8 long years of zero-sum Obamanomics.

Nonetheless, the Fed follows U-3, and this “stunning” news has likely confirmed a Federal Reserve interest rate increase announcement will be forthcoming at their mid-December meeting. Now that unemployment has “stunningly” decreased and now that the election is over, the Fed no longer needs to protect the incumbent party, and we’d now bet the ranch on a 0.25 interest rate boost incoming shortly.

All this would ultimately confirm that, at least as far as the Feds are concerned, the inflation they’ve long claimed we needed to solve a passel of economic problems, is nearly upon us, something that’s already being influenced by the proclamations of America’s President-elect.

Not even in office at this point, Trump is thus far proving to be a phenomenal influence on the economy. It will be interesting to see what happens when he finally takes over. The Maven’s hope is that his inauguration will mark the end of one of America’s longest economic nightmares, not the beginning of another one.

Meanwhile, in the Eurozone, another tempest is brewing, this time due to an upcoming plebiscite scheduled to take place this weekend in that economic mess otherwise known as Italy.

One of Italy’s biggest problems over the last half-century has been its never-ending succession of incredibly short-term governments, something that’s long prevented long term economic policy fixes. Much of this political instability can be traced to an intractable disconnect between the mostly northern ruling elites and the largely impoverished populace of Sicily and Italy’s “boot,” the latter of which seems to be the moral equivalent of America’s “flyover country.”

To make a long story short, the latest edition of Italy’s confusing government sweepstakes involves an up-or-down vote on a major constitutional change put forth by the country’s latest prime minister, Matteo Renzi. Renzi, who has crusaded as an economic reformer, wants to alter the Italian constitution so that the executive branch of the government—in this case, Renzi and his cabinet—can pass laws if they’re only okayed by the Italian parliament’s lower house, bypassing the historically intransigent upper house.

Desperate to turn around Italy’s corpse-like economy after years of stagnation, Renzi views this vote as so crucial that he’s vowed to resign from office if the referendum goes down in flames.

EU elites, oligarchs and EU bond holders—including EU government entities—fear that more chaos and instability in Italy will once again destabilize the entire zone as governments, bankers, investors and pretty much everyone else will rapidly retrench, jeopardizing the EU’s current economic trajectory, such as it is.

Adding to these fears is the simple fact that a Renzi defeat could also mark Phase Three of the Peasants’ revolt that began in the UK with the Brexit vote and then exploded on November 8 with the convincing election of Donald Trump as the next U.S. President.

In other words, the Italian vote could be viewed as Strike Three against the EU’s globalist-socialist coalition, which in turn could next lead to a populist vote in France in 2017, and… well you get it. It’s the kind of dominoes game the elites never expected. But they asked for it, and now they appear to be getting it. Good and hard.

At any rate, Monday’s trading could again be chaotic, either up or down. Friday’s tepid, low volume trading, at least in the U.S., indicates that market players are currently adopting a posture of watchful waiting.

Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17