View: Any new Fed money printing should flatten the curve
August data was already looking rather bleak and this afternoon’s first estimate of last month’s non-farm payrolls merely adds to this view with a headline print of zero vs. the +68k median guestimate while July’s numbers saw a revision to +85k from +117k and June’s was dropped to +20k from +46k. The unemployment rate was unchanged at 9.1% but hours worked slipped again to 34.2 from 34.3. Even if you strip out the Verizon strike which explains around 45k of the headline drop it’s a pretty miserable report (-81k after lifting out strike and including revisions back to June). The knee jerk reaction from stock futures was to extend earlier falls unsurprisingly, tagging the 38.2% support line at 1,183 in the first instance. As we noted in our Wednesday update if the bears can crack this line and then 1,175 fear should pick up again.
However, the bleak payrolls number might be something of a double edged sword for the market. At first glance so negative but it will clearly increase pressure on Congress to respond positively to Obama’s new jobs programme due next week and of course Obama himself to reach for the more aggressive side of the proposals box. The doves on the FOMC should also find themselves with an easier task; it should have even more ‘bad data’ by then to lean on too. We already know Bernanke is fond of unorthodox measures and will no doubt have another crack at checking the equity decline in search of that wealth effect (hubris) which seems to be the only rabbit he wants to reach for in his rather shabby hat. The fact that stocks look behind the curve in anticipating the increasing chance of recession is lost on him. So it’s quite possible that knee jerk selling on the number turns into smarter buying from those building a book around a QE3 event.
We ought to be able to see some clues in how the deck is stacked by looking at the dollar index but this isn’t particularly inspiring on the chart at the moment, a little unusual given the impact Fed money printing has had on the greenback in anticipation of and throughout QE2. History never repeats itself exactly though; there should of course be further downside in the dollar (the capitulation phase if you like) but not to the same extent as 2010. Similarly there could be some initial demand for risk assets/stocks. We don’t think stock investors will be suckered so easily this time round, smart money should rotate to a more defensive posture - be it sector rotation or into bonds.
Where we think we should see a bigger impact is on the yield curve, short rates are pretty much anchored at zero and outright yields may look rich from a historical perspective but with inflation likely to subside due to the demand deficit and more supportive base effects (basic/industrial commodities may also suffer this time round) the longer-end should continue to outperform. This might even prove to be the exact route the Fed goes down, aiming to lower longer-dated yields either via rolling its existing holdings down the curve or possibly another round of outright purchases to expand its balance sheet with.