Why Are Japan and Eurozone Abnormal? (excerpt)

Japan and the Eurozone have abnormally low bond yields because investors aren’t convinced that their governments’ ultra-easy monetary policies and debt-bloated fiscal policies will revive their economies. These policies are propping up their social welfare states, but aren’t stimulating their private sectors.

Near-zero government bond yields certainly allow the governments of Japan and the Eurozone to keep borrowing to fund their social welfare spending. Yet bank credit remains tight for other borrowers, particularly in the Eurozone. The accommodative monetary policies of the BOJ and ECB remove all the pressure on their governments to rein in their fiscal excesses. Consider the following recent developments:

(1) In Japan, Abenomics, which is simply a bigger dose of the same stimulative policies that didn’t work in the past, isn't working now. Industrial production plunged 3.3% in June (the steepest decline since March 2011), and 6.9% from the recent peak during January. It is back down to the lowest level since June 2013. The outputs of both consumer and capital goods industries are down.

(2) In the Eurozone, the Economic Sentiment Indicator recovered smartly last year, but has stalled over the past four months through July. Most of the region’s survey-based economic indicators have been upbeat for the past year. However, the actual economic recovery has been extremely weak. This is confirmed by the flat trend in the forward earnings of the EMU MSCI over the past year as analysts’ consensus earnings expectations for 2014 and 2015 continued to plunge through the week of July 17.

Today's Morning Briefing: New Abnormal? (1) New abnormal for bonds. (2) Old normal for stocks. (3) From endgame fears to anxiety fatigue, and now complacency. (4) The Bond King’s word games. (5) Old vs. new normal (or neutral). Good morning or good evening? (6) Greenspan and Yellen are investment strategists now. (7) Should the Fed have an investment opinion on biotechs? (8) Japan and Eurozone are abnormal. (9) Old normal GDP in US. (10) Fed in no rush to normalize interest rates. (More for subscribers.)

US Confidence Is Heating Up (excerpt)

While the latest batch of US economic indicators has been mixed, as I observed on Monday, consumers seem to be saying that the economy is heating up. That’s according to July’s consumer confidence survey conducted by the Conference Board. This survey is especially sensitive to labor market conditions, which are clearly continuing to improve. Let’s review the latest survey results:

(1) The Consumer Confidence Index (CCI) jumped this month to 90.9, the highest reading since October 2007. Both the present and expectations components of the index moved higher.

The index is available for three broad age categories. July’s gain was led by rising confidence among 35- to-54-year-olds followed by the age cohort that is older than 54. Interestingly, while confidence among those who are under 35 has stalled in recent months, it is higher than for the older groups.

(2) The jobs-plentiful response rate rose to a cyclical high of 15.9 during July. That’s the highest reading since May 2008. The jobs-hard-to-get response rate remained at a cyclical low of 30.7. This series tends to be highly correlated with the official unemployment rate. It is also highly correlated with initial unemployment claims, which fell to the lowest reading since May 2007 in mid-July.

Today's Morning Briefing: Heating Up. (1) Consumers are upbeat. (2) Jobs are more plentiful, so they say. (3) Consumers also say jobs are less hard to get, as confirmed by jobless claims and jobless rate. (4) Underemployment may be depressing Yellen more than consumers. (5) Asia is hot. (6) Good news out of China. Not so good out of Japan. (7) Production at record highs in lots of Asian economies. (8) Asia is especially cheap compared to the Eurozone with its economic and geopolitical woes. (More for subscribers.)

Profits Continue to Provide Tailwind to Stocks (excerpt)

There are numerous measures of corporate profits. The National Income and Product Accounts (NIPA), which cover GDP, also include profits data on a pre-tax and after-tax basis. The NIPA data also show profits as reported to the IRS and on a cash flow basis, i.e., from “current production.” Of course, both tend to follow the trend in nominal GDP. Since 1960, profits and GDP have fluctuated around a long-term uptrend line growing at a 7% compounded annual rate.

S&P 500 earnings tend to fluctuate between long-term growth uptrend lines of 5% and 7%. That’s especially the case for actual four-quarter trailing earnings on both a reported and operating basis. Forward earnings tends to fluctuate around the 7% trend line. During 2009 and 2010, it rebounded back to this uptrend line following a steep drop in 2008. Since early 2011, it has been tracking the 7% uptrend line closely. In recent weeks, it’s been showing signs of faster growth.

