Crescenzi: Money Market Trumps Jobs Data
Senior VP, Strategist, Portfolio Manager Pimco
There's plenty to say about the December jobs report but not much of what can be said is likely to alter the dynamic much for the financial markets, mainly because the preparedness of the financial markets was high for the report, just as it was a month ago.
Increasingly, it is becoming important to look away from the laggard jobs data toward conditions that will eventually alter the outlook on jobs. One of these is the money market, in particular Libor. It continues to slide and today's data has further reinforced the trend, mainly on the idea that the data behooves the Fed and the world's central banks to keep short-term interest rates low for longer.
I have said often for more than a month that I expected Libor to collapse and today's data reinforces this likelihood. The decline in Libor is extraordinarily important, not only because of what it means for debtors, but for what it tells us about the banking system and the availability of credit, and because a decline in Libor creates a set of conditions in the financial markets that compel investors to move out the risk spectrum.
At today's setting, 3-month Libor fell 9.375 basis points to 1.26%, a new low and about a percentage point lower than a month ago. Early indications are that 3-month Libor will fall by an amount similar to today's, in part because of today's jobs report, which reinforces the idea that the Fed will be compelled to keep the federal funds rate low for longer.
The lower Libor goes, the more likely it is that yields on fixed-income products will fall. Investors know this and this will compel them to move further out the risk spectrum, as they have since late November when the Federal Reserve said it would purchase $100 billion of agency securities and $500 billion of mortgage-backed securities.
Since then and concomitant with the decline in Libor, mortgage securities have rallied significantly, as have corporate bonds. These gains look likely to continue, although there is much more room for corporate bonds to rally than there is for securities in the mortgage realm. Gains are also likely in the asset-backed securities market, where in just a few weeks the Federal Reserve will begin a new program to inject up to $200 billion into the asset-backed market, via the Fed's Term Asset-Backed Securities Loan Facility (TALF).
Gains in riskier assets--rooted in gains in the money market and in the Federal Reserve's support programs, are sowing the seeds for a set of conditions different from what has led to the current downturn in the job market. For example, automobile sales are set to stabilize, which will reduce the rate of job losses in the automobile sector. Hence, increasingly, jobs figures will weigh less and less in importance in terms of the direction of the financial markets.
- US Payrolls Drop 524,000; Unemployment Rate at 7.2%
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Tony Crescenzi is the Chief Bond Market Strategist at Miller Tabak + Co., LLC where he advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of the forthcoming book, "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."Crescenzi is a contributor to RealMoney.com."