A Few Charts Before NFP

As we anticipate today’s release of the US May jobs report, let’s take a look at the macro implications of yesterday’s disappointing Chicago PMI and the earlier Philly Fed survey.

The Chicago PMI hit its lowest level since October 2009 at 52.7 in May, from last month’s 56.2. The index has fallen by 10 points in two months, pushing its New Orders sub-index to the lowest since September 2009.

Considering that the correlation between Chicago PMI and ISM surveys is above 0.88, and the ISM manufacturing is due today, the expected 53.8 reading may prove ambitious, which could lead to further disappointment.

The US economy has been widely credited for being the lone G10 nation to have escaped a contraction (below 50) in either ISMs.

Looking at the chart below, the common denominator in all graphs, is the “lower highs” formation, whereby each series attempts to regain its 2010/2011 highs but fails half way.

Finally, the bottom chart illustrates the close correlation between US non-farm payrolls and the S&P500. As both turn lower, it is a question of time before NFP dropped back below 100K and S&P50 tested the 1270s level. With weekly jobless claims having added 20K from their March lows and the VIX pushing above 25 and showing rebounds more frequently than anytime in the previous 6 months, the trend towards 50Ks in NFP, 1250 in S&P500 and 1185 in the Dow-30 appears increasingly plausible.

With all the headline stories about the comeback of US manufacturing, it is not surprise that the ISM manufacturing (blue) has outperformed. Yet, both sectors seem approaching the 50.0 line, denoting the split between expansion and contraction. Just as services lagged behind manufacturing in later 2007, the inverse may be occurring this time as manufacturing ISM remains above services.

Earlier this month, the May Philadelphia Fed index on business outlook fell to -5.8 from April’s 8.5, its worst and first negative reading since September 2011. Its employment sub-index plummeted to -1.3 from 17.9, the worst reading since June 2010. The last time the Philly Fed survey had fallen fell from positive to negative was in August 2001, when funds were fleeing Italian banks and the market was calling for QE3.

One month after the Philly Fed fell below zero, the Fed unveiled its third edition of quantitative easing known as Operation Twist, which was not as liquid as QE1 & QE2. Operation Twist in September 2011 was insufficient for eurozone woes-damaged liquidity, until the Fed intervened with a co-ordinated FX swaps in December 2nd, followed by the LTRO-1 on December 20th – deemed by many as the equivalent of an “Italy-bailout”.

It is increasingly hard to ignore these interrelationships, which suggest a repeat of the 2007-8 cycle is imminent. We illustrated that inWednesday’s Four charts (Spain 10-year yield, BRICs rates, EU/US LIBOR spread, Ezone confidence/GDP). The re-emergence of that trend is already here.