Archive - Aug 2011

Where are we...

In a carbon copy of Goldman's action from exactly one year ago, Goldman's Jan Hatzius has just killed his outlook for the remainder of the year, said there is a 33% chance of a recession and is now looking forward to some QE3 announcement next week. "As foreshadowed in recent publications, we have lowered our US real GDP growth forecast to 2% (annualized) through 2012Q1 and 2½% thereafter.  We now see the unemployment rate edging up to 9¼% by the end of 2012, and see a one-in-three risk of renewed recession.  On the monetary policy side, we expect no rate hikes or changes in the size of the Fed's balance sheet until 2013 or later; moreover, we now expect the FOMC to provide more guidance about the future size of its balance sheet at next week’s meeting." Recall that 3 weeks after last year's such downgrade, we had a rather unpleasant announcement at Jackson Hole. Deja vu.... all over again.

Watch the live webcast below to hear as "President Obama Speaks on the Administration’s Work to Prepare Our Nation’s Veterans for the Workforce" and discuss today's jobs number in general. Beginning shortly post the fashionably late arrival. As for why a nation's veterans should be preparing for the workforce, well, we leave that one to others smarter than us.

Yep. Europe again. Following comments from Generali's CEO Giovanni Perissinotto based on a transcript from a conference call earlier that the Eurozone is at risk of breakup (something which everyone knows, but nobody dares to say, especially not anyone whose CDS is trading in lockstep with those of Italy), the USDCHF just plunged to fresh all time lows. And so all the goodwill created by the robotic buying on the NFP headlines is gone.

After soaring by over a hundred points, the DJIA subsequently plunged in a flash crash type move after Reuters carried headlines saying that the CDU budget expert said that the Eurozone leaders have clearly excluded boosting the volume of the EFSF (and the plunge has nothing to do with any ridiculous rumor of an S&P downgrade - the S&P would be sent into exile if it dared to defy Obama at this point in his debt ceiling hike victory lap). The plunge was further exacerbated by a previous interview on CNBC with Olli Rehn in which he was pressed for details on the EFSF which he naturally would not provide as obviously Germany is still not onboard. And as everyone knows, without a €1.5 trillion expansion in the SPV monetization mechanism known as the EFSF, Italy is doomed. The result: a 30 point plunge in the ES showing once again that when it comes to flash crash risk, it is once again all about Italy and insolvent Europe in general.

We already learned that the one biggest red flag in unemployment data had been raised when we found that the labor force participation rate was the lowest since 1984. Now we find that the other critical data point: average length of unemployment, just hit a new all time high of 40.4 weeks in July, up from the previous record of 39.9 in June. Someone should tell the average American who is rapidly approaching one year in average unemployment that the stock market soared on good payroll news. They will be delighted.

BOTTOM LINE: Employment report good but not great. Establishment survey data clearly better than expected, household survey still soft.

In our monthly update on how many jobs have to be created by the end of Obama's potential second term, when accounting for the 90K per month natural growth in the labor pool, we now get a new record of 256K jobs per month, up from 254K last month. In other words, to regain all the losses in the labor force since the December 2007 start of the great depression, which at this point are 10,596,000 when adding the 3,870,000 growth in the labor force over that period together with the 6,726,000 cumulative jobs lost, somehow America needs to add 16,356,500 jobs over the next 64 months. Good luck America.

While we still await for BLS.gov to finally come back up online half an hour after printing the actual NFP number, here is the one data point that we know for a fact: the labor force participation rate, and the reason why the general unemployment rate declined to 9.1%, just dropped to 63.9%, the lowest in 16 years, or matches the participation rate from January 1984.

Change in Non-Farm Payrolls M/M 117K vs. Exp. 85K (Prev. 18K)
Change in Private Payrolls (Jul) M/M 154K vs. Exp. 113K (Prev. 57K)
Change in Manufacturing Payrolls (Jul) M/M 24K vs. Exp. 10K (Prev. 6K)
US Average Hourly Earnings (Jul) M/M 0.4% vs. Exp. 0.2% (Prev. 0.0%)
US Unemployment Rate (Jul) M/M 9.1% vs. Exp. 9.2% (Prev. 9.2%)

More coming as soon as bls.gov actually comes up

Just like on the last NFP release, we now have Obama again addressing the country at 11:00 am on the "jobs situation." The more conspiratorially minded saw in the last statement an indication of a major beat only for the final number to be an abysmal miss. We would not read much into this scheduled conference, although if anyone knows the job number in advance, it is the Teleprompter. Another interesting, if once again prescheduled data point is the 12:45 pm testimony of BLS commission Keith Hall to the Joint Economic Commitee. This is also a recurring monthly event.

Market talk of the ECB buying in the Eurozone periphery government bonds, together with an affirmation of Ireland's sovereign ratings by the S&P boosted risk-appetite
EU's Rehn said the European Commission will present a report on feasibility of the Eurobonds, adding that effective lending capacity of the EFSF and its scope should be boosted
CHF came under selling pressure in early trade after market talk of further intervention by the SNB
The Eurozone 10-year government bond yield spreads narrowed across the board as the European session progressed
Markets look ahead to the Nonfarm Payrolls report from the US due to be released at 1330BST (0730CDT)

There is just one number that is important in the just released Fannie Mae Q2 earnings release, in which the firm reported a loss of "just" $2.9 billion, which includes $6.1 billion in credit related expenses all of which was blamed on Bush (no, really "substantially all of which were related to the company’s legacy (pre-2009) book of business"). The number that matters is that for the 11th consecutive quarter a bankrupt Fannie Mae came running to the Treasury, this time requesting $5.1 billion from Tim Geithner, the second highest number in the past year. This brings the total cumulative bailout since Fannie's conservatorship to a stunning $103.8 billion. And wasn't it pathological liar Tim Geithner who himself said a month ago that the GSEs are no longer a burden on the Treasury? Perhaps he can explain the chart below taken from the company's announcement.

An interesting day, for sure. But a surprise? It shouldn’t have been, since even the Guvvamint’s statisticians and spinmeisters seem to have noticed that The Great Recession is back with a vengeance.

All eyes on the July employment report. Goldman summarizes what to expect below, and while we refuse to predict what the number will be this time, we remind readers that it was the horrible July NFP reported in the first week of August 2010 that set off a chain of events starting with Goldman first downgrading the economy, leading to Hatzius and Dudley holding hushed tete-a-tetes, and ultimately culminating with Jackson Hole three weeks later. If the Fed is truly hell bent on QE3 or bust, expect a very disappointing NFP number this month (and potentially an even worse one next month when the economic data is goalseeked to validate monetary policy which only succeeds in raising the Russell 2000).