Market Commentary

The worst unemployment slump in the post World War II era may be about to end.
December 07, 2009

The worst unemployment slump in the post World War II era may be about to end.  November’s headline unemployment rate fell to 10.0% from October’s 10.2% rate.  Nonfarm payrolls only declined by 11,000, the fewest jobs lost since December 2007.  Moreover, prior month job losses were revised lower where the three month average payroll loss now stands at a comparatively mild 87,000.

What I think is most significant it appears there was little benefit from seasonal adjustment which suggests bona fide improvement in labor market and the economy is on the verge of creating jobs --perhaps as early as January.

There are other data points that support this view.   The average private and factory workweek rose more than expected.  The former was up 0.2 hours to 33.2 hours and the latter jumping 0.3 hours to 40.4.  The index of aggregate weekly hours rose a sharp 0.6% and is on track to be about flat for all of Q4 after falling 3% last quarter and 8% in the second. 

In addition, the numbers of temporary workers surged for a second straight month to 52,000, the largest increase since 2004 and the fourth consecutive weekly gain.

I thought the data would surprise most but I did not think the statistics would be this good.  However, reflecting upon the events of last year where the economy lost 5.3 million jobs from October 2008-July 2009 during a period where I believe companies panicked and fired too many employees to ensure survivability; such a dramatic change could be expected.

To place these jobs losses into proper perspective a total of 1.4 million and 2.8 million jobs were lost in the two previous “killer recessions” of 1973 and 1981.  Incidentally, a total of 7.4 million jobs have been eliminated since the onset of the recession in December 2007.

I believe many will dismiss this data as a “one off” event however this is to be expected at any transition point.  Normally when the market is surprised with either a really bad quarter or really good statistic, it is typically the harbinger of things to come.  However, I must write this change is never linear.

Fed Funds futures, which are a gauge of market sentiment, are now suggesting the overnight rate will be raised to 0.50% by June 2010.  But if the economy is recovering as fast as today’s data suggest, a March increase is indeed possible.

Equities were rather volatile rallying about 150 points at the market opening, declining about 50 points during mid day only to close higher after Treasury Secretary Tim Geithner said economic growth is strengthening and the unemployment rate may decline further.

 I ask is the volatility a function of fear surrounding that inevitable change in monetary policy?  How will the economy/market respond when the overnight rate is hiked?  When the overnight rate is raised I will view it as an “all clear sign” definitively stating the recession and the crisis that surrounds it are finally over.

Incidentally if history is to serve as a guide stocks will continue to rally after an initial sell off.

Commenting briefly on the Treasury market, Treasuries declined moderately on the data as well as this week’s upcoming auction.

What will happen this week?  Later in the week consumer credit, retail sales, business inventories and University of Michigan sentiment survey are released.

Last night the foreign markets were down. London was down 0.29%, Paris down 0.45% and Frankfurt down 0.08%.  Japan was up 1.45% and Hang Sang down 0.77%.

The Dow should open   nominally lower as traders increase the odds that the Federal Reserve will raise rates as early as January. The 10-year is up 8/32 to yield 3.44%.