U.S. stocks fell for a fourth-straight session on Friday as the EU debt contagion trumped the best U.S. jobs report since 2006.  Lending between European banks was beginning to freeze up as counterparty risks were on the rise; when you don’t know what junk the other guy may have on his books then the cost to borrow increases. 

The jobs report was mixed.  A very good release in terms of the headline jobs number, but still very ugly with regard to long-term unemployment levels.  Within 30 minutes of the market’s official open, traders completely moved their focus to the troubles in Europe again.  Friday’s losses extended the week’s decline to 6.39% (as measured by the S&P 500), by far the worst week since March 2009.  This follows a 2.51% decline in the week prior. 

The German Parliament, the lone holdout, approved the Greek bailout package Friday, but more people were beginning to doubt it to be enough and few traders were willing to go into the weekend with all that has occurred.   The contagion fully spread to Portugal on Friday as their two–year note hit 8.78%, 800 basis points above two-year German debt.  So, the market waited as everyone expected the EU and ECB to come up with something over the weekend, and they’ve done just that as we’ll discuss below.

U.S. regulators continue to search for what exactly caused the 8.5% plunge at one point during Thursday’s session.  The fact that they’re still looking pretty much eliminates the thought that a massive trade error triggered the rout.  Maybe it’s just that everyone is looking in the wrong places.  Maybe this is just what you get when there’s a rush for the door, a rush that’s set up when policymakers (and I’m largely talking about the Fed, but not totally) induce a surge in stock prices as they make yields in safer assets unappealing.  Everyone loves ZIRP and gargantuan levels of government spending when the markets drive higher, but of course no one enjoys the ugly downside of such policy.  So the regulators will keep searching, and they’ll end up blaming this on high-frequency trading (algorithmic trading).  They’ll have a point on that one, but even absent such automated trading, regulations cannot change human behavior.  When fear hits a crescendo, liquidity will always dry up and there’s no stopping a market slide. 

Market Activity for May 7, 2010

Europe’s Tarp

The EU rushed to get something done that would calm the markets by the time they opened Sunday night.  What they did was come up with something big, but it’s hardly original.  The members agreed on a $940 billion loan back-stopping program that involves the IMF.  Eurozone members will be on the hook for roughly 60% of this amount, and one wonders where a cash-strapped Europe will find the resources to make this plan credible.  Of course, they never intend on using this back-stop, hoping that the very announcement of government guarantees will keep the crisis contained to Greece.  These masters of kicking the can down the road will lose this game of chicken as the market will test both their ability and resolve to make good on this claim. 

The ECB (European Central Bank) also stepped into the game by announcing they’ll venture down the road of quantitative easing by buying both government and private debt.  Our own Fed is playing a role as well, re-opening the emergency currency swap program – providing as many dollars as needed to European central banks.  Bernanke & Co. had closed these “swap” lines in February (the swap just means that our Fed takes euros and gives EU central banks dollars under the agreement to reverse the transaction at a later date) thinking the issues had cleared, so much for that.

Stock-index futures are higher than I recall ever seeing them, so we’ll see a surge at the open. 

April Jobs Report

The Labor Department released a very good April employment report in terms of the headline increase in payrolls, but some of the internals showed weakness continues to prevail, namely long-term unemployment.

Payrolls jumped 290,000 last month, a full 100K better than expected, and most importantly it was mostly due to a rise in private-sector jobs – hiring for the 2010 census only accounted for 65K of this number.  Census hiring still has yet to really show up and that means we’ll see a monster reading either for May or June as census hiring will hit 300K-500K in one or both of these months combined.  Further, the nest revisions to the prior two months were higher by 121K.

Goods-producing industries added 65,000 jobs.  The manufacturing sector added 44,000 positions and construction payrolls increased 14,000.  These two sectors combined have added 103,000 jobs over the past two months, of little solace as they slashed nearly four million positions over the previous two years but we’ll take it. 

Service-providing industries increased payrolls by 166,000.  Business services added 80,000 (temporary workers were up 26,00 so this shows temp. employment didn’t dominate as has been the case for several months).  Education and health-care, the only segment of the report that never registered a decline during the labor-market rout, added 35,000 jobs.  Leisure and hospitality increased payrolls by 45,000.  Retail trade payrolls increased 12,000.  Trade and transportation and information technology both reduced payrolls by 3,000.

So these are some nice numbers overall, and the nice aspect of the report.  Where things remained ugly were on the long-term unemployment side of things and the enormous amount of labor resources that sit on the sidelines.  As these workers begin to re-enter the market, feeling better about their prospects of getting hired, which has begun, we’ll need job growth of 300K per month to keep the official jobless rate from moving above 10% again.

And speaking of which, the unemployment rate increased to 9.9% (15.3 million people officially unemployed) from 9.7% in March even as payrolls increased 290K.  This occurred because the number of people re-entering the labor market jumped by 805K, overwhelming the increase in jobs.  Watch for the jobless rate to fall over the next couple of months as the bulk of census hiring occurs, but a couple of months beyond that it may very well surpass 10% again. 

The long-term unemployment figures continue to disappoint.  The average duration of unemployment hit 33.0 weeks (record high), up from 31.2 weeks in March.  Those out of work for more than 27 weeks (the labor-department’s gauge of long-term joblessness) hit 45.9% (7.0 million people).

The U6 unemployment rate, which includes both those working part-time because they can’t find full-time work and those who are marginally attached to the labor force (they stopped looking for work over the four weeks this report covers because they’re discouraged) is back on the rise.  The figure rose to 17.1% (26 million people) from 16.9% in March; it remains below the high of 17.4% hit in October.  With 805,000 workers re-entering the labor force, most of this rise must have come from the part-time for economic reasons segment – this explains why average hourly earnings were flat in April, some of the job gains came via low-paying part-time work. 

Have a great day!

Brent Vondera, Senior Analyst