Friday, December 4, 2009
Today's November jobs report arguably marks a turning point in the market's perception of reality. Revisions to previous months added 159,000 jobs according to the establishment survey; when combined with the loss of only 11,000 jobs in November, the economy (presumably, if you trust the government's data) has 148,000 more jobs today than it did a month ago. The household survey says the same thing: it showed a net gain of 110,000 jobs in November, with 39,000 of those coming from the private sector. However, you look at it, there is little doubt now that there has been a significant improvement in the labor market in recent months.
The market so far has reacted in predictable fashion to the news that the economy was in better shape than previously thought. The dollar is up, gold is down, and expectations of future Fed tightening have been accelerated (the yield on Dec. '10 eurodollar futures is up 17 bps today). Stocks are up, but not by a lot, suggesting the market is cheered by the good news, but at the same time worried that an earlier removal of monetary stimulus might threaten the recovery. I think this latter concern is silly. If the economy grows by any decent amount (3-4% real growth, as continues to be likely in my view), then the Fed must raise rates, and higher rates will only reinforce the recovery because they will restore confidence in the dollar. Plus, as I've mentioned before, the household sector is a net beneficiary of higher rates because households have more floating rate assets than floating rate debt.
I'm watching the relationship of the dollar and equities very closely. To date, they have moved inversely, but today could mark the end of that relationship. If so, we could be embarking on a new era of virtuous trends: a stronger dollar, a stronger economy, and a stronger equity market. It's too early to make that call, but it would sure be something if it were to happen. It would go almost completely against the prevailing wisdom, and that is when exciting things happen from the perspective of contrarians like me.
UPDATE: Here's a chart of the 6-mo. annualized rate of change of private sector jobs, according to the establishment survey. Note the dramatic improvement in recent months.
Posted by Scott Grannis at 10:38 AM