The monthly employment report was released last Friday. The overall conclusion was that this was a poor report. Each month, there are two reports; the establishment survey which shows that 169,000 new jobs were created last month (compared to estimates of 180,000) and the household survey which told us that there were 115,000 fewer people employed last month. Therefore, based on the headlines, the two reports were undoubtedly weak.
The unemployment rate fell to 7.3% from 7.4%, which should be good news on the face of it. To confuse the issue, the unemployment rate is calculated from the household survey which had 115,000 fewer individuals employed so the unemployment rate should have risen. However, the number of potential workers fell by 516,000 which means that the unemployment rate declined owing to a smaller overall workforce, even though the number of people working declined as well. This is not really good news...
The full time workers versus part time workers ratio improved, as did the number of hours worked. However, the year on year rate of increase in earnings remains very slow. How can an economy grow robustly if earnings are anaemic?
What is clear from subsequent action particularly in equity markets is that this poor employment report does not matter. We live in an "upside down world" where poor economic data drives equities higher because poor data means that the Central Bank will keep on printing money. However, it is possible that the agenda at the Fed has changed, and poor data may not be sufficient in preventing the Fed from reducing QE; only disastrous data will do that. Perhaps the Fed believes that QE is losing its efficacy and the costs are beginning to outweigh the benefits. In that scenario, QE is coming to an end so long as the US does not slide back into recession.
Friday's employment reports were ambiguous enough to encourage doubt that the Fed will reduce QE on its 18 th September meeting. Although we believe they will taper, if not this month almost certainly before year end, what does this mean for markets? It probably just leads to erratic trading until the Fed's decision which will be frustrating for everyone. In the first two charts below, we plot the S&P 500 and FTSE 100 and then Gold and the US Dollar index. These assets have erratically chopped sideways for between 4 and 6 months leaving the only way to make money has been to be tactical and try to predict the range – not easy.
Our best guess is that these markets simply do not have the ability to break these ranges until after the Fed meeting. However, these ranges will break at some point probably at the pint most people think unlikely and probably not in the direction people thought.