Broad Gains, but Where Are the Skilled Workers?

U.S. Review

Broad Gains, but Where Are the Skilled Workers?

There were broad improvements in the economic data this week, with more optimism among small businesses, lower jobless claims and expanding consumer credit. However, according to the NFIB and JOLTS, a number of employers cannot seem to find qualified workers.
Fed minutes revealed a slightly more dovish tone than was articulated during the press conference. We continue to look for the Fed’s rate hike to come around the middle of next year.

Seeking Qualified Workers

Spring is shaping up to look quite a bit better than the severely cold and snow-ridden winter. This week continued that trend, with improvements in small business optimism, growing consumer credit and fewer jobless claims. Per usual, none of these improving metrics of the U.S. economy point to anything different from our previous outlook: that the economy continues to grow and make improvements, but the pace of that growth is still somewhat subdued.

Although this week signaled the same old economic story, the underlying details reveal a more interesting one. There is still plenty of slack in the labor market and one would rightly assume that a job is difficult to come by. However, employers are also struggling to find the workers they need. In the NFIB survey, 41 percent of small business owners who were hiring said that there were few or no qualified applicants for the job, and 22 percent of respondents reported that they had positions they could not fill. This same sentiment is showing up in at least two other surveys. In the NAHB survey, part of the explanation for weak homebuilder sentiment was due to the lack of skilled workers. This problem was corroborated by JOLTS data that show an upward trending job openings rate for construction positions, while the hiring rate continues to plummet well below that level. Although a skills mismatch is not great news for the labor market, it is a sign that employment growth has more potential, and that potential is slowly being realized. During the first week of April, initial jobless claims fell to their lowest level since 2007. Furthermore, we saw the largest net share of small businesses increase compensation since the recovery began.

Higher Prices but Still Easy Money

The Fed reaffirmed its commitment to keep its loose stance on monetary policy until the labor market is healthier and inflation picks up (See the Interest Rate Watch for a more in depth analysis of the Fed’s meeting minutes). Despite a larger-than-expected increase in import prices in March, inflationary pressures are still fairly weak. Import prices were driven mostly by temporary factors, such as rising demand for natural gas during the cold winter and a giant increase in fresh fruit prices stemming from drought, disease and the influence of cartels in Mexico. Compared to a year ago, import prices are still 0.6 percent lower. PPI was also boosted by the rise in food prices, although rising costs for services was a larger contributor. Even with the upside surprise in the PPI, most of the broader measures of inflation, including the CPI and PCE deflator, remain well contained.

After a strong build in inventories in 2013, we expect a drawdown to weigh on growth this year. Wholesale inventories continued to grow in February, but the rate is considerably lower than the highs reached in October. Although sales picked up in the month, the inventory to sales ratio remained at an elevated 1.19. Fewer small business owners are adding to their inventories, supporting expectations that inventory growth will continue to slow through at least the first half of the year.

Global Review

IMF’s Downward Revision and Some Positive Offsets

The IMF this week made headlines with its semi-annual update to its global forecasts, which shaved estimates for this year and next by a tenth of a percentage point each. Official projections from the IMF now expect top-line global GDP growth of 3.6 percent in 2014 and 3.9 percent in 2015. This is slightly rosier than our global growth forecast of 3.3 percent for 2014 and 3.8 percent in 2015.
In this week's Global Review on page 4, we discuss how the outlook for some parts of the global economy brightened this week with better-than-expected data.

German Industrial Production

In terms of international economic news, the week began with some better-than-expected data for the German factory sector. Industrial production increased 0.4 percent in February, which was a slightly larger pick up than expected. The year-over-year rate now stands at 4.8 percent, which is a shade off the 4.9 percent rate reported in January, but is still the secondstrongest annual growth rate since 2011.

After the ECB’s decision to stay on hold last week, ECB President Draghi made it clear that the ECB stood ready to employ a number of options to stave off deflation in the Eurozone. The better-than-expected factory data in Germany represent a welcome bright spot for the Eurozone economy, which has struggled to maintain consistent improvement.

Bank of England Meeting

Real GDP growth in the Eurozone has been outpaced by more robust growth in the United Kingdom. We expect this relative outperformance to continue for the next couple of years, and we are not alone in that view. The IMF’s updated forecast released this week has a real GDP forecast of 2.4 percent this year and 2.5 percent in 2015 for the United Kingdom. Not only is that faster than the forecast for the Eurozone, it is the fastest of all the G7 economies.

The CPI inflation rate in the United Kingdom, at 1.7 percent yearover- year, is fairly close to the Bank of England’s (BoE) 2.0 percent target. Still, at its meeting this week, the BoE kept its target rate unchanged and made no move to alter its asset purchase program. Meeting minutes will not be available for several weeks, but we know from March meeting minutes that the bank’s Monetary Policy Committee remains concerned about slack in the labor market and a mixed assessment of global economic growth.

