A disappointing jobs report couldn’t stop the market from rallying for a third-straight session – the Fed’s got its back – as a late-session spike drove the major indices into positive territory. 

The Labor Department reported that payrolls rose just 39,000 last month as expectations were for 150K; the official unemployment rate closed in on 10% again.  Even so, stocks never really sold off – only down 0.4% at the worst of the day.  The Fed is there to backstop things and that’s going to work...until it doesn’t as I like to say.   News broke late in the day that in Bernanke’s 60 Minutes interview (which was taped Friday, but aired Sunday) he stated QE2 could be expanded beyond the $600 billion.  This is why I stated a few weeks back that there won’t be a QE3, 4 or 5 as QE2 is open-ended. 

Now that the interview has aired we see Bernanke remains very negative on the economy and its ability to be self-sustaining.  He also signaled that when things do return to normal the Fed will be prepared to increase rates and unwind this accommodation at lightning speed.

Basic material, energy and financial shares led the advance.  Consumer staples and telecoms were the day’s worst-performing groups but even they closed higher.  Volume was pretty pathetic, 12% below the already very low six-month average.

The CRB Index moved closer to that post-crisis high of 319 – closed at 316.16 on Friday – as cotton, wheat, sugar, corn and silver delivered the fourth rally in five sessions.  The price of crude oil has done more than close in on the $90/barrel level, as we stated was occurring earlier in the week, as it closed at $89.32 on Friday.  Consumers won’t have much fun with $3 gasoline in this environment. 

Well, Thursday I mentioned that ECB President Trichet refused to be as short-term market friendly as Bernanke.  Traders expected an announcement that the ECB would expand its bond-buying campaign, but Trichet was fairly mum on the subject, as least with an explicit statement.  Scratch that now, as central banks of course need to be judge by their actions, not their words.  The ECB was in buying up Portuguese and Irish debt on Thursday at four times the amount of their previous campaign, according to the Financial Times.  Those bonds rallied hard late last week, the spreads narrowed big time.  The artificial prop-up continues.

Market Activity for December 3, 2010

November Jobs

The Labor Department reported that payrolls rose much less than expected in November, rising just 39,000 (150K was expected, and the whisper was probably closer to 200K considering how excited people have become of late).  Although, the October results were revised up to show 172K were added – previously reported at +151K.. 

Private payrolls rose just 50,000, less than one-third of the 160K expected. 

The official unemployment rate rose to 9.8% from 9.6% in October – we’ve been stuck at 9.0% or higher for longer than any time in the postwar era, 19 months now.  The jobless rate, which runs off of the household survey, not the establishment survey (which produces that payroll figure), increased because household employment (which captures self-employed and much of small business) fell 173,000, while 103,000 returned to the workforce. 

Full-time workers fell for a fourth-straight month in November, down a large 478,000 – three times the average of the previous three months.

In terms of industry, goods-producing industries cut payrolls by 15,000.  The construction sector reduced payrolls by 5,000, manufacturing by 13,000 and mining added 6,000.  Manufacturers have cut payrolls for four-straight months now – the ISM link has completed broken down as the employment measure within that report has suggested factory employment is robust.

Service-providing industries add 65,000 payrolls, which is little more than half the three-month average of 115K.  Trade and transport reduced payrolls by 13,000; retailers reduced payrolls by 28,000 (likely a seasonal-adjustment factor as retailers may have hired holiday employees sooner than usual – October rather than November); financial services reduced payrolls by 9,000.  Business services added 53,000 jobs (40K coming from temporary workers); education & health-care added 30,000; leisure & hospitality added 11,000.

Government cut payrolls by 11,000.

Again, the official unemployment rate rose to 9.8%; the U6 rate held steady at 17.0%.

The duration of unemployment numbers were mixed but remained ugly.  The average length of joblessness ticked down to 33.8 weeks after October’s 33.9 weeks.  The percentage of those unemployed that have been out of work for at least 27 weeks (the longest period of time the Labor Department tracks) ticked up to 41.9% from 41.8%.

Average hourly earnings were unchanged in November, after October’s 0.3% increase.  Weekly hours worked also were unchanged at 34.3 weeks.

So we continue to see the market get very excited about things, only to be let down.  Recent jobless claims data had many people thinking we’d move to a higher level of job gains beginning in November and the very latest personal income figure had many believing that incomes were on the rise.  This report certainly diminishes those outlooks. 

Look, we’re in an environment in which too many people let their euphoria run wild on just a couple of better reports.  One can’t look at things this way; the improvement has to be more long-lasting, more durable, than just one or two months of reports.  As we discussed on Friday, it is likely that employment numbers will remain choppy, averaging a monthly rate of growth that is insufficient to bring the jobless rate lower on any reasonable timeline. 

ISM Service Sector

The Institute for Supply Management’s gauge of service-sector activity came in a bit better-than-expected at 55.0 for November (54.8 was expected) after 54.3 in the previous month. 

The sub-indices looked really good with new orders up a point to 57.7 (remember anything over 50 marks expansion); employment up almost two points to 52.7; backlog of orders down a half-point, but still above 50 at 51.5; and export orders jumped four points to a hot 59.5.

The inventory readings do show the service sector may be dealing with a little unintended stockpiling.  The straight inventory gauge rose back above 50 to 51.5, which is fine in and of itself but the inventory sentiment reading remains very high at 60.0 (it was down 1.5 points) – a higher reading means respondents are less comfortable with inventory levels and this is a high level for this point in the cycle.

So the ISM figures, both manufacturing and service sectors, continue to post readings as if GDP is running well-above trend (the long-term growth average).   Unfortunately, GDP is running below trend.  These ISM figures are a measure of direction not degree.  That is, it measures the number of net respondents that are saying business is improving.  Thus they may be posting these strong numbers simply because things are much better relative to where we were at the worst of the financial crisis.  This is the only thing I can come up with to explain the discrepancy.  This may also explain why the ISM employment reading are signaling strong jobs growth, yet reality shows the labor market remains weak relative to past recoveries. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900