As long as the economy continues to grow, forward earnings should continue to provide a good tailwind for the stock market. S&P 500 forward earnings tends to be a good leading indicator of actual operating earnings over the coming year when the economy is growing.

Today's Morning Briefing: Earnings Tuesday. (1) Earnings are still growing. (2) Another setup for positive earnings surprises. (3) All measures of profits on uptrends. (4) The magic long-term growth number is 7%. (5) Earnings providing tailwind for stock market. (6) Revenue estimates rising for S&P 500. (7) Broad-based upturn in revenues and earnings for the 10 sectors. (8) IT outperforming, while consumer sectors underperforming so far this year. (9) Financials are cheap. (10) Still recommending overweighting in Financials, Health Care, Industrials, and IT sectors. (More for subscribers.)

Something Is Off In Europe (excerpt)

The UK remains one of the few advanced economies that is advancing at a solid pace. During Q2, real GDP rose 3.1% y/y, the best since Q4-2007. The same can’t be said for the Eurozone. The region’s July flash PMIs look solid. The composite output index, which was 54.0 this month, has been hovering around that level since February. It has been looking good since last summer, yet the “hard” data, such as industrial production and retail sales, have been quite soft. (Click to add Markit PMIs to MyPage.)

Weighing on the Eurozone is that bank loans continue to fall in the region. They declined by €243 billion at an annual rate over the three-month period through June. While the ECB has been providing easy monetary policy, bank regulators (including the ones at the ECB) continue to subject the banks to stress tests that discourage risky lending.

Even Germany, the Eurozone’s strongest economy, is showing the negative effects of tough lending standards, particularly on its large trading partners in the region. The strong euro is another headwind. The uncertainty caused by the Ukrainian crisis, with the potential for shortages and higher prices of natural gas this coming winter, is also weighing on the Eurozone. No wonder that Germany’s Ifo business confidence index fell from a recent peak of 111.3 during February to 108.0 in July. Both its present and expectations components fell sharply this month.

Today's Morning Briefing: Mixed Signals. (1) Bond yields at historic lows, as credit spreads start widening. (2) LargeCaps up, while SmallCaps down. (3) Q2 GDP estimates weaken, as earnings improve. (4) PMIs in Eurozone and China overstating economic growth. (5) Easy monetary policy is coming and going. (6) US labor market improving, yet there’s still slack. (7) ECB is easy on monetary policy, but tough on banks. (8) Strongest economy in Eurozone is weakening. (9) China’s excess capacity is producing more. (10) Japan losing its growth and inflation mojo. (11) “Lucy” (+). (More for subscribers.)

The Import of Chinese Imports (excerpt)

On July 15 we learned that China’s real GDP rose 7.5% y/y during Q2, up from 7.4% during Q1. The quality and accuracy of China’s economic data have always been questionable. That’s why I monitor all the available indicators to see when they are telling the same story, and when they are not doing so. One of the better sets of numbers is on Chinese imports. Currently, it isn’t confirming the improvement in real GDP growth.

Indeed, total imports (using the 12-month sum in US dollars) is down 0.7% in June from its record high in February. On a yearly percent change basis, it has been growing around 5% since late 2012, well below the double-digit pace of the previous three years.

I also track Chinese imports by country of origin. The recent slowdown in imports to China has been widespread among these countries, with the exception of the European Union, which is at a new record high. Australia and Brazil, the big commodity exporters to China, are flat-lining. So are Japan, South Korea, and Taiwan, which tend to ship capital equipment and technology goods to China. Chinese imports from emerging countries have been submerging a bit in recent months from February’s record high.

Today's Morning Briefing: Mad Dash. (1) A liberal labor market economist. (2) A dashboard with 19 labor market indicators. (3) The result is one index, which is posted on Fed’s website. (4) Different strokes for different folks. (5) Giving more weight to the slackers. (6) Yellen overweights wages. (7) Demographic shifts may be keeping a lid on wage inflation. (8) Easy come the bubbles. (More for subscribers.)

