Rosenberg Update On NFP, Market Action, Gridlock, And QE
As usual, those who want the truth behind the cheery, and misleading, headlines don't have many options. David Rosenberg continues to be one of the best options. Here is his take on today's NFP, recent market action, impact of D.C. gridlock (bad for fiscal policy, no impact, we believe on monetary - all hail emperor Ben), and why $5 trillion in total QE means Goldman's estimate for $1,650 gold may need to soon add an extra zero to it.
NICE TREAT IN U.S. PAYROLLS, BUT THERE WAS A TRICK IN THE HOUSEHOLD SURVEY
Well, that was quite the shocker. Nonfarm payrolls managed to dramatically exceed expectations and rung up a total of 151,000 jobs in October — more than double consensus estimates. And, the prior two months were revised higher by a total of 110,000. The workweek edged back up to 34.3 hours from 34.2 hours in September and along with the moderate increase in wages, average weekly earnings, a proxy for work-based personal income, jumped 0.5% MoM. This more than recouped the 0.2% decline the month before and was a welcome relief for a household sector that will be confronting sharply rising gas prices and grocery bills ahead.
The headline was undoubtedly strong, as were some of the details, but we want to warn readers that this was not a universally solid report. First, within the nonfarm report itself, virtually all the gains were in three sectors — health/education, retail trade and waste/administrative services. Goods-producing employment barely rose. The diffusion index for private payrolls dipped in October, to 55.0 from 55.6, which is a four-month low, and for manufacturing, the diffusion index fell to 42.1 from 54.3, which is the lowest since December 2009. So while there was depth to the report, in terms of magnitude, there was not a whole lot of breadth to it. Many sectors still reported job declines last month, including manufacturing, commercial and residential construction, transportation, information, financial and government. As I said, not a universally strong report, notwithstanding the solid headline results.
Moreover, the Household Survey showed a 330,000 decline in October, and again, full-time jobs declined, as they have for each of the past five months for a cumulative plunge of 1.1 million. The employment-to-population rate — the share of the population that is working — fell to 58.3% from 58.5%, a 10-month low. Many labour market experts actually consider this to be the most accurate barometer of the health in the labour market (though they are clearly not day traders, judging from the immediate reaction in the bond and stock pits). And many of the other measures of the unemployment rate edged up, with the broad U6 index staying stubbornly high at 17%. It will be very difficult to build any sustained wage pressure with this degree of slack overhanging the labour market. While the number of people working part-time for economic reasons slid 318,000, this has to be viewed in the context of the near-one million bulge in the prior two months. Meanwhile, those folks who have been unemployed and looking for work fruitlessly for at least six months jumped 1.54%, or 83k, last month — the first increase since last May — and the median and mean duration of unemployment both rose as well (to 21.2 weeks from 20.4; and to 33.9 weeks from 33.3, respectively).
Bottom line: Nice headline on U.S. employment, and the income figure too. But the Household survey did not offer ratification and the problem of excess labour supply has clearly not gone away. We finished off October with a level of jobless claims (455k) that is consistent with stagnant job growth, so do not be surprised to see some giveback in payrolls when the November data roll around next month.
On Market Action views:
The equity markets are running on fumes right now; extremely overbought and sentiment near extreme levels. The only correlation that counts is the U.S. dollar. Nothing now says that the equity market can’t go higher still, as it did during the “don't-fight-the-Fed” days in the fall of 2007 — but what a dangerous market that proved to be. What is fascinating is that the last time the S&P 500 was at current levels, back at the prior recovery high in April, the consensus outlook for 2011 S&P 500 operating EPS was $100/share; today it is barely above $95. And, back at the previous market high, the outlook was for 3% real GDP growth in 2011, now it is 2.4%.
The market was hitting those highs last April when there were still visions of a V-shaped recovery and the Fed was so confident over a sustained reflationary cycle that it was discussing exit strategies. Now the economy is skating on pretty thin ice and the Fed is now re-opening the liquidity floodgates. As Gary Shilling is fond of saying, all the Fed creates are reserves; it is up to the banking system to churn that into a reflationary pro-growth credit creation cycle.
On what gridlock means for Emperor Ben (sorry, but there is no way even three objectors can stop the Bernanke juggernaut):
SOME HEADWINDS THE MARKET MAY BE DISMISSING
When you look at the makeup of the new U.S. Congress, it is filled with an energetic bunch of more right-leaning Republicans and a Democratic House that is visibly more to the left. This is definitely fertile soil for gridlock. It will be next to impossible to get any fiscal stimulus through. In fact, the GOP would like to trim spending by $100 billion, which is about 0.7% of GDP. Moreover, if the lame-duck Congress does not extend the Bushy-era tax cuts, we are talking potentially of a 1.4% hit, which would mean a combined two-plus percentage point drag on headline growth.
In terms of the Fed, we may well have seen the last of the quantitative easings. Why? Because starting in 2011, there will be three new voting Federal Reserve Bank presidents who vocally oppose any more easing initiatives. Charles Plosser of the Philly Fed and Richard Fisher of the Dallas Fed oppose QE and Narayana Kocherlakota of the Minneapolis Fed is sceptical it will work. They replace the three “doves” in the form of Rosengren from Boston, Pianalto from Cleveland and Bullard from St. Louis.
And on why $600 billion QE is a drop in the bucket compared to the $5 trillion (as we have been saying for a long time) that is actually needed... and will transpire. Got gold?
The $600 billion of QE2 that the markets have fallen in love with is actually a drop in the bucket next to the $5 trillion of asset buying that would be needed to completely close the output gap and generate a lasting inflation backdrop. According to econometric work cited in the WSJ, even if the Fed comes back with another $1 trillion, the impact would only be to take the unemployment rate down 0.2 percentage points both in 2011 and 2012. So we would still be talking about a 9%-plus jobless rate, which would be at least 300 basis points north of the most conservative estimates of full employment. There may be inflation in commodities but it is the deflation in wages that will end up being the most troublesome development moving forward … across many levels.
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