While the headline number from the just-released August non farm payrolls report shows the unemployment rate falling to 8.1% from 8.3%, the details of the report were decidedly grim. The U.S. economy only added 96,000 jobs during the month and the drop in the headline figure was primarily the result of the three decade low labor force participation rate. Furthermore,
"...the birth-death model added 87,000 of the 96,000 jobs 'created'.... manufacturing shed 15,000 jobs during the month...[and] June and July's figures were revised lower to 45,000 and 143,000 respectively."
Indeed, even the mass media had trouble spinning the report in a positive light. Nonetheless, stocks hovered at or around the flat line in morning trading. As one might expect in a world where central bank policy means more than economic fundamentals, the reason stocks have held their ground in the wake of the dismal report has been plausibly attributed to the possibility that the weak jobs number may give the Fed an excuse to implement more quantitative easing.
Not one to be left out of the conversation, Goldman's chief U.S. economist Jan Hatzius is out with a note to clients which not only predicts more quantitative easing in the very near future, but also specifies the form the purchases will likely take:
"BOTTOM LINE: With today's August employment report showing a nonfarm payroll gain of 96,000 and an unemployment rate of 8.1% because of a drop in the participation rate, we expect a return to unsterilized and probably open-ended asset purchases at the September 12-13 FOMC meeting."
More specifically, Hatzius believes the Fed will purchase more agency mortgage backed securities (MBS). This of course is no surprise. As I noted in a previous article, the Fed is the natural buyer for the securities Fannie and Freddie need to unload as part of the accelerated wind down mandated by the Treasury department. Goldman notes that Treasuries will "potentially" be part of the program as well. The reason for this, although Goldman doesn't mention it, is that the MBS market simply cannot accommodate the Fed if it tries to buy too much:
"Regarding the prospect of further Fed purchases of agency MB...Barclays analysts Nicholas Strand, Siddarth Ramkumar and Sandipan Deb...estimated that further purchases of MBS would have to be limited to no more than $500 billion."
Of course $500 billion may not be enough of a boost to the market. Given the diminishing nature of the returns on easing, and given that it is the 'flow' of the purchases that now matters, any new program will effectively have to pledge unlimited support via open-ended purchases. Specifically, Goldman is dusting-off its summer prediction:
"...our base case is that QE3 will be formulated as an open-ended asset purchase program of around $50 billion per month, with an end date that is not given in advance but made dependent on progress in the economic recovery"
And so, just like that, a poor jobs number becomes cause for unlimited purchases of at least two types of assets. The irony here is that a positive spin on economic data is now a guarantee: if a piece of data is so bad that the media can't figure out how to dress it up, they can simply revert to the tried and true tactic of using it as QE fodder. All in all, if you are inclined to make short term wagers, Friday's NFP number may be just the excuse you need to make a short term bet that this central bank-fueled rally is about to run a bit farther.