BRICs Outperforming Despite Russia (excerpt)

Global stock investors seeking some upside action seem to be finding it in EMs, especially the BRICs. The BRIC MSCI stock price index is up 17.4% since it bottomed earlier this year on March 14. They must be attracted to the relatively low valuation of the index, which has a forward P/E of 9.0 though with quite a bit of dispersion: India (16.1), Brazil (10.3), China (8.9), and Russia (4.9). On a ytd basis and in US dollars, the India MSCI stock price index is up 22.5% followed by Brazil (15.5) and China (0.9). Russia is back down by 14.5% after the downing of the Malaysian passenger jet.

Today's Morning Briefing: (1) Complacency setting stage for correction or melt-up? (2) Stock prices meandering, avoiding both extremes, for now. (3) Bearish contrarians on alert as all the bulls continue to buy the dips. (4) We are all investment strategists now. (5) Are stock investors too upbeat on Eurozone? (6) BRIC MSCI outperforming. (7) Abe may be losing his mojo. (8) US inflation in comfort zone. Too close to absolute zero in Eurozone. (More for subscribers.)

Beware of “False Dawns” (excerpt)

The minutes of the previous FOMC meeting noted: “The information reviewed for the June 17-18 meeting indicated that real gross domestic product (GDP) had dropped significantly early in the year but that economic growth had bounced back in recent months.” In her July 15 congressional testimony, Fed Chair Janet Yellen was a bit more cautious on the outlook: “The [Q1] decline appears to have resulted mostly from transitory factors, and a number of recent indicators of production and spending suggest that growth rebounded in the second quarter, but this bears close watching.” She was particularly concerned about housing, which “has shown little recent progress.”

Yellen concluded: “Although the economy continues to improve, the recovery is not yet complete.” That’s an astonishing conclusion given that real GDP has been expanding since Q3-2009 for 19 quarters, and has been in record-high territory since Q2-2011. The average length of the six expansions since Q2-1961 was 27 quarters, excluding the short upturn from July 1980 to July 1981. Obviously, Yellen is a monetary dove and is inclined to keep interest rates near zero for much longer than most of her colleagues on the FOMC. A weaker-than-expected Q2 GDP report would favor her approach. In her testimony, she warned about the “false dawns” that tricked Fed officials in recent years.

Yellen is right to be concerned about the recent stalling of homebuilding activity. Housing starts averaged 980,000 units (saar) during Q2, up slightly from Q1’s 925,000 unit pace, but below Q4-2013’s 1.03 million units. Single-family starts have been stuck around 600,000 (saar) since the start of the year. Residential construction could be slightly negative in the next GDP report because completions of single-family homes fell from 613,000 units during Q1 to 606,000 units during Q2. Construction spending on home improvements has been surprisingly weak this year, falling 12.5% over the past five months through May.

Today's Morning Briefing: False Dawn? (1) Q2 GDP release coincides with next FOMC meeting. (2) Curbing our enthusiasm. (3) Might it be half as much as expected? (4) Beware of “false dawns.” (5) Consumer spending still leading the way higher. (6) Residential construction has stalled, while spending on home improvements is down. (7) Capital spending on equipment looking good, but not so good on structures. (8) Inventories turn from big drag to small boost. (9) Exports are up, but imports are up more. (More for subscribers.)

Less Misery in the Misery Index (excerpt)

As I’ve noted before, bear markets tend to coincide with sharp increases in the Misery Index. It is the average of the unemployment rate and the core PCED inflation rate. The index was down to 7.8% during May from the most recent cyclical peak of 11.5% during March 2010. The unemployment rate has dropped from 6.7% at the end of last year to 6.1% during June. If it continues to drop at this rate over the rest of the year, it will be down to 5.5% by December. Inflation has edged up recently, but is likely to remain subdued around 1.5%.

Nevertheless, if the jobless rate continues to plunge, the Fed will be hiking rates sooner rather than later. Right now early next year is possible, and late this year can’t be ruled out. That might trigger financial tremors including a correction in stock prices. However, the US economy should prove remarkably resilient, which would augur well for a secular bull market.

