U.S stocks gave back early gains for a time on Friday, but a spike in the final minutes of trading delivered the major indices to the plus side – up every session last week for a 3.6% gain. 

A much better-than-expected jobs report confused traders a bit, not knowing what this means for QE -- the consensus expectation is that there will be more Fed easy money to come beyond this latest electronic money printing that will be delivered over the next eight months.  A surprisingly better report has people wondering now, although we need to realize that the 87K/month in overall payroll average payroll increase (112K/month average in private-sector payroll growth) over the past 10 months would have to be tripled to get the unemployment rate down to a still elevated 8% 12-18 months from now.

As an aside, there are a lot of people talking about QE3 and QE4.  Look there won’t be another numerical version of QE because QE2 is open ended; it is data dependent and thus can go on for however long…until what we talked about on Friday brings an abrupt and unwilling end to this unprecedented monetary action. 

Financials, industrials and consumer discretionary shares led the broad market to its gains.  Telecom and health-care were the losers.

The metals drove the CRB higher again on Friday. Nickel and silver were the leaders but copper gained additional ground too.  The price of copper, a major metal for the construction industry, has climbed to within 3% of its all-time high – a level hit in 2006 when U.S. housing and commercial construction activity was gangbusters. Today activity in those markets is all but dead. 

Oh, and the price of oil rose to the highest level since the financial crisis began, closing at $87.08/barrel.  The boost in commodity prices is clearly more Fed driven than anything and without pricing power, firms are going to have a rough time coping. 

Market Activity for November 5, 2010

October Jobs Report

In summary:

The Labor Department reported that total payrolls rose 151,000 (expected at 60K) in October and private payrolls rose 159,000 (expected 80K). 

The prior two months were revised up in a pretty big way, up by 110,000 – meaning we lost only 42,000 jobs instead of the 152,000 previously believed for those months.  For the year, private-sector payrolls have averaged 112K.

The unemployment rate held at 9.6% -- household employment (via the household survey, which is used to calculate the official jobless rate) fell 330,000 as 254,000 people removed themselves from the labor force by not looking for work over the past four weeks. (Thus the unemployment rate actually ticked up just a bit, but rounding it the number remained unchanged from September.

The long-term unemployment situation deteriorated on balance.  The U6 unemployment rate (includes those who are working part-time because they can’t find full-time work and the marginally attached, those who didn’t look for work during the survey period) ticked down to 17.0% from 17.1%; however, the average duration of unemployment rose to 33.9 weeks from 33.3.  In addition, the percentage of the unemployed who have been out of work for more than six months ticked up to 41.8% from 41.7%

(6.2 million Americans). 

Full-time employment fell for a fifth-straight month, down 1.124 million over this span.

Average weekly earnings rose a strong 0.5%, which more than makes up for the 0.2% decline in September.

On specifics and the charts:

Goods-producing industries added just 5,000 positions as manufacturing cut payrolls by 7,000 (the third month of decline, so much for that ISM readings), while construction added 5,000 and mining/energy extraction added 7,000.  (The construction component added jobs in heavy civilian engineering, but cut in building construction.)

Service-providing industries increased payrolls by 154,000.  Trade & transport added 37,000 (3 mos. avg. is 24K); retail added 28,000 (3 mos. avg. is 15K); business services added 46K (3 mos. avg. is 34K), mostly due to a 35K increase in temporary help; education & health-care add 53,000 (3 mos. avg. is 39K). 

We’ll get to a time here when the education & health-care segment (along with other local government jobs), which has been the only segment never to post a decline during the labor-market contraction, begins to show the worst financial situation for state & local government finances in the postwar era – but it won’t occur until the Fed’s lifeline of check-writing to the states runs out. 

Bottom line:  This is a solid report on a relative basis, but it is just enough to keep the jobless rate unchanged if such increases become a trend.  However, we need at least a year of 300K/month job creation, followed by 200K prints for another year after that to get the jobless rate back to what is still an elevated 7.5%-8.0% level – tough number to estimate, but I’m going off of the four million people that need to re-enter the job market in addition to college graduates. 

I’m doubtful this growth is in the cards absent a real policy shift that drives tax rates lower and eliminates the health-care mandates coming down the pike.  I do believe that, at the least, the most pernicious aspects of the health-care legislation will be removed and this will help.  But full-fledged tax reform that is necessary to carry the economy from this nasty de-leveraging/liquidity-trapped environment is likely a couple of years out still.  Congressional gridlock isn’t sufficient as this time economic realities are very different. 

Pending Home Sales

Pending home sales (which portend official previously-owned home sales the next month or two out as these are contract signings) fell 1.8% in September – the market expected an increase of 3.0%. 

This comes off of a 4.4% rise in August. Thus, we may see a mild increase via October existing home sales (released at the end of the month) thanks to the August rise in pending.  But we’ll probably round the year out on a down note, particularly since the foreclosure chaos has put the nix on distressed property sales for a little while. 

ECRI WLI

The latest from the Economic Cycle Research Institute’s Weekly Leading Indicators gauge showed no change from the previous week as the figure came in at -6.50 (meaning the index fell at a 6.5% annualized rate. 

As the chart below shows, the gauge has pulled back from the -10 level it remained at or below for nine-straight weeks back in July, August and early September.  While the improvement is nice to see, it remains deeply negative even as stock prices (a major component in any leading indicator index) have jumped 17% since late August.  I would normally believe the market’s signal, but I’m skeptical this time as the Fed has been manipulating prices as their unprecedented monetary moves are pushing (rather than a solid-to-robust economy pulling) investors into riskier assets.  The components of the ECRI’s WLI are proprietary so no one outside of the organization knows exactly what they are.  But I wonder what the other components are doing as a 135% at an annual rate surge in stock prices can’t even get it to a reading of zero. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900