Goldman's Response To The NFP Miss: Here Comes QE3
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.
1. Following today’s worse-than-expected jobs report, we now look for the FOMC to announce a lengthening of the average maturity of the Fed’s balance sheet at the September 20-21 meeting, with sales of relatively short-dated Treasuries and purchases of relatively long-dated Treasuries.
Short, sweet and to the Torque.
And more observations from GS on the NFP:
1. Nonfarm payroll employment was unchanged in August, in contrast to expectations for a moderate gain. Payroll growth in the previous two months was also revised down by 58k. Special factors in the report-the return of state workers in Minnesota and the Verizon strike-likely subtracted about 20k on net. The latest figures still therefore would have been quite soft excluding these effects. Additional details from the payroll survey were also disappointing. First, Job growth softened across a variety of sectors-manufacturing fell by 3k, construction declined by 5k, and retail trade declined by 8k. Second, the average workweek declined by one tenth to 34.2. Third, average hourly earnings fell by 0.1% month-over-month, and year-over-year growth was three tenths weaker than expected at 1.9%.
2. In contrast, the household survey of employment was reasonably healthy, showing a gain of 331,000 jobs (adjusted for methodological consistency with the payroll report, household employment would have increased by 134k). The official unemployment rate was unchanged because an uptick in the labor force participation rate to 64.0% caused the labor force to rise by a similar amount. Still, the broader "U-6" measure of unemployment-which includes "discouraged workers" (those who want a job but have not looked for one in the past month) and part-time workers who prefer full-time employment-rose a tenth to 16.2%.
3. The preliminary August reading for our Current Activity Indicator (CAI) is a decline of 0.5%. As discussed in Thursday's US Daily, survey-based indicators for August deteriorated sharply, and most "hard" data for the month are yet to be released ("The Hard/Soft Data Divide." September 1, 2011). In general we believe it is correct to put a high weight on soft or survey-based indicators. However, it is possible that the last four weeks of soft data may have overstated the deterioration in the outlook.
4. Following today's worse-than-expected jobs report, we now look for the FOMC to announce a lengthening of the average maturity of the Fed's balance sheet at the September 20-21 meeting. As discussed in a recent US Daily, one hypothetical implementation would be to sell Treasury securities that mature over the next two years and purchase Treasuries that mature between 10- and 30-years, apportioning the buying based on outstanding amounts in the market. This type of operation would be the equivalent of 80-90% of QE2 in terms of duration risk removed from the market (for more details see "For More Easing, Will Fed Go Big or Go Long?" US Daily, August 15, 2011).
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