Today's Morning Briefing: US Is Outstanding. (1) The next bear market. (2) End of NZIRP could be a shock, but might trigger a correction rather than a bear market. (3) Not much misery in Misery Index. (4) Resource Utilization Rate has room to move higher. (5) Leading indicators remain bullish. (6) Two regional business surveys are booming. (7) US oil production continues to soar. (8) Railcar loadings upbeat for autos and housing. (9) Production trending higher. (10) Semiconductors are hot, but not overheating in the US. (More for subscribers.)

China Propping Up Growth (excerpt)

China’s real GDP rose 7.5% y/y during Q2-2014, up slightly from 7.4% during Q1. More interestingly, real GDP rose 7.9% during Q2 at a seasonally adjusted annual rate, up from 5.7% during Q1, the weakest quarterly gain since Q4-2008.

Apparently, a hefty expansion in credit was necessary to boost the economy during Q2, as I discussed yesterday. China remains dependent on credit-driven investment, which exacerbates the problem of excess capacity, as evidenced by the 28 consecutive months of deflation in the PPI. Government officials want to change that, but don’t know how to achieve this goal. So they continue to prop up growth with short-term stimulus programs. Occasionally, they attempt to tighten credit, but back off quickly when growth slips.

Today's Morning Briefing: Bubbles In Fashion. (1) Yellen makes a statement. (2) A smart-looking outfit. (3) Sign of the times. (4) Fed is monitoring junk bonds and leveraged loans. (5) Equities are fairly valued with a few small exceptions, according to Fed. (6) Senator Coburn makes a good point. (7) Too many bubbles to catch? (8) Bubbles will become more obvious once Fed starts hiking interest rates. (9) The biggest bubble of them all. (10) Beware of “false dawns.” (11) More on China’s credit bubble. (12) Focus on over-weight rated S&P 500 IT (More for subscribers.)

China Still Relying on Too Much Debt to Spur Growth (excerpt)

The Chinese government is no longer providing massive economic stimulus to prop up China’s growth rate. Instead, the government is targeting spending in a more rifle-shot approach. That’s the official mini-stimulus story. It just doesn’t jibe with the latest “social financing” data, which show that China’s economy continues to be flooded with credit. It worked in the past, and it should work now. But one day, it won’t work, and the economy could sink rather than float on the sea of credit. Let’s review the latest data:

(1) Social financing rose $320 billion during June. That’s not an annualized number. It is the amount of borrowing by all sectors just during that one month. On a ytd basis, it totals a staggering $1.7 trillion compared to $1.6 trillion over the same period last year.

(2) The totals above include bank loans, which increased $175 billion during June and $934 billion ytd. Chinese bank loans totaled a record $12.6 trillion during June, 64% more than the loans held by US commercial banks.

Today's Morning Briefing: Solid Sales. (1) US business sales at new high. (2) Lots of indicators pointing to 5% revenues growth for S&P 500. (3) Analysts forecasting 5% revenues growth for lots of sectors. (4) Upward revision for consumer spending during Q2. (5) Wages and salaries outpacing inflation by about 2 percentage points. (6) YRI Earned Income Proxy showing solid income growth driving retail sales. (7) Chinese government still flooding economy with credit. (8) Investment advice from the Fed. (9) Yellen is a liberal. (10) Focus on market-weight-rated Retailers. (More for subscribers.)

The US Stands Out (excerpt)

Helping to mitigate corrections have been the steady uptrends in the forward earnings of the S&P 500/400/600 to new record highs. Forward earnings did it again last week. What is different this time is that estimates for 2015 have stopped falling. Over the past three years, annual estimates mostly fell, yet forward earnings moved higher because the coming years’ estimates remained higher than the current years’ estimates. In calculating forward earnings, the former get more weight and the latter get less weight as time passes.

Another positive is that S&P 500 forward revenues remains on an upward trend and rose to a new high during the week of July 3. Estimates for 2014 and 2015 have been rising recently and are expected to grow 3.4% and 4.4%, respectively. With the exception of Emerging Markets, the US stands out as having one of the best-looking forward revenues profiles among the various major global MSCI composites. It has the best profile for forward earnings. The US forward profit margin is at a record high, yet still trending higher.