Aussie Payrolls

Prior to this week’s release of the March employment report for Australia, there was a degree of skepticism about the true health of the Aussie labor market. Since mid-2011, the unemployment rate had been trending higher as job growth has been generally unimpressive. So when February data showed a net increase of more than 47,000 jobs and the strongest month of hiring for fulltime jobs in more than 20 years, market-watchers there braced for a slower pace of hiring in March as was evident by the consensus expectation of just 2,500 new jobs in March. We learned this week that the Aussie economy created another 18,100 new jobs in March and that is off a February gain that was revised even higher. Although full time hiring gave back some of the gains, the unemployment rate fell to 5.8 percent, the largest single-month decline in the jobless rate since 2010.

The improvement in hiring diminishes expectations for an easing in monetary policy from the Reserve Bank of Australia and may even bolster the case for a rate hike. In our view, a rate increase in Australia would be premature. Recent minutes from the RBA discuss a period of stability and that seems the most likely nearterm course, in our view.

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Recently, the stock market has experienced high levels of volatility. If you are thinking about participating in fast moving markets, please take the time to read the information below. Wells Fargo Investments, LLC will not be restricting trading on fast moving securities, but you should understand that there can be significant additional risks to trading in a fast market. We've tried to outline the issues so you can better understand the potential risks. If you're unsure about the risks of a fast market and how they may affect a particular trade you've considering, you may want to place your trade through a phone agent at 1-800-TRADERS. The agent can explain the difference between market and limit orders and answer any questions you may have about trading in volatile markets. Higher Margin Maintenance Requirements on Volatile Issues The wide swings in intra-day trading have also necessitated higher margin maintenance requirements for certain stocks, specifically Internet, e-commerce and high-tech issues. Due to their high volatility, some of these stocks will have an initial and a maintenance requirement of up to 70%. Stocks are added to this list daily based on market conditions. Please call 1-800-TRADERS to check whether a particular stock has a higher margin maintenance requirement. Please note: this higher margin requirement applies to both new purchases and current holdings. A change in the margin requirement for a current holding may result in a margin maintenance call on your account. Fast Markets A fast market is characterized by heavy trading and highly volatile prices. These markets are often the result of an imbalance of trade orders, for example: all "buys" and no "sells." Many kinds of events can trigger a fast market, for example a highly anticipated Initial Public Offering (IPO), an important company news announcement or an analyst recommendation. Remember, fast market conditions can affect your trades regardless of whether they are placed with an agent, over the internet or on a touch tone telephone system. In Fast Markets service response and account access times may vary due to market conditions, systems performance, and other factors. Potential Risks in a Fast Market "Real-time" Price Quotes May Not be Accurate Prices and trades move so quickly in a fast market that there can be significant price differences between the quotes you receive one moment and the next. Even "real-time quotes" can be far behind what is currently happening in the market. The size of a quote, meaning the number of shares available at a particular price, may change just as quickly. A real-time quote for a fast moving stock may be more indicative of what has already occurred in the market rather than the price you will receive. Your Execution Price and Orders Ahead In a fast market, orders are submitted to market makers and specialists at such a rapid pace, that a backlog builds up which can create significant delays. Market makers may execute orders manually or reduce size guarantees during periods of volatility. When you place a market order, your order is executed on a first-come first-serve basis. This means if there are orders ahead of yours, those orders will be executed first. The execution of orders ahead of yours can significantly affect your execution price. Your submitted market order cannot be changed or cancelled once the stock begins trading. Initial Public Offerings may be Volatile IPOs for some internet, e-commerce and high tech issues may be particularly volatile as they begin to trade in the secondary market. Customers should be aware that market orders for these new public companies are executed at the current market price, not the initial offering price. Market orders are executed fully and promptly, without regard to price and in a fast market this may result in an execution significantly different from the current price quoted for that security. Using a limit order can limit your risk of receiving an unexpected execution price. Large Orders in Fast Markets Large orders are often filled in smaller blocks. An order for 10,000 shares will sometimes be executed in two blocks of 5,000 shares each. In a fast market, when you place an order for 10,000 shares and the real-time market quote indicates there are 15,000 shares at 5, you would expect your order to execute at 5. In a fast market, with a backlog of orders, a real-time quote may not reflect the state of the market at the time your order is received by the market maker or specialist. Once the order is received, it is executed at the best prices available, depending on how many shares are offered at each price. Volatile markets may cause the market maker to reduce the size of guarantees. This could result in your large order being filled in unexpected smaller blocks and at significantly different prices. For example: an order for 10,000 shares could be filled as 2,500 shares at 5 and 7,500 shares at 10, even though you received a real-time quote indicating that 15,000 shares were available at 5. In this example, the market moved significantly from the time the "real-time" market quote was received and when the order was submitted. Online Trading and Duplicate Orders Because fast markets can cause significant delays in the execution of a trade, you may be tempted to cancel and resubmit your order. Please consider these delays before canceling or changing your market order, and then resubmitting it. There is a chance that your order may have already been executed, but due to delays at the exchange, not yet reported. When you cancel or change and then resubmit a market order in a fast market, you run the risk of having duplicate orders executed. Limit