Employment Picture Makes Things Cloudy for Investors
Maybe today’s nonfarm payrolls number will convince investors not to get their hopes up too high.
Amid the almost breathless anticipation that has come to greet these monthly unemployment reports, the government put forth some fairly vanilla numbers: 192,000 new jobs created, which was a bit below consensus, and a drop of the unemployment rate to 8.9 percent, which was a bit better than consensus.
Any way you slice it, the payroll gains are consistent with at least some level of recovery, especially after the dismal February report.
Market reaction? A drop in stock prices—and, curiously, a drop in bond yields—underscoring how the recent spate of decent economic reports might be putting a little too much fire in the investor belly.
“This report was good, but it was not the blockbuster some people thought we might get,” said Josh Feinman, chief global economist for Deutsche Bank Advisors. “These are the daily vagaries of sentiment in the market.”
Wall Street followed up a huge rally Thursday with a pullback Friday, perhaps a classic sell-the-news event but also a sign that some good news isn’t good enough.
“This notion that things are going to boom all of a sudden, that’s not the way it works,” said Liz Ann Sonders, chief investment strategist at Charles Schwab in San Francisco. “You have to bottom first and then you slowly make your way up. You don’t get from the bottom to the next top in one fell swoop.”
Also inherent in the trader reaction was a dichotomy on Wall Street in these improving economic times.
So much of the two-year stocks rally has been fueled by Fed-injected liquidity into the system, all of which was predicated on the need to perform radical surgery to get the dying economy off the operating table.
But with a recovery now coming more clearly into sight—inflation dangers and all—the worry becomes that the Federal Reserve will have less incentive to keep up its easing programs and thus will prepare to pull a critical lifeline to the stock market.
While an early exit from the second leg of quantitative easing—QE 2—hardly seems likely, the end now becomes a little easier to see.
“It’s status quo for the Fed,” says Sonders.
Yet she cautions that those hoping for the Fed to wait until 2012 to increase interest rates might be disappointed as well. Sonders actually hopes the Fed does start tightening this year, but the main question will be whether the market is ready for it.
“I would be surprised if the timing is pushed into the beginning of 2012. If we get a couple more numbers like this, you could pull that expectation back into 2011,” she said. “Zero interest rate policy is for an economy in triage and I don’t think we’re in triage anymore…We’re starting to play a dangerous game if we keep the pedal to the medal.”
The bad news, then, could be the good news: While the jobs report may have looked encouraging, there’s still a lot of work to do.
“It is still early to break out the champagne, because the February surge came after a weak January when only 63,000 jobs were added,” University of Maryland economist Peter Morici wrote. “March data will tell much as to whether the economy is on a sustainable path for growing jobs.”
Indeed, the employment picture, despite its rebound in February, still seems loaded with caveats.
Some very prominent voices have been raised this week over inflation fears, among them investors Warren Buffett and Sam Zell and former Fed Chairman Alan Greenspan.
At the same time, disruptions continue in the Middle East, and US crude oil has eclipsed the $100 mark while pushing prices at the pump up to $3.47 a gallon across the nation.
These are both significant headwinds for employment, as both cut into corporate profits and put pressure on pricing beyond what unleaded gas or a pound of ground beef cost.
Still, the mood remains upbeat, at least until next month’s equally highly anticipated report comes out.
“Overall this report strongly confirms the growing evidence that the economic expansion has moved into a self-sustaining growth phase,” David Resler, economist at Nomura Securities, wrote in an optimistic but still a bit cautionary note to clients. “Unless the surge in oil prices undercuts confidence and spending markedly, look for the trend in employment gains to strengthen further in the months ahead.”
Feinman, at Deustche Bank, said that remains to be seen.
“We need to get stronger than that and we need to sustain that for a long time,” he said. “You’ve got to walk before you can run, but we’re getting there.”
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