U.S. stocks dropped as the latest G-20 meeting ended without a deal and the October jobs report, while hyped as a good one by CