Traders are watching the August jobs report Friday as an election indicator, as much as for an economic indicator.
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Economists expect to see 125,000 nonfarm payrolls were added in August, and an unemployment rate stuck stubbornly at 8.3 percent, according to Reuters data.
That compares to 163,000 jobs that were added in July, but on Thursday market talk was that the August number could be 140,000 to 150,000 or better, based on a strong ADP private payroll report showing 201,000 jobs added in August, and surprising job strength in the ISM nonmanufacturing survey.
The jobs number is viewed as the latest grade on President Barack Obama’s economic report card, and also as a trigger for possible Fed action.
“This is really about whether the trajectory of the economy is going to take (Obama) over the top or not,” said Dan Clifton, head of policy research at Strategas.
The Fed meets next Wednesday and Thursday, and the jobs report is the last big piece of economic news officials will consider. While some economists expect to see the Fed embark on another quantitative easing (QE) program, they mostly expect it later in the year. But those odds change if the 8:30 a.m. ET jobs number is very weak.
“I think we might be in a situation where if the number is really good, it’s not going to get much of a reaction,” said Barry Knapp, head of U.S. equity portfolio strategy at Barclays. “If we were going to get something that looks like the ADP report then that lowers the probability of additional Fed stimulus, and it lowers the probability of getting an election outcome the market will like.”
Republican Mitt Romney is Wall Street’s preferred presidential candidate. “You could almost see if it’s a bad number, that could be perceived as good for the market, because that would help Romney,” said Steve Massocca of Wedbush Securities.
Massocca and others see a Romney victory, or a Republican win of the Senate as a path to easier resolution of the so-called fiscal cliff at the end of the year. The fiscal cliff is the dual expiration of Bush era tax cuts combined with the automatic spending cuts that would hit the economy starting Jan. 1 if Congress does not act.
“I think part of this rally is the feeling that Republicans are going to do very well in November,” said Massocca. The S&P 500 soared 28 points to 1432, and the Dow jumped 244 points Thursday to 13,292 after the European Central Bank announced a bond buying program aimed at driving down borrowing costs for cash-strapped countries. The Dow is at its highest level since December, 2007, and at the highest level it’s been at since Obama took the White House.
“If you’re a middle-of-the-road voter whose major concern is the economy than these data points are going to matter,” Massocca said. “And given the fact you’re going to have some sort of fiscal policy shift, then whose hands are on the tiller when that happens is going to matter.”
As for the jobs report, Mark Zandi, chief economist at Moody’s Economy.com, expect to see 150,000 jobs added, the underlying rate of job growth year-to-date. He does not expect to see the Fed move before the election.
“I don’t think they want to move until after the election, when the economy really truly is going to weaken because of the fiscal issues. Each time they do QE, it’s really less potent,” he said.
Zandi expects to see the unemployment rate stay at 8.3 percent. “I think we’re creating enough jobs that at the moment, unemployment stabilizes or even moves down a notch by the election,” he said.
Strategas’ Clifton said the election has come to a period of “shock and awe,” with a number of major events that could swing sentiment. Those include President Bill Clinton’s speech Wednesday night where he asked voters to be patient, saying no president could have done better to fix the economy. He said other major factors are the ECB action, the jobs report and next week’s Fed meeting.
“You’ve got Obama’s speech (Thursday night) and they’re hoping for a bounce,” he said. President Obama is always briefed on the jobs report the evening before it is released so traders were watching that speech for clues.
Clifton said the jobs number is important but not because of the way voters react to it.
“That’s not what happens. Voters are going to vote how they really feel. When that number comes across the tape, that number is going to reflect how they really feel.” Clifton said the jobs number is a lagging indicator, already reflecting what the public has experienced. He did say the unemployment rate is very much correlated to the president’s approval rating.
“The driver really is the president’s approval rating. The president’s approval rating is 45 percent. He needs 50 percent. The only thing that can take him from 45 to 50 is a stronger trajectory of growth in the economy…people need to be getting jobs. Their income needs to keep growing.”
Clifton said his research shows there is a strong correlation between growth in payrolls and presidential reelections. “The president needs 1.1 percent growth in nonfarm payrolls from January through September to get to 50 percent,” he said. “They’ve increased about 0.8 percent…basically he needs 400,000 jobs between this month and next month and then he’ll be at 50 percent.”
“No president has won reelection with an approval rating below 50 percent before the election,” he said, pointing to data going back to the Johnson Administration.
He also said Obama needs consumer sentiment to improve. While at a three-month high, the Thomson Reuters/University of Michigan consumer sentiment survey is at 73.6. “It’s been over 90 for every other president that has won. We think the president needs to get that number to 83,” Clifton said. Consumer sentiment was in the low 70s in 1980, when Ronald Reagan won and in 1992 when Clinton won.
“This is basically in Obama’s hands at this point, and it’s really in the economy’s hands,” Clifton said.
Knapp said the August jobs report is the last big one in terms of influencing the debate.
“A strong number will hurt Romney, but not as much as a weak number will hurt Obama,” he said.
“People are skeptical but they do want to buy into the longer term bullish story on the U.S. around manufacturing, and our energy position,” Knapp said. “ I think people want to be optimistic…I think the market’s collective mind is ‘we’re going to get to the right place.’ There’s certainly no reason for the market to be rallying this strongly based on core fundamentals.”
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