Archive - Sep 2, 2011

Not a lot of commentary in Jan Hatzius' response to the horrendous NFP number, although what he says, speaks volumes: "BOTTOM LINE: We now look for the FOMC to announce a lengthening in the average maturity of its balance sheet at the September 20-21 meeting."

Take Green (i.e. double zero), and subtract from it the Birth Death adjustment and presto: you have reality, or what we predicted earlier today- a negative NFP print. Also, for the seasonal sticklers Birth Death has added 491k jobs in the past year: no seasonality here.

Key Highlights:

• At 0, the NFP number is a plunge of 85K, from a downward revised July, which was previously at 117. This is the biggest drop since September 2010
• The Household Survey saw an increase of 331K in the number of employed
• Average hourly earnings for all employees on private nonfarm payrolls decreased by 3 cents, or 0.1 percent, to $23.09. This decline followed an 11-cent gain in July. This is the first time the avg hourly earnings have been negative MoM since January 2008
• Underemployment, U-6, rose to 16.2%, from 16.1% in July
• The labor force rose to 153.6 million in August.
• Ironically the only good news in the report, was what many have been indicating is a negative for months: namely that the Labor Force Participation rate actually rose for the first time in months from the nearly 30 year low of 63.9% to 64.0%

Once again European debt problems are hitting the headlines and putting pressure on stocks globally. While we were busy basking in the glow of the now annual Jackson Hole rally, the situation in Europe actually got worse. The bickering and finger pointing seems constant now. A few key things are worth watching are presented below. In the meantime, as we wait for NFP, SOVX is back above 300, MAIN is above 160, and IG and HY are both well off their tights and are trading as though a lot of bears got long for a trade jumping on the momentum from last week and the month-end and long weekend technicals.

With just half an hour left until the NFP report, all bets should have been made by now if the number will come above the consensus of 68K, or well below it. One who is confident the number will be a big disappointment is Goldman's Jan Hatzius and team who lists the following reasons for why the number will not meet Wall Street's traditional permabullish outlook: Weakened hiring, due to a deterioration in households' assessment of the labor market, weaker real time economic employment indices, fewer online job ads, moderate ADP employment gains; the picture is not better on the demand side as jobless claims remain low, and announced job cuts are rising. There is always a strawman in the form of the Verizon strike which would cut about 45,000 people from the NFP, but laslty, and most importantly, Income tax receipts have dropped substantially in recent weeks: an indication that either employees are paying less in taxes, or there are just less of them. Goldman's summary: "Taken together, our models suggest a deceleration in the pace of payroll growth in August. We therefore expect a gain of 25,000 in the 's report (revised down from 50,000 previously)." Also, let's not forget that the Fed needs some ammunition if it wishes to proceed with announcing QE3 at the September 21 FOMC meeting- yesterday's ISM certainly did not provide it.

Everyone will focus on the Non Farm Payrolls report, which even Goldman expects will be just a shade higher than negative. We, for what it's worth, are confident that when all the revisions are said and done, and when removing the birth/death adjustment, both the headline, and the private jobs number will be negative.

• White House sharply cuts U.S. growth forecast (Reuters)
• U.S. judge pans rush in BofA $8.5 billion mortgage pact (Reuters)
• Italy cobbles together austerity compromise (FT)
• Fresh Scrutiny of BofA (WSJ)
• Fed asks BofA to list contingency plan: report (Reuters)
• Germany backs calls to widen IMF currency basket (FT)
• U.K. Warns Scotland on Costs of a Split (WSJ)
• U.S. Is Set to Sue a Dozen Big Banks Over Mortgages (NYT)
• US Deficit forecast falls below estimates (FT)

Today, the President of the ECB, Jean- Claude Trichet did not rule out a gold backed euro bond in an interview with ‘Il Sole 24 Ore’ published on the ECB’s website. The comments were a response to former Italian Prime Minister Romano Prodi who proposed - in Italian national daily business newspaper ‘Il Sole 24 Ore’ last week - the creation of a euro bond backed by member states’ gold reserves. Prodi was President of the European Commission from 1999 to 2004. Trichet was asked about “the creation of a fund guaranteed by the gold reserves of countries that would issue bonds to buy back national debt and make new investments.” Trichet did not answer the question directly but said “at this stage, we have the EFSF bonds, which are bonds with a European signature. The main message of the ECB Governing Council to governments is to implement rapidly, fully, comprehensively the decisions taken by the European heads of state and government on 21 July.” Separately the Central Bank of Ireland has said that it will not disclose whether the gold reserves of Ireland (a paltry 6 tonnes) have been swapped or loaned out or had any other receivable status recorded against them (see Commentary below). A senior administrative officer for financial control at the Central Bank of Ireland responded to an inquiry regarding the custody and ownership of Ireland’s gold reserves: “The bank is not, however, in a position to provide further information, nor to outline its investment strategy in relation to the gold holdings.”

European markets under pressure. DAX underperforming and leading us lower....

All you need to read.