U.S. stocks didn’t take kindly to the large increase in the unemployment rate as the benchmark indices began the morning session down roughly 1.5% across the board. However, the market reversed course in the afternoon as people realized, while the economy has lost jobs for eight-straight months, the losses remain mild relative to the typical labor-market downturn.
In addition, most of Thursday’s decline a significant move, was in anticipation of this employment report as the jobless claims data offered an indication losses would continue. Point is most of the damage due to this event occurred on Thursday.
Also, possibly helping to spark the reversal was a report from Barton Biggs – a well-known market strategist – that stocks are “pretty close to a bottom” and can mount a “powerful” rally from here. Although, we’ve heard this from Mr. Biggs before, only then to see stocks make new multi-year lows. (This is not meant to disparage Biggs, whom I admire, just stating the fact.)
Market Activity for September 5, 2008
The chart below shows the strong rebound from the day’s low point – up 2.00% from that intraday bottom.
Financial, consumer staple and basic material shares led the rally – financials were up 3.23%, consumer staples added 1.00% and materials 1.13%. The worst-performing group was utility shares, down 1.75%.
On the economic front, the Labor Department reported the economy shed 84,000 payroll jobs in August, which was a bit higher than expected but meaningfully less than the whisper range of between a 100,000 -110,000 decline.
That said the previous months’ job-loss figures were revised up. Prior to these revisions the monthly job-loss average year-to-date was 66,000. That average has moved to minus 75,000 per month due to these adjustments.
Again, the economy lost 84,000 payroll positions in August – according to the initial estimate at least – as the majority of these losses where in manufacturing and business services. Manufacturing, lost 61,000 and business services shed 53,000. (I’ll note, most of the manufacturing decline came from the motor vehicle and parts segment of goods-producing industries as auto-land employment declined 39,000 last month.)
Interestingly, construction lost only 8,000, which is a major improvement relative to the past few months – we’d averaged a decline 41,000 monthly construction jobs prior to this report year-to-date. The bright spots remained education and health services, adding 55,000 combined (38,000 pick up from health services and 16,000 in the education sector).
The unemployment rate jumped to 6.1% from 5.7% in July and is higher by a full 1.7 percentage points since hitting a multi-year low of 4.4% in March 2007. Although, I think it is safe to say that that low-point for unemployment was a bit artificial as it was the former (as opposed to the current easing campaign) very easy monetary policy stance by the Fed that led to housing-industry excesses and the big jump in construction employment as a result. It is more appropriate in my view to gauge the current increase in unemployment to the 5.00% level reached prior to those excesses totally taking hold – which is still a significant rise that amounts to roughly 1.6 million in jobs losses – this includes the self-employed.
The civilian labor force (those currently employed or looking for work) rose 250,000 in August, while household employment declined 342,000. So, we had 250,000 new entries – those looking for work – which is why the unemployment rate shot up to 6.1% as the labor market lost jobs in addition to those new entries. To add, much of the rise in the unemployment rates over the past few months was due to the teenage segment of the report. Not so in August as it was all adults.
(Just to clarify for new readers, there are two reports that encompass the monthly jobs figures. One is the establishment, or payroll, survey. This is the number you see in the headlines and this is where the 84,000 jobs lost in August came from. It is a survey of 400,000 businesses. The second is the household survey, this is the figure that is used to calculate the unemployment rate – it’s a survey of 60,000 households and includes the self-employed.)
Average hourly earnings accelerated to 3.6% on a year-over-year basis, from 3.4% in July. This is quite helpful and good to see a slight acceleration. Another positive from the report, and not touched by most, was the percentage of private companies adding jobs rose to 48.9%, the highest in many months. Not sure this is the start of a trend, but it’s something to watch for indication the labor market scenario may flatten out in the coming months.
What does this job’s report say for monetary policy? It increases the likelihood Bernanke and Co. will actually cut their benchmark fed funds rate – that’s right, I said cut. This would prove to be a very large mistake if in fact they do so – in my personal opinion --, but their flawed Phillips Curve models will point them in that direction with the unemployment rate jumping to 6.1%. (For additional perspective, the current unemployment rate matches the 30-year average, but the Fed will take notice to the jump from 4.4% last year and possibly think they have a green light to reduce rates without sparking inflation. Not saying this will happen, just that it wouldn’t surprise me if it did.)
