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Some have opined the first Friday of each month brings a new chapter of the government chronicalizing the health of the US economy; the BLS Employment Report.  Stock and bond markets respond immediately too it as many—analysts, traders, central bankers—form broad based conclusions, conclusions that typically support one’s preconceived biases.  Many times the data is contradictory with many dismissing abnormalities as “one off events.”

Today the number of people filing for unemployment benefits is hovering near the lowest level in almost four decades, so is the labor participation rate (LPR), a huge contradiction.  The unemployment rate is at a decade low to a level most regard as “full employment” which should cause wage pressures to accelerate.  Another contradiction.

What gives? I will ardently argue because regulatory pressures are preventing greater job growth that increases the LPR, economic growth will remain anemic.  Most fail to remember that 90% of job creation from 1996-2007 was created by firms employing less than 499 people according to the BLS.  In other words, small business created the jobs not huge corporations, huge corporations that have the resources to challenge regulatory oversight.

In my view strong job creation that increases the LPR will not occur until there is regulatory relief.  These job gains will not come from multinational corporations but rather from small businesses, businesses that have also been starved from capital because of regulatory changes, specifically Dodd Frank.

Commenting specifically about the largely disappointing April labor report, not all the news was bad.  Wages gained 0.3% bringing the annual increase to 2.5%, nominally higher than expectations.  Moreover average hours worked met expectations, rising slightly from March’s level.

Equites initially traded lower on the news, confirming the rising negative narrative the economy is slowing. Stocks then reversed course as the data may prevent the Fed from raising rates in June.

Commenting further about Friday’s markets, oil rose nominally as Nigeria’s daily production fell to the lowest levels since 1994 because of civil strife.  As noted many times, the oil markets are devoid of any geopolitical premium, an environment find incredible given that the Middle East is facing the greatest anarchy in over 100 years and four OPEC nations are essentially failed nation states.  The fire in Canada also supported prices.

What will happen this week?  There is little on the economic calendar until late in the week.  Data released include retail sales, a sentiment survey and inflation statistics.

Last night the foreign markets were up.  London was up 0.48%, Paris up 1.31% and Frankfurt up 1.88%.  China was down 2.39%,  Japan was up 0.68% and Hang Sang up 0.23%.

The Dow should open nominally higher as oil is up about 1.5% because of the Canadian fire.   The 10-year is unchanged at 1.78%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.