David Rosenberg had some negative thoughts on this morning’s payrolls figures (shocking, right?). More interesting though are his thoughts on the implications of the report:
FED ON HOLD INDEFINITELY
Fed Chairman Bernanke hinted loudly that any interest rate increases in the future would be dependant on the path of resource utilization — code for the unemployment rate. And in October, even in the face of a dip in the labour force participation rate (which should be going in the opposite direction in a real recovery), the headline (U3) measure of the unemployment rate still managed to rise to 10.2% from 9.8% in September — the highest level since April 1983. But the labour market slack story does not end there — the broader U6 measure (which marginally attached workers and those working part-time for economic reasons) soared to an all-time high for the series, to 17.5% from 17.0% in September. In other words, more than one in six Americans are either unemployed or under-employed, despite the most dramatic monetary and fiscal efforts by a government anywhere to reverse a collapse in private sector credit.
IMPLICATIONS FOR THE FINANCIAL MARKETS
The bottom line here is that the Fed is staying put indefinitely and that should help anchor the fixed-income market.
The further loss of manufacturing jobs (-61,000) and decline in the diffusion index (not entirely consistent with the ISM) is likely to encourage the Administration to sustain its policy of benign neglect when it comes to the U.S. dollar. This should help anchor gold and commodities.
The stock market has had a history this year of shrugging off weak employment report after weak employment report because the expectation is that we will see further rounds of fiscal stimulus, so it’s hard to say what equity investors will do with this latest piece of data. We find it hard to believe that nurturing a policy that risks taking the government debt-to-GDP ratio above 100% in the next three-to-four years is deserving of the P/E multiples currently underpinning equity market valuation. It should not be lost on anyone that the S&P 500 has managed to rally over 60% from a low during which payrolls have declined 2.8 million, and that this is without precedent. Let’s define normal as the norm of prior 60% rallies and what’s normal is that by now the economy is not only standing on its own two feet but has already generated over two million net new jobs.
Sounds about right.
Source: Gluskin Sheff