Jobs: The Straw That Stirs the Fed

by Dan Burrows | September 7, 2012 11:14 am

Looks like we’re getting QE3[1] after all.

The August jobs report crashed short of the runway, landing gear up. Federal Reserve Chairman Ben Bernanke isn’t going to wait for anything else to crash and burn before pulling yet another monetary safety net from the central bank’s shrinking toolbox.

Nonfarm payrolls grew by an anemic 96,000[2] last month against expectations for 125,000 new jobs. Private payrolls, which strip out the effects of local, state and federal government austerity, added just 103,000 positions, far short of the forecast for jobs growth of 144,000.

And, in another “ugh,” the data for June and July were revised lower by a combined 41,000, too.

That’s pretty much all Bernanke & Co. needed to know ahead of the Fed’s policy meeting next week.

As The Wall Street Journal’s Jon Hilsenrath (known as “Fed Wire” for his incomparable access to Fedthink) summed it up[3]:

Fed Chairman Ben Bernanke described the weak labor market as a grave problem in comments in Jackson Hole last week, a strong suggestion that he wanted to take new actions to strengthen economic growth … Friday’s jobs report was the last hurdle standing in the way of the Fed proceeding.

September is shaping up to be the bond-buying extravaganza the markets have been betting on since late July. On Thursday, the European Central Bank finally became the eurozone’s lender of last resort with an unprecedented pledge to buy the bonds[4] of Italy, Spain and pretty much any other eurozone country whose sky-high borrowing costs have its finances circling the drain.

The ECB took a page from the Fed’s playbook, and now the Fed’s playbook is about to get even thicker about this time next week.

Traders have been frothing at the mouth on all this anticipation of more central bank intervention. It’s made for one heck of a rally. The S&P 500 has tacked on 9% in just the last three months to hit a level last seen in 2007.

It’s been fun, sure, but at what point does reality intrude? After all, central banks don’t deem these policy moves necessary because everything is hunky dory.

The ECB can help stabilize the finances of troubled eurozone countries, but it can’t turn on economic growth like a spigot. Indeed, the ECB is now acting like a mini-IMF. Sure, countries can get help, but only if they accede to the very same fiscal belt-tightening that actually hampers growth.

The fact remains that the European Union and eurozone are in recession — and not coming out of it anytime soon. China, the driver of the global economy, is decelerating, probably more steeply than first thought, partly because Europe is its biggest trading partner.

And here in the U.S., GDP is dangerously close to stall speed, August hiring was weak and corporate revenue and earnings — the ultimate driver of share prices — are looking to get downright recessionary in the current quarter[5].

Make no mistake: The global economy is slowing markedly. Doesn’t anyone remember when FedEx (NYSE:FDX[6]) took a hatchet to its profit forecast[7] way back on … Wednesday?

Third-quarter earnings are forecast to decline 2.8%, according to data from FactSet. As recently as June 30, the Street was looking for profit growth of 2.1%. And all along the market has been grinding higher.

It was a summer to remember for risk-on assets and hot money, but investors need to maintain longer horizons. At some point traders will return to fretting about corporate outlooks or China or Angela Merkel or some other anxiety du jour.

Hooray for higher share prices, but QE3 has been priced in, and this market looks to have gotten ahead of itself.

Endnotes:
  1. we’re getting QE3: http://investorplace.com/2012/08/qe3-odds-improve-after-fed-minutes-but/
  2. payrolls grew by an anemic 96,000: http://investorplace.com/2012/09/96k-jobs-added-in-august-unemployment-falls-to-8-1/
  3. summed it up: http://blogs.wsj.com/economics/2012/09/07/wsj-analysis-jobs-report-raises-likelihood-of-fed-action/
  4. unprecedented pledge to buy the bonds: http://investorplace.com/2012/09/the-idiot-americans-guide-to-todays-big-europe-news/
  5. downright recessionary in the current quarter: http://investorplace.com/2012/08/get-ready-the-earnings-floor-is-set-to-fall/
  6. FDX: http://studio-5.financialcontent.com/investplace/quote?Symbol=FDX
  7. took a hatchet to its profit forecast: http://investorplace.com/2012/09/fedex-profit-warning-is-no-surprise-fdx/

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