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Non-Farm Payrolls Create Basis For October Relief Rally

|Includes: SPDR S&P 500 Trust ETF (SPY)

The release of the September non-farm payroll numbers was obviously crucial to the direction of the market going forward. Another bad number could have been devastating to a market concerned about both the possibility of a synchronized global recession and the affects of a worsening debt crisis in Europe. However, quite possibly we have now just seen the first of two factors with the potential to prime the market for a much needed relief rally -

 

  • The non-farm payrolls were a bit better than expected, particularly allowing for the revisions up in the previous two months. This will no doubt be enough to keep the market's recession barometer just a tad away from double dip for now.
  • Attention may now turn to the potential for some kind of a agreement in support of a resolution to Europe's debt crisis at the November 3-4th G20 in Cannes. Sentiment on Europe is heavily negative. We now have the potential for increased talk of some kind of coordinated action to support a relief rally in stocks. More on this in a follow-up article.

 

In terms of the payroll numbers themselves, as you can see from the table below, the headline number came in at 103k, above expectations of an increase of only 65k. That good news was partially diluted by the fact that some of the increase was also related to the return of 45,000 Verizon Communications workers who had been on strike in August. However, the numbers for July and August were revised up by a net 99k, providing a better than expected outcome all told.

 

Released on 10/7/2011 8:30:00 AM For Sep, 2011

 

Prior

Prior Revised

Consensus

Consensus Range

Actual

Nonfarm Payrolls - M/M change

57,000 

65,000 

30,000  to 115,000 

103,000 

Unemployment Rate - Level

9.1 %

 

9.2 %

9.0 % to 9.5 %

9.1 %

Average Hourly Earnings - M/M change

-0.1 %

-0.2 %

0.2 %

0.0 % to 0.5 %

0.2 %

Av Workweek - All Employees

34.2 hrs

 

34.2 hrs

34.2 hrs to 34.3 hrs

34.3 hrs

Private Payrolls - M/M change

17,000 

42,000 

95,000 

54,000  to 135,000 

137,000 

 

Source: Bloomberg

 

Overall, these numbers remain anemic and are certainly not strong enough to bring the unemployment rate down, which remains at 9.1%. However, the market has been debating whether or not the economy will drop back into recession, following growth of only 1.3% at an annualized rate in Q2. The metrics we've seen so far suggest that Q3 could squeeze out a small improvement to some 2% growth. September's payroll number offers some relief in that it tends to support that overall story - i.e. one of an economy seeing weak growth but one which just manages to skirt around the recession threat. 

 

[Chart]

Source: Bloomberg

 

At time of writing, the market's reaction is not particularly supportive with the S&P and the Nasdaq down and the Dow up a tad.  However, once the dust settles, these numbers should allow for something of a relief rally. At that point, any discussion of negotiations on a potential deal on European debt at the G20 summit could help the market higher. There is certainly room for such a development and my read of the political tea leaves is that it may well involve a significant commitment from China. If that looks likely to be the case, it should again help the market towards a recovery.

 

Following the release of the previous month's payroll numbers for August, I recommended cutting all positions in preparation for what looked likely to be an ugly performance in September (see my original article here). That proved to be the case. However, the bottom line is that these latest numbers have now significantly reduced the immediate threat of another bout of concern over the potential for a renewed recession. As a result, there appears to be good potential for something of an overall recovery in the stock market - whatever the initial reaction in the market on the day.



Disclosure: I am long SPY.