Employment Numbers and New Fed Liquidity

Nonfarm payrolls declined by 20,000 in April, much less than the 70-80K loss that was predicted. February and March numbers were revised down. The unemployment rate surprisingly fell 0.1% to 5%. Average hourly earnings increased $0.01, or 0.1%.

The Fed also released a statement about 15 minutes before the payroll number announcement, somewhat spooking the market. The statement highlighted how it will increase the size of its term auction program and expand currency swaps with the ECB and Swiss National Bank, adding further liquidity to the markets. The increase brings the Term Auction Facility to $150 billion, from $100 billion. The swap line with the ECB increased from $20 billion to $50 billion dollars of available credit for borrowing at European banks. Initially the market assumed this news was implying that the payroll numbers would be weak, but of course, they were not as bad as expected.

Recently, at my blog, I have discussed how the parsing of the Fed statements has reached near comic proportions. I still believe this. What is more important is what the Fed does, and not necessarily what it says - or more importantly, what we think it says. From the statement on Wednesday, I really have no way to know 100% whether they plan to pause or not, regardless of what the pundits say. Friday's action also does not indicate a pause, but does highlight how the Fed realizes that rate cuts are not enough, and that other measures need to be taken to increase liquidity.

In this regard, the Fed is spot-on. By working with the ECB to help fix the issues with LIBOR, and increase liquidity, it is possible that ARMs and other rate sensitive instruments may reset at manageable levels, and could even possibly reset favorably for some borrowers. This will be good news for the market and investors, and not just those that are currently upside down in their loans.

Comments

[DeaverB]

This author seems to understand that ARMs resetting favorably matters. My wife's reset in March; she saved $650 per month. That money got reinvested in her businesses. Her corporate loan keeps going down, down, down in interest rate costs and is saving her business a like amount of money per month versus a year ago, $650 or thereabouts.

How can that not matter? If subprime people can't make the payments at these rates, they have a real problem--which most of them have. But to the rest of this, all this helps each and every month. The next reset on my wife's mortgage, if current rates hold, will drop her costs another $400. This matters.

[gordon]

Deaver- great news for your wife, but how many homeowners who lost $50-100K so far in their home equity, or refi-d cash-out, to live their (over leveraged) lifestyles, realize prices will come down another 20%, and it will take them 10-15 years to break even? How many of them can be persuaded to stay when they can rent for near 1/2 the cost?

[xing-hu]

It is the liquidity that will drive the market up and the dollar down, we can NOT be sure whether this is good or bad on a general basis, only individuals can evaluate that. But what matters is the cooperation by Central banks. This may avoid the destruction of the dollar and world commerce. Small matters, but progress towards working things out.