The tweet heard ’round the world is as meaningless as most of the other rubbish that passes for political discourse in the Grand Republic. It seems that Jim Cramer had it right from the beginning for traders and investors. The only thing that matters is how the markets accept the jobs data and what will its impact be on asset prices going forward. The market is definitely in the mindset of weighing the data in a “more good is good and bad is bad” mode.
The impact of FED policy seems to have been fully digested and the markets are anxious to measure whether or not the FED’s policy is gaining traction. If Friday’s unemployment rate sticks in the months going forward and the lackluster nonfarm payroll continues, will the markets accept that as good enough to sustain equity prices? Does a 7.8% headline rate pose a problem for the FED that just became very aggressive at its last FOMC meeting and moved the extended period to late-2015, as well as announced an increase in MBS purchases to ensure mortgage rates remaining very low. How can the FED’s models have missed the largest household jobs increase in 30 years just after Chairman Bernanke described the unemployment situation as grave?
Maybe the equity bulls have been correct in buying stocks as the underlying economy is stronger than the FED’s models indicate? If the FED backs off its bond buying program as the unemployment rate drops to 7%–and even as GDP growth remains tepid–how will the dilemma for the FED be resolved? These are very important issues going forward as the market digests this dramatic fall in the jobless rate. The FED has never mentioned the U-6 or other statistics but seems to committed to the headline rate so that is what we will continue to utilize in our analysis.
However, before all the talking heads have finished spinning Friday’s unemployment report to death, the only voice we need to hear from is Chairman Bernanke and his take. Also, the average hourly earnings had an above consensus increase of 0.3% as did the average work week, which increased 0.1% to 34.5 hours. The previous two jobs reports were also revised higher so from a data perspective the September report was not short of consensus.
The most troubling part was that manufacturing lost jobs and construction continued to be anemic. The Canadian unemployment report was much stronger than the U.S. as jobs grew a very robust 52,000, well above the expected 11,000, while the jobless rate increased to 7.4% to 7.3%. It seems the health of the Canadian economy is seeing many new entrants into the labor pool. The only problem with the Canadian data was that manufacturing lost 6,200 jobs but construction gained 29,000 jobs.
The BOC has been trying to rein in the housing sector so this is going to be a factor in forcing BOC Governor Carney to become more aggressive in restraining credit to the construction sector. The building permits data came out along with the unemployment report and building permits were up a robust 7.9% while consensus had a negative number. All is all, the Canadian data was very positive.
***Looking at the 2-YEAR YIELDS in Europe ECB President Draghi should be allowed to feel some success. It was the rise in short-term yields in late July that prompted President Draghi to get very aggressive in turning the tide on the near-term problems of the European sovereign debt markets. The Spanish and Italian 2-YEAR yield had climbed to almost 7% on July 25, causing severe problems for those nations looking to borrow money within the time frame of the previous LTRO interventions.
In reviewing the present 2-year note prices, Mr. Draghi can feel that his concept of monetary transmission channel is certainly effective in calming the storms that were battering the debt stressed peripherals:
So without question the ECB’s efforts have definitely had an impact on the ability of the peripherals to borrow at somewhat globally competitive rates. The Irish 2-year note is equivalent to the Canadian rate of the same duration. Does this mean that for Europe the troubles are past and investors can proceed with investing in Europe? Hardly.
The difficult work for Europe begins with Spain and how it will deal with funding itself with a contracting economy. Investors have to worry that the ECB has followed the FED in breaking the price discovery function of its bond markets. This is the major problem for global investors as we move forward. This is why we will keep on top of the price of short-term debt in Europe as a very important barometer of global risk. If the Euro curves begin a new round of bear flatteners I will become very cautious about risk. For President Draghi: Do not become to enamored with this recent success for the markets will humble all and will prove that perceived victories can be fleeting. The markets can be repelled for a while but if policy fails and undermines the impact of precious time bought by successful interventions the market will exact an enormous toll.