Orders Can Limit Risk A limit order establishes a "buy price" at the maximum you're willing to pay, or a "sell price" at the lowest you are willing to receive. Placing limit orders instead of market orders can reduce your risk of receiving an unexpected execution price. A limit order does not guarantee your order will be executed -" however, it does guarantee you will not pay a higher price than you expected. Telephone and Online Access During Volatile Markets During times of high market volatility, customers may experience delays with the Wells Fargo Online Brokerage web site or longer wait times when calling 1-800-TRADERS. It is possible that losses may be suffered due to difficulty in accessing accounts due to high internet traffic or extended wait times to speak to a telephone agent. Freeriding is Prohibited Freeriding is when you buy a security low and sell it high, during the same trading day, but use the proceeds of its sale to pay for the original purchase of the security. There is no prohibition against day trading, however you must avoid freeriding. To avoid freeriding, the funds for the original purchase of the security must come from a source other than the sale of the security. Freeriding violates Regulation T of the Federal Reserve Board concerning the extension of credit by the broker-dealer (Wells Fargo Investments, LLC) to its customers. The penalty requires that the customer's account be frozen for 90 days. Stop and Stop Limit Orders A stop is an order that becomes a market order once the security has traded through the stop price chosen. You are guaranteed to get an execution. For example, you place an order to buy at a stop of $50 which is above the current price of $45. If the price of the stock moves to or above the $50 stop price, the order becomes a market order and will execute at the current market price. Your trade will be executed above, below or at the $50 stop price. In a fast market, the execution price could be drastically different than the stop price. A "sell stop" is very similar. You own a stock with a current market price of $70 a share. You place a sell stop at $67. If the stock drops to $67 or less, the trade becomes a market order and your trade will be executed above, below or at the $67 stop price. In a fast market, the execution price could be drastically different than the stop price. A stop limit has two major differences from a stop order. With a stop limit, you are not guaranteed to get an execution. If you do get an execution on your trade, you are guaranteed to get your limit price or better. For example, you place an order to sell stock you own at a stop limit of $67. If the stock drops to $67 or less, the trade becomes a limit order and your trade will only be executed at $67 or better. Glossary All or None (AON) A stipulation of a buy or sell order which instructs the broker to either fill the whole order or don't fill it at all; but in the latter case, don't cancel it, as the broker would if the order were filled or killed. Day Order A buy or sell order that automatically expires if it is not executed during that trading session. Fill or Kill An order placed that must immediately be filled in its entirety or, if this is not possible, totally canceled. Good Til Canceled (GTC) An order to buy or sell which remains in effect until it is either executed or canceled (WellsTrade® accounts have set a limit of 60 days, after which we will automatically cancel the order). Immediate or Cancel An order condition that requires all or part of an order to be executed immediately. The part of the order that cannot be executed immediately is canceled. Limit Order An order to buy or sell a stated quantity of a security at a specified price or at a better price (higher for sales or lower for purchases). Maintenance Call A call from a broker demanding the deposit of cash or marginable securities to satisfy Regulation T requirements and/or the House Maintenance Requirement. This may happen when the customer's margin account balance falls below the minimum requirements due to market fluctuations or other activity. Margin Requirement Minimum amount that a client must deposit in the form of cash or eligible securities in a margin account as spelled out in Regulation T of the Federal Reserve Board. Reg. T requires a minimum of $2,000 or 50% of the purchase price of eligible securities bought on margin or 50% of the proceeds of short sales. Market Makers NASD member firms that buy and sell NASDAQ securities, at prices they display in NASDAQ, for their own account. There are currently over 500 firms that act as NASDAQ Market Makers. One of the major differences between the NASDAQ Stock Market and other major markets in the U.S. is NASDAQ's structure of competing Market Makers. Each Market Maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the Market Maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds. Market Order An order to buy or sell a stated amount of a security at the best price available at the time the order is received in the trading marketplace. Specialists Specialist firms are those securities firms which hold seats on national securities exchanges and are charged with maintaining orderly markets in the securities in which they have exclusive franchises. They buy securities from investors who want to sell and sell when investors want to buy. Stop An order that becomes a market order once the security has traded through the designated stop price. Buy stops are entered above the current ask price. If the price moves to or above the stop price, the order becomes a market order and will be executed at the current market price. This price may be higher or lower than the stop price. Sell stops are entered below the current market price. If the price moves to or below the stop price, the order becomes a market order and will be executed at the current market price. Stop Limit An order that becomes a limit order once the security trades at the designated stop price. A stop limit order instructs a broker to buy or sell at a specific price or better, but only after a given stop price has been reached or passed. It is a combination of a stop order and a limit order. These articles are for information and education purposes only. You will need to evaluate the merits and risks associated with relying on any information provided. Although this article may provide information relating to approaches to investing or types of securities and investments you might buy or sell, Wells Fargo and its affiliates are not providing investment recommendations, advice, or endorsements. Data have been obtained from what are considered to be reliable sources; however, their accuracy, completeness, or reliability cannot be guaranteed. Wells Fargo makes no warranties and bears no liability for your use of this information. The information made available to you is not intended, and should not be construed as legal, tax, or investment advice, or a legal opinion.