In our early morning pre-jobs report commentary we said that "recent economic data tilts the odds in favor of a strong employment report this morning". Like many others throughout the land, our expectations were soon proven to be slightly off base as the report which so many had waited on pins and needles for all week came in significantly below expectations.
Average hourly earnings , the number we said to watch, surprised on the downside with a meagerly gain of 0.2%. Non farm payrolls, that most watched of numbers, registered a surprisingly small gain of 124,000 jobs, compared to expectations of a 220,000 rise. The unemployment rate provided the only black spot, but it was an expected black spot, as the rate dipped to 4.2%.
This morning we said, "We expect the stock market to rally if the numbers come in as forecast, or below forecast. Keep in mind that with the Dow still above its critical support level of 10,450 that there is still enough complacency floating around to spark a rally at the drop of a hat".
Well, the hat was dropped, and the market did rally as expected, but is the current rally justified, has today's report changed the future scenario for interest rates, will the Pre-emptive Crusader put his costume in storage?
We think not.
As we said this morning (when we expected an upside surprise), "...we would caution against taking today's employment numbers in isolation. While there is an increasing tendency to regard each bit of economic data as "the definitive report" that will sway the Fed, the reality is no one bit of economic data holds the magical answer to the Fed's next move. Each economic report must be evaluated in the context of the broader knowledge base of economic data that has preceded it."
Today's report, benign and inflation free as it was, closely followed a string of strong economic reports that have been released over the past week that indicated that the economy remains strong, the consumer happy, and the labor market tight.
Today's report , despite the below forecast showing by non farm payrolls, on closer examination shows that third quarter job creation is running marginally above trend at 231,000 versus the 12 month average of 228,000. It also should be remembered that the non farm payroll number is a volatile creature, May's numbers also provided a pleasant surprise, one which was quickly erased in subsequent months. The recent strength shown in the durable goods numbers and the NAPM
So, while today's numbers came in below
expectations, we do not believe that the question surrounding the future
direction of interest rates has been resolved with their release.
While there are many central bankers who
have no problem with doing a monetary policy flip based on one indicator,
and their economies are the worse for the wear because of it, we give the
Federal Reserve a little more credit.
After enjoying a momentary relief rally
lapse from the jitters of rate policy uncertainty, we expect the market to
quickly return to its recent path of living economic release to economic
release.
On the interest rate front, the
questions of when, if, and by how much have not been answered by today's
report. In short, the jury remains out pending further evidence.
Finally, in a completely unrelated note,
was it really only a week ago that the mention of the words "asset
bubble" and "valuations" sent traders running for cover--How
time flies, and how short memories are.