The economy is not in terrible shape even though these jobs reports are less than encouraging. A number of sectors continue to show nice progress and from an overall perspective just look at business sales (a chart we show regularly), which remain on an upward trajectory rising 6.5% year-over-year. What we are seeing within the labor market is a housing and auto sector drag that is causing firms to cut jobs within goods-producing industries – that’s where the pressure is coming from.
However, for the auto-sector at least, the latest auto report showed incentives are clearing inventories and leading to a mild increase in sales – even if they remain depressed from a historical perspective. There is evidence however, that auto production will extend upon August’s increase (the data we saw on Wednesday has changed my mind in this regard). Housing will remain weak for sometime, but a little boost from the auto sector will do a lot to keep manufacturing activity near or slightly above the expansion/contraction cut line. Many segments within the industrial sector remain upbeat. The Fed’s models though will likely push them in the wrong direction in my view at this time. We shall see.
Fannie and Freddie
The big news of the weekend came from Hank Paulson and the Treasury Department, stating the two housing GSEs Fannie Mae and Freddie Mac would be placed in conservatorship – which means the government, via the Federal Housing and Finance Agency (FHFA), will take them over and shore them up until the housing market stabilizes. This was not triggered for fear of imminent collapse – both have capital that is above the requirement, but further housing-sector losses would test that capital position in time and this was the furthest point from the election, yet after the conventions, to take such action. Prior to this, Paulson’s hope was that simply talking of a government backstop would calm markets; alas, that strategy only made things worse.
The terms of the plan will be to eliminate dividends on common shares and at least suspend dividends on the preferred. Interest and principal will continue to be paid on the subordinated debt and one would expect over the next few days for mortgage-backed bonds to perform well.
The Treasury will extend their credit facility to both Fannie and Freddie to $100 billion each in order to make sure they maintain a positive net worth. The Treasury will also receive $1 billion of senior preferred stock and 10% interest on the stake. As a condition, the two GSEs will have to shrink their portfolios, not to exceed $850 billion as of December 31, 2009 and shall decline 10% per year until it reaches $250 billion. (Currently, Fannie’s portfolio stands at $758 billion.) The point of the December 2009 timeline is that this is a relatively safe bet the housing woes will have run their course by this point. Longer-term this will be a very good thing because if they are currently too big to fail, then the logical solution would be to shrink these behemoths. I do believe this plan to shrink their portfolios must first be approved by Congress, so it’s not official just yet.
Stock futures are up big on the news so the effort by Treasury will result in at least short-term market strength.
Have a great day!
Brent Vondera, Senior Analyst
In addition, most of Thursday’s decline a significant move, was in anticipation of this employment report as the jobless claims data offered an indication losses would continue. Point is most of the damage due to this event occurred on Thursday.
Also, possibly helping to spark the reversal was a report from Barton Biggs – a well-known market strategist – that stocks are “pretty close to a bottom” and can mount a “powerful” rally from here. Although, we’ve heard this from Mr. Biggs before, only then to see stocks make new multi-year lows. (This is not meant to disparage Biggs, whom I admire, just stating the fact.)
Market Activity for September 5, 2008
The chart below shows the strong rebound from the day’s low point – up 2.00% from that intraday bottom.Financial, consumer staple and basic material shares led the rally – financials were up 3.23%, consumer staples added 1.00% and materials 1.13%. The worst-performing group was utility shares, down 1.75%.
On the economic front, the Labor Department reported the economy shed 84,000 payroll jobs in August, which was a bit higher than expected but meaningfully less than the whisper range of between a 100,000 -110,000 decline.
That said the previous months’ job-loss figures were revised up. Prior to these revisions the monthly job-loss average year-to-date was 66,000. That average has moved to minus 75,000 per month due to these adjustments.
Again, the economy lost 84,000 payroll positions in August – according to the initial estimate at least – as the majority of these losses where in manufacturing and business services. Manufacturing, lost 61,000 and business services shed 53,000. (I’ll note, most of the manufacturing decline came from the motor vehicle and parts segment of goods-producing industries as auto-land employment declined 39,000 last month.)
Interestingly, construction lost only 8,000, which is a major improvement relative to the past few months – we’d averaged a decline 41,000 monthly construction jobs prior to this report year-to-date. The bright spots remained education and health services, adding 55,000 combined (38,000 pick up from health services and 16,000 in the education sector).
The unemployment rate jumped to 6.1% from 5.7% in July and is higher by a full 1.7 percentage points since hitting a multi-year low of 4.4% in March 2007. Although, I think it is safe to say that that low-point for unemployment was a bit artificial as it was the former (as opposed to the current easing campaign) very easy monetary policy stance by the Fed that led to housing-industry excesses and the big jump in construction employment as a result. It is more appropriate in my view to gauge the current increase in unemployment to the 5.00% level reached prior to those excesses totally taking hold – which is still a significant rise that amounts to roughly 1.6 million in jobs losses – this includes the self-employed.
