Weather is partly to blame, but the US December non-farms payrolls results will influence markets for the coming month, as discussed below
This is a special report about the December US jobs report shocker - aberration or harbinger of things to come?
The Facts - Bad Numbers: Harbinger of Weakness or Just A Passing Cold Spell
--A Huge Miss: December was the worst month for non-farms payrolls since January 2011 up only 74k, far lower than the 241k increase in November and the 197k forecast.
--Falling Labor Participation: The unemployment rate dropped from 7% to 6.7%, the lowest level in 5 years, not because so many people found jobs but because more people dropped out of the work force, leaving a smaller number of unemployed relative to the (now reduced) total number of available workers. Labor force participation rate (LFPR) declined to 62.8% from 63.0%. No one is clear about how much the cold weather is to blame, and the fact is that the pool of available workers has plunged by more than 750k over the past 2 months.
--The drop in average hourly earnings and weekly hours confirms that Americans are working less and making less which only happens when employers feel less optimistic. Although it's unclear if this report will affect the pace of the taper (which is slow already), the bigger impact could come from these reduced incomes on consumer and business spending.
--Weather WAS A Factor: As Marc Chandler notes here, "whatever the cause, it was a North American phenomenon," because Canada's monthly jobs reports were at least as bad. Of the two big common denominators between the two economies, the weather and the NHL, we suspect it was the weather. We'll know better next month.
Ramifications Watch For Domino-Effects In Spending, Output
First, the weakness in US employment should radiate through a number of other reports in the coming weeks. The drop in average hourly earnings and weekly hours likely means that data on spending and output will also drop, unless:
--consumers save less or take on more debt. As a father of 5, I could see that possibility given the pressures of the holiday season.
--businesses make up the lost hours in January
The 6.5% Unemployment Rate Threshold Could Be Cut Lower Or De-Emphasized
The poor jobs report could cause the Fed to emphasize improvement in employment over inflation measures in its forward guidance.
Friday's unemployment rate fell, but for the wrong reasons, highlighting how the unemployment rate can be distorted and that the 6.5% rate mentioned earlier as a trigger to end QE can be adjusted as needed if it doesn't reflect the originally assumed robust improvement in the jobs picture. At this rate it could be reached in a few months, without the true employment situation improving. We therefore wouldn't be shocked if the Fed lowers this threshold to 6% or deemphasizes it in the coming weeks.
Meanwhile, inflation remains low and if is more likely to go lower than higher. As Marc Chandler writes here, Headline inflation has tended to gravitate toward core inflation in the US. Core inflation tends to gravitate toward wage growth. Year-over-year average earnings growth in the US is 1.8% in December down from 2.0% in November. This is in nominal terms…. The bottom line is the inflation remains low and shows no signs of moving toward the Fed's target.
The Big Question: Will This Report Slow Or Halt The QE Taper?
Based on Friday's reaction, which included a sell-off in the dollar, drop in U.S. yields and recovery in stocks, investors believe that the report means the Fed will be less aggressive in reducing QE in the first half the year, however this first day reaction is far from conclusive. Until there is countervailing bullish data, an accelerated taper is likely off the menu.
Per Wednesday's FOMC meeting minutes from December, the Fed wisely remains uncommitted to any specific taper timetable or criteria for changing it. The weak report provides a fine excuse for the Fed to show judicious caution and suspend the taper this month until it sees another month of data; however the current $10 bln per month is not large in any case.
In sum, the only question now is whether the Fed continues the cautious current pace or halts the taper for a month while it waits for new data.
We believe the odds favor continued taper at the continued pace, because:
- The $10 bln per month is small anyway, so it doesn't matter much.
- The FOMC minutes issued Wednesday showed the Fed believes that QE's beneficial effects are fading with time anyway
- As we note below, the FOMC's voting members are now more hawkish as a group and so more inclined to err on the side of continued taper
If we're right, it means current trends in all markets continue until some new fundamental driver appears.
But If The Fed Pauses…
If the Fed does elect to suspend its taper for a month then that would duplicate this past Friday's response: good for risk assets, bad for safe havens in general, definitely hurts the USD and so helps the EUR and other major USD crosses. The dollar dropped hard versus all major currencies in the wake of the weak jobs numbers.
It also helps gold, PMs, and other materials that benefit from USD weakness like oil.
February Jobs Reports Take On New Importance
Just remember that until Friday, optimism ruled. US data was beating expectations on jobs and GDP, and there was a lot of talk about a possible accelerated taper. Friday's December jobs reports ended that talk. However sentiment is volatile. If January's jobs figures show that this past month was indeed mostly a weather-driven aberration, the accelerated taper debate returns.
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Disclosure/disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.