Is it time to get more bullish on the economy? That much awaited jobs number today certainly drove some of the recession scare out of the markets, but it hasn't really changed the picture for slowing growth so far.
September's employment report showed the creation of 110,000 new jobs, slightly more than the 100,000 economists expected. But the unemployment rate ticked up to 4.7% from 4.6%, also expected. What traders liked was that big revision in August jobs, turning last month's very negative story into a positive. The government's initial August report showed a loss of 4,000 jobs, but that has turned into a revised gain of 89,000 jobs.
Art Cashin of UBS says it really indicates that things aren't as "drastic" as they were. Certainly, it doesn't feel nearly as drastic as the day that initially negative August report hit the tape last month. Stocks got a big lift from today's report, with the S&P 500 moving into the record zone. The dollar also moved higher, and selling in Treasuries pushed yields higher.
This report does not end the debate about the Fed's next rate action but it changes it. Many traders had been counting on another 0.25% cut from the Fed at the end of the month, but some pundits argue the Fed should hold off on another cut, instead sending a better signal that the economy is strong enough.
Fed funds futures in fact are signaling traders now believe the chance of an end October rate cut is now below 50%. Before the data, the futures signaled a more than 70% chance. Comments from Fed Vice chairman Donald Kohn this morning also seem to be swaying some of the thinking away from a rate cut.
Kohn said after near-term weakness from the housing contraction and tighter credit conditions, he sees a return to moderate growth and high levels of employment. He also said the decline in the value of the dollar is putting upward pressure on imports and said the Fed will monitor inflation developments carefully.
Laksham Achuthan of Economy Cycle Research Institute summed up the continued fragility of the economy quite well on "The Call" this morning: "The patient has stabilized....Recession has been kept at bay. There are still a lot of blemishes on this economy. It's a kind of beat up Goldilocks economy," he said. "You've got continued growth but it's slowing. But the good news is inflation pressures are actually easing despite a lower dollar."
Wall Street's Laundromat
Merrill Lynch today joins the parade of financial firms airing their dirty laundry this week. In the street's biggest credit-related hit yet, Merrill said it would write down $5.5 billion related to subprime mortgages and leveraged loans. The firm says it could have an operating loss for the third quarter of $0.50 per share, compared to estimates of a $1.43 per share profit.
Until this morning, Merrill Lynch was the straggler on Wall Street, hinting at losses, rumored to be in deep but not showing its hand. Speculation about the extent of the damage at Merrill grew after two top executives "left" the firm Wednesday and unconfirmed rumors surfaced that the firm is anticipating big layoffs in its fixed income department.
Merrill quieted some of the rumor mongering with its announcement and its stock moved higher on the news. Similar revelations about losses and writedowns came from Citigroup , Deutsche Bank and UBS this week.
Also today, Washington Mutual washed out its bad news, saying it expects third quarter net to drop 75% because of the weak housing market and credit conditions. Its stock is also higher.
The question remains though whether this is the real extent of the losses or whether Wall Street is partying a little too early.