Today's Morning Briefing: Corrections & Complacency. (1) Panic attacks followed by relief rallies. (2) Shorter and shallower event-driven corrections. (3) From anxiety fatigue to complacency. (4) Ahead of schedule. (5) Another new high for S&P 500 forward revenues and earnings. (6) Analysts predicting solid Q2 earnings growth for most of the sectors. (7) US stands out, which is why US stocks aren’t cheap. (8) Sector valuations around the world. (9) Yellen has been worrying about income inequality since 2006. (10) Help wanted. (More for subscribers.)

Eurozone Still in Recession (excerpt)

During the second half of the 1990s, the looming introduction of the euro led to a sharp drop in borrowing costs among the peripheral economies of the Eurozone. That boosted their economies and the region’s overall economy. The Italian unemployment rate fell from its 1998 peak of 11.5% to 5.8% during 2007. The Spanish jobless rate plunged from a 1994 high of 22.3% to 7.9% during 2007. Those rates have risen since then to 12.6% in Italy and 25.1% in Spain. French joblessness is currently at 10.1%, up from a recent low of 7.2% during 2008. On the other hand, Germany’s unemployment rate is only 5.1% currently, the lowest since reunification during 1990.

The low bond yields of the previous decade set the stage for the Eurozone’s sovereign debt crisis by allowing governments to borrow too much. It started in Greece during 2010, spreading rapidly to the other peripheral countries as their bond yields soared through the summer of 2012. The Eurozone fell into a recession during Q4-2011, with real GDP declining during six consecutive quarters. Draghi’s “whatever-it-takes” speech of July 26, 2012 turned the situation around surprisingly well, as yields subsequently plunged in the peripherals and real GDP rose modestly for the past four quarters through Q1-2014.

The problem is that the drop in yields has spread to the core countries this year, with the German and French yields now down to only 1.1% and 1.5%. The Eurozone’s recovery since last summer has been lackluster at best and is showing signs of stalling. Industrial production excluding construction is up only 1.7% y/y in Germany, down 3.7% y/y in France (the weakest reading since November 2012), and down 1.8% y/y (wda) in Italy. Deflation has become a concern, as the CPI inflation rate has dropped close to zero.

In fact, the Eurozone isn’t officially out of the recession that started during Q4-2011. On June 16, the CEPR Euro Area Business Cycle Dating Committee concluded that the “lack of evidence of sustained improvement of economic activity in the euro area does, however, preclude calling an end to the recession that started after 2011Q3. …in spite of several quarters of positive (but weak) economic developments…”

Today's Morning Briefing: Eurosclerosis Déjà Vu?(1) Another summertime panic attack in Europe. (2) Draghi wants more reforms. (3) Europe’s arteries hardening again. (4) Introduction of the euro set the stage for current crisis in the Eurozone. (5) Bond yields approaching zero in Germany and France. (6) Eurozone’s weak recovery stalling as region remains officially in recession. (7) EMU MSCI forward revenues and earnings remain depressed. (8) Will the P/E-led rally continue? (9) ECB’s stealth QE. (10) Eurozone banks: To lend or not to lend? (11) “Stay Home” still outperforming “Go Global” ytd. (12) Weak numbers out of China and Japan. (13) Yellen testifies. (14) “Dawn of the Planet of the Apes” (+ +). (More for subscribers.)

Deflation Weighing On China’s Heavy Industries (excerpt)

The PBOC certainly has contributed to the supply of global liquidity since the Great Financial Crisis. So have the government’s various spending programs. The problem is that monetary and fiscal stimulus has stimulated too much excess capacity. The result has been deflation in China’s various PPI measures. Indeed, the overall PPI fell 1.1% y/y during June, the 28th consecutive monthly decline.

The PPI is falling especially fast among heavy industries as follows: Coal (-10.8%), Ferrous Metals (-6.5), Chemicals (-4.9), All Heavy Industries (-2.6), and Nonferrous Metals (-2.4). With so much PPI deflation weighing on profits for so long, its no wonder that the China MSCI stock price index (in dollars) has been a global underperformer for the past few years.

Today's Morning Briefing: The Liquidity Story. (1) Frustrated central bankers. (2) Not very stimulating. (3) Liquidity floating lots of boats other than economy. (4) Pumping it up. (5) US short-term business borrowing well exceeds inventory financing needs. (6) ECB to provide 4-year loans to banks to make more loans, or whatever. (7) Eurozone banks still shedding loans. (8) BOJ also lending to banks that are lending to the government. (9) Lots of monetary and fiscal stimulus in China creates excess capacity and PPI deflation. (More for subscribers.)

