Wall Street hears the helicopter coming.
Stocks initially dipped after August’s painfully weak employment report showed job growth of just 96,000, but the market was flatas traders bet the number could help push the hand of the Federal Reservetowards a new round of quantitative easing.
Market pundits, within minutes of the 8:30 am ET report, unleashed a flurry of notes raising the odds of QE3.
Fed Chairman Ben Bernanke won the nickname “Helicopter Ben” after he referred to a statement by Nobel economist Milton Friedman about fighting deflation by using a helicopter drop of money. Now, traders expect to see a money drop, with a better chance it will come when the Fed meets next week.
Goldman Sachs economists quickly put the chances at above 50 percent that the Fed would announce a plan to purchase mortgage-backed securities and Treasurys, in an open-ended program that would be dependent on the progress of the economy.
They also expect it to continue Operation Twist through the end of the year, as planned. The Fed, in that program, buys longer dated Treasurys and sells shorter dated securities, without increasing its balance sheet as QE does.
Others agree that the Fed, if it acts, will look to give an added boost to the recovering housing market and keep rates low with mortgage purchases.
“I wouldn’t say this seals the deal, but it does make it more likely they announce asset purchases next week,” said JPMorgan economist Michael Feroli. "It probably will involve some mortgages. It may be a smaller, more nimble kind of open-ended form."
Feroli said the Fed could announce purchases of $50 billion to $75 billion a month.
Bernanke cleared the way for more easing last Friday when he spoke at the Fed’s annual symposium in Jackson Hole. In that speech, he offered little new, but again assured the markets the Fed was ready to act if needed.
The August jobs report was weaker than the 125,000 consensus forecast, but it contained many troubling signs, and a revision that trimmed 41,000 off of the last two month’s report.
The participation rate fell to 63.5 percent, the lowest level since September, 1981. The unemploymentrate fell to 8.1 percent from 8.3 percent, but the decline was because 368,000 people left the labor force. The average hourly earnings and hours worked were flat. (Read More: 'This Is Not What Recovery Looks Like')
“Last month was the anomaly, and there’s just nothing good about it,” said David Ader, chief Treasury strategist at CRT Capital.
Treasury yields fell, as buyers stepped in after the report.
“The only inhibition to our market not doing better is perhaps supply next week, and maybe the ECB (European Central Bank) stuff, but the Fed is really going to be thinking we have to offer something,” Ader said.
The Treasury auctions 3- and 10-year notes, and 30-year bonds next week.
Ader, however, thinks the Fed will not move on QE right away, and that it will instead just adjust the language in its statement to extend the period it plans to keep rates near zero to 2015 from end 2014. (Read More: World's Highest Jobless Rates)
“I think they’re still going to be anxious about QE3 and wonder if they shouldn’t keep their powder dry for a more depressing event,” said Ader.
He said the approaching “fiscal cliff” at the end of the year could be a reason for the Fed to wait. The fiscal cliff is the dual expiration of Bush-era tax cuts at year end, and the automatic spending cuts that start to take place Jan. 1 if Congress does not act on the deficit.
“I don’t think they should ease right now but I think for them the economic reports are pressing and I think they can be justified in their view by doing more now,” said Daniel Greenhaus, chief global market strategist at BTIG.
Greenhaus sees the chance of September action now at 90 percent from 50 percent, and he sees the Fed announcing an open-ended program of asset purchases.
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