Hold Your Horses

By: Michael Ashton | Fri, Nov 5, 2010
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Wow, the Employment number was a mess. I don't know that I have ever seen the Establishment survey and the Household survey more at odds with each other. Private payrolls rose 159k, compared to 80k expected, with positive net revisions of 110k. So forecasters missed by 189,000 jobs. They missed because this huge strength was not hinted at in the Consumer Confidence survey, any of the regional surveys, the ADP count, or Initial Claims. At best, some modest improvement was expected.

On the other hand, the household survey showed a rise in the Unemployment Rate to 9.644% from 9.579%, barely missing an uptick. This is after several months in which an uptick was expected but not delivered. More disturbing, the labor force participation rate fell to a 24-year low (see Chart), hardly a sign of economic vigor. The average and median durations of unemployment both rose.

Now, the establishment survey is ordinarily the more accurate of the two surveys, since it relies on an actual count of employees rather than the self-identification by individual respondents, but it is not without its misses. There seems little doubt that the jobs picture is improving slowly, but there also seems little doubt that the jobs picture is not improving robustly, or we would have seen the evidence in other surveys. I think the overall message here is: hold your horses. This report is not the last word about the state of the economy, and there are good reasons to maintain some skepticism. Does this report improve the odds that the economy may be starting to accelerate? Surely, it does. But is it sufficient reason to make that the new null hypothesis, and to throw caution to the wind about the New Expansion? It most certainly does not.

On the news, the dollar shot higher. Bonds got smacked. Stocks rallied. These are all the usual responses to a strong Employment report. Quite interestingly, though, stocks were unable to hold the early gains. As a colleague of mine pointed out, this was a market that for months has been looking for reasons to rally - and today, with a reason to rally, it failed to rally. It is only one day, but it is interesting. (When this comment goes out, the market will also not yet be closed, so we could still get an end-of-day move...but with this data we shouldn't need to wait that long, should we?) I noted yesterday that the S&P is right up in an area of resistance, so we probably need to give this thing time to play out.

Unfortunately, key economic reports like this have consequences that go beyond the interpretations and re-interpretations of economists. To the extent that this news is taken as a signal of a sudden resurgence in the economy, it will complicate the negotiations in Congress for an extension of the Bush tax rates. If the economy is really surging, then it ought also to foreshorten QE2, which program would now be unnecessary. Needless to say, I don't think these are valid concerns after one strong number in the last 250 numbers, but this report has consequences that are more far-reaching than most.

There is still a great deal of uncertainty around, even if we take the establishment side of the report at face value. Today the ECB declined to disclose internal documents that explained how swaps had been used by Greece to hide her debt burden (story here). ECB President Trichet said that to release the documents would "undermine the public confidence as regards the effective conduct of economic policy" and create a "risk of adding to volatility and instability." Well, thanks for that. Question: if someone says to you "I'm not going to tell you about what is happening in the other room, because if I told you then you'd probably panic and try to escape the building," would you say, "Thanks. Then I'll just watch the rest of the movie in peace"?

Economically speaking, there isn't much data next week. There are some Fed speakers around, including over the weekend at the Atlanta Fed's conference on Jekyll Island. Be forewarned that Minneapolis Fed President Kocherlakota speaks on Saturday on the the topic of Monetary Policy and Asset Bubbles. He might consider asking Bernanke and Greenspan, who are there to participate in a panel discussion on Saturday. I'm not kidding. The current Chairman and the last Chairman are both on a panel discussion about the Fed's purpose, structure, functions, and future. And they are taking audience questions!



Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA

Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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