The Jolt in JOLTS (excerpt)

The latest JOLTS and NFIB surveys suggest that the US labor market is continuing to gain traction much faster than widely expected. Both show significant increases in job openings, hiring intentions, and quits. They also suggest that pressures may be starting to build for higher wages. Fed Chair Janet Yellen should be pleased. However, she isn’t likely to support raising interest rates until wage inflation actually does rebound, as I’ve discussed before. Let’s review the latest data, which are uniformly upbeat:

(1) Openings. According to the JOLTS survey, there were 4.64 million job openings during May, up 761,000 the past four months and the highest reading since the previous cyclical peak during March 2007. The ratio of total unemployed workers to job openings is down to 2.1, the lowest since May 2008.

The NFIB survey of small business owners found that during June, 26% of them said that they had one or more job openings, the highest since June 2007. The 12-month average of this series tends to be a leading indicator for wage inflation.

(2) Hiring intentions. The JOLTS survey shows that total hires remain on the slow, but steady upward trend that started in 2009. However, the openings data suggest that hiring would increase more rapidly if employers could find the workers they are seeking. The NFIB survey found that 12% of small business owners expect to increase employment, which is the highest reading of the expansion so far.

(3) Quits. The number of workers who quit their job rose to 2.53 million during May, the highest since June 2008. Here is what Yellen had to say about this and the other job turnover variables at her 3/19 press conference:

A remarkably large share of workers quit their jobs every month, usually going directly into another job. And I take the quit rate in many ways as a sign of the health of the economy. When workers are scared they won’t be able to get other jobs, they show a reduced willingness to quit their jobs. Now, quit rates now are below normal pre-recession levels, but on the other hand, they have come up over time, and so we have seen improvement. The job opening rate has also come up. The hires rate, however, remains extremely depressed, and I take that as a sign of a weaker labor market. But most of these measures, although they don’t paint the identical extent of improvement, if you ask about my dashboard, the dial on virtually all of those things is moving in a direction of improvement.

Today's Morning Briefing: Yearning for Earnings? (1) Do earnings matter? (2) Some investors matter more than others. (3) A new story that’s an old story. (4) Buybacks matter. (5) Q2 earnings estimates set for upside surprises again. (6) Still optimistic on 2015. (7) Profit margins expected to rise across-the-board. (8) Job openings spike higher. (9) Quits at cyclical high. (10) Yellen’s spin on job turnover data. (11) Europe seems to be sputtering. (More for subscribers.)

The Four Phases of the Bull Market (excerpt)

In 1725, Antonio Vivaldi composed “The Four Seasons,” a set of four violin concertos. The sounds of each concerto resembles its respective season. So for example, “Winter” is punctuated with pizzicato notes from the high strings, suggesting icy rain. “Summer” sounds like a thunderstorm in its final movement, which is often called “Storm.”

One of the great virtuosos of the investment business was Sir John Templeton. He observed that bull markets experience four phases: pessimism, skepticism, optimism, and euphoria. Similarly, my friend Laszlo Birinyi has also identified four phases: reluctance, digestion, acceptance, and exuberance.

Where are we now in the current bull market? In my opinion, we are moving from the third to the fourth phase for the S&P 500. The first phase started on March 9, 2009 and ended after the second and worst correction of the bull market, on October 3, 2011. The second phase included three minor corrections, with the last one ending on June 1, 2012. The third phase has had no corrections and is probably coming to an end now. It may be setting the stage for what can also be called the “melt-up” phase. The start of the fourth phase probably coincided with the bottom in the “internal correction” of the momentum stocks on May 8. A chart of the S&P 500’s forward P/E can also be used to identify these four phases.

Today's Morning Briefing: The Fourth Phase. (1) Vivaldi, Templeton, and Birinyi. (2) The four phases of a bull market. (3) Transitioning from the third to the fourth phase. (4) Exuberance fueled by buybacks, M&A, and Yellen. (5) Equity fund flows entering the fourth phase. (6) Industry analysts are exuberant about earnings. (7) Can the secular bull survive a melt-up/meltdown scenario? (8) Bear market triggers. (9) Sectors leading the earnings parade. (10) Global growth remains slow according to German data. (11) Focus on overweight-rated S&P 500 Transportation. (More for subscribers.)

