Notes From Underground: Not Quite Groundhog Day, But It’s Time for the Unemployment Report to See Its Shadow

Will it be another mediocre report or will the economy show signs of life after the “fiscal cliff” issue was pushed down the halls of Congress? The robustness of the equity markets would certainly make one presume the jobs data “ought” to be better, but my readers are well aware that its ultra low interest rates that put the continued bid to global stocks. In fact, low wage growth and low interest rates have been a dynamic duo for corporate profits as high unemployment continues to keep downward pressure on wages and, of course, corporations are borrowing massive amounts of money through bond offerings and bypassing the need for bank financing. The recent GDP release showed that wages and bonuses had a large increase in the fourth quarter but that was due to businesses bringing dividends and bonuses forward to 2012 so as to beat the tax increases in the new year.

The market needs to see a large spurt in nonfarm payrolls, something on the order of 250,000 or more to get its mojo going and test the all-time highs in the S&Ps up at around 1580. Yes, zero interest rates around the world are certainly a catalyst for the BULLISH SENTIMENT but fundamentals are going to have to improve to support the rally of Ben Bernanke’s PORTFOLIO BALANCE CHANNEL. The market is anticipating a nonfarm payroll number of around 165,000, average hourly earnings to rise 0.2% and the work week to remain flat at 34.5 hours per week. The FED‘s beloved unemployment rate is expected to remain steady at 7.8%. The most bullish data would be a large growth in the NFPs and a rise in the rate for that would indicate that people are returning to the labor force in a bout of optimism. The jobs market needs to come out of its hole in an effort to be more than a mere shadow of itself in terms of previous recoveries.

***There is no Canadian jobs report tomorrow as the data seems to take longer to collect in the economy up North. The data I like to have on the Ontario auto manufacturing will have to wait until next Friday. Manufacturing jobs in the U.S. will be of interest because of the way exports lagged in this week’s GDP report as a big reason for the downturn was the drop in U.S. exports. Will the coming sequester act as a drag on manufacturing as industrial corps are nervous about new hires in the face of a very possible curtailment of government spending? Again, this is one data set that needs to be absorbed before traders get aggressive. Be cautious of the headline-triggered ALGOS that create wild volatility on what can be very misleading information.

***As we close out the month, the yield curves in Europe remain well-behaved  with the Spanish 2/10 at 268 basis points; Italy at 264 basis points; Portugal at 280 basis points; and France at 190 basis points. The U.S. 2/10 curve sits confined to a long-term range but is at a recent high of around 170 basis points. The Canadian 2/10 curve had the most recent sizable move as it widened from 68 to 83 basis points based on the softer tone from the Bank of Canada. Also for the month,the precious metals were a mixed bag as the GOLD closed marginally lower while the silver and platinum had sizable rallies. It seems that any metal with utility value, as well as a store of value, outperformed.

This synthesizes with the large gain for the stock markets as anything that has productive value was in demand–in response to holding cash with its negative yield. While there is a great deal of talk about currency wars, investors are not concerned enough yet to avoid all fiat currencies but we will be attentive to the GOLD/CURRENCY crosses to look for clues when the market becomes seriously fearful of a full-blown currency war. The developing economies from China, Korea to Brazil have made it known that they view recent central bank actions as currency manipulation. If the U.S. FED is responsive only to unemployment data, a domestic issue may become an international problem.

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