The civilian labor force (those currently employed or looking for work) rose 250,000 in August, while household employment declined 342,000. So, we had 250,000 new entries – those looking for work – which is why the unemployment rate shot up to 6.1% as the labor market lost jobs in addition to those new entries. To add, much of the rise in the unemployment rates over the past few months was due to the teenage segment of the report. Not so in August as it was all adults.
(Just to clarify for new readers, there are two reports that encompass the monthly jobs figures. One is the establishment, or payroll, survey. This is the number you see in the headlines and this is where the 84,000 jobs lost in August came from. It is a survey of 400,000 businesses. The second is the household survey, this is the figure that is used to calculate the unemployment rate – it’s a survey of 60,000 households and includes the self-employed.)
Average hourly earnings accelerated to 3.6% on a year-over-year basis, from 3.4% in July. This is quite helpful and good to see a slight acceleration. Another positive from the report, and not touched by most, was the percentage of private companies adding jobs rose to 48.9%, the highest in many months. Not sure this is the start of a trend, but it’s something to watch for indication the labor market scenario may flatten out in the coming months.
What does this job’s report say for monetary policy? It increases the likelihood Bernanke and Co. will actually cut their benchmark fed funds rate – that’s right, I said cut. This would prove to be a very large mistake if in fact they do so – in my personal opinion --, but their flawed Phillips Curve models will point them in that direction with the unemployment rate jumping to 6.1%. (For additional perspective, the current unemployment rate matches the 30-year average, but the Fed will take notice to the jump from 4.4% last year and possibly think they have a green light to reduce rates without sparking inflation. Not saying this will happen, just that it wouldn’t surprise me if it did.)
The economy is not in terrible shape even though these jobs reports are less than encouraging. A number of sectors continue to show nice progress and from an overall perspective just look at business sales (a chart we show regularly), which remain on an upward trajectory rising 6.5% year-over-year. What we are seeing within the labor market is a housing and auto sector drag that is causing firms to cut jobs within goods-producing industries – that’s where the pressure is coming from.
However, for the auto-sector at least, the latest auto report showed incentives are clearing inventories and leading to a mild increase in sales – even if they remain depressed from a historical perspective. There is evidence however, that auto production will extend upon August’s increase (the data we saw on Wednesday has changed my mind in this regard). Housing will remain weak for sometime, but a little boost from the auto sector will do a lot to keep manufacturing activity near or slightly above the expansion/contraction cut line. Many segments within the industrial sector remain upbeat. The Fed’s models though will likely push them in the wrong direction in my view at this time. We shall see.
Fannie and Freddie
The big news of the weekend came from Hank Paulson and the Treasury Department, stating the two housing GSEs Fannie Mae and Freddie Mac would be placed in conservatorship – which means the government, via the Federal Housing and Finance Agency (FHFA), will take them over and shore them up until the housing market stabilizes. This was not triggered for fear of imminent collapse – both have capital that is above the requirement, but further housing-sector losses would test that capital position in time and this was the furthest point from the election, yet after the conventions, to take such action. Prior to this, Paulson’s hope was that simply talking of a government backstop would calm markets; alas, that strategy only made things worse.
The terms of the plan will be to eliminate dividends on common shares and at least suspend dividends on the preferred. Interest and principal will continue to be paid on the subordinated debt and one would expect over the next few days for mortgage-backed bonds to perform well.
The Treasury will extend their credit facility to both Fannie and Freddie to $100 billion each in order to make sure they maintain a positive net worth. The Treasury will also receive $1 billion of senior preferred stock and 10% interest on the stake. As a condition, the two GSEs will have to shrink their portfolios, not to exceed $850 billion as of December 31, 2009 and shall decline 10% per year until it reaches $250 billion. (Currently, Fannie’s portfolio stands at $758 billion.) The point of the December 2009 timeline is that this is a relatively safe bet the housing woes will have run their course by this point. Longer-term this will be a very good thing because if they are currently too big to fail, then the logical solution would be to shrink these behemoths. I do believe this plan to shrink their portfolios must first be approved by Congress, so it’s not official just yet.
Stock futures are up big on the news so the effort by Treasury will result in at least short-term market strength.
Have a great day!
Brent Vondera, Senior Analyst
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