Strong Job Gains with Subdued Wage Inflation (excerpt)

Also adding to last week’s lovefest was June’s employment report. It was a strong one, which should have raised concerns that the Fed might have to start raising interest rates sooner rather than later. Indeed, the 10-year US Treasury bond yield has risen from the year’s low of 2.44% on May 28 to 2.65% on Thursday. That’s a relatively tame reaction given that the unemployment rate is down to 6.1%, the lowest since September 2008.

However, wage inflation remains subdued at 2.0% despite the drop in the jobless rate. Since she became Fed chair earlier this year, Yellen has stated that she wants to see wage inflation rise to between 3%-4% before she’ll be happy with the performance of the labor market. Of course, this is just one of the labor market indicators on Yellen’s “dashboard.” Some of the others show that the labor market is improving, but she is clearly giving more weight to wages. Let’s review:

(1) The U-6 unemployment rate fell from 12.2% during May to 12.1% during June, the lowest since October 2008.

(2) The long-term unemployment rate fell to 2.0% last month, the lowest since February 2009.

(3) The long-term unemployment as a percentage of total unemployment fell to 32.8% during June, the lowest since June 2009.

There were plenty of other upbeat employment indicators, as Debbie reports below. Most importantly, our Earned Income Proxy (i.e., aggregate hours worked times average hourly earnings) rose 0.5% last month to another record high. It is highly correlated with both private wages and salaries in personal income and with retail sales.

Today's Morning Briefing: Monetary Lovefest. (1) Should monetary policy aim for financial stability? (2) Yellen prefers “macroprudential policies” to address the issue. (3) Yellen sides with Lagarde. (4) Raising margin requirements is on the table. (5) Bull charged up again by more NZIRP talk. (6) The melt-up scenario is back in play. (7) Frothy P/Es. (8) Internal correction is over. (9) Yellen’s Dashboard: Putting more weight on wage inflation. (More for subscribers.)

Why ECB’s Latest Easing Won’t Work (excerpt)

On August 5, the ECB implemented additional easing moves, including lowering its official rate by 10bps to 0.15% and charging 0.10% on bank reserves. One of the goals was to weaken the euro to boost both the Eurozone’s inflation rate and exports. So far, the euro is down only 1.5% from this year’s high of 1.39 on May 6.

Meanwhile, the region’s recovery remains very weak. Especially troubling is that some of that weakness is showing up in Germany, the Eurozone’s strongest economy. The German Ifo business index fell 1.3% during the two months ending June. The expectations component of this index, which is highly correlated with Germany’s M-PMI, is down four of the last five months by a total of 3.8%. It is also highly correlated with the y/y growth rate in German manufacturing orders, which has been slowing over the past three months.

The Eurozone’s flash CPI for June was released yesterday, showing a 0.5% y/y increase. It’s extremely unlikely that the Draghinomics will be as successful at boosting the Eurozone’s inflation rate as much as Abenomics lifted inflation in Japan given the strength of the euro.

Another drag in the Eurozone is that the region’s banks still aren’t lending. Yesterday, we learned that over the past three months through May, loans are down by €201.2 billion at an annual rate. Perhaps the marginally negative rate on bank reserves at the ECB will encourage banks to lend. However, the ECB and other banking regulators are pressuring them to improve their balance sheets at the same time!

Today's Morning Briefing: Genies vs. Ogres. (1) Lagarde sees inflation genies and deflation ogres. (2) IMF prefers the monetary accelerator. (3) BIS says tap the brakes. (4) Chapter IV. (5) More “noisy” inflation data for Yellen. (6) Bullard sees rate hikes early next year. (7) Yellen more likely to follow Lagarde’s advice. (8) BOE implements “macroprudential policies” for housing. (9) Carney’s misguided guidance. (10) ECB's latest easing probably won’t do much for Eurozone. (11) German indicators weakening. (12) Abe’s third arrow is up in the air. (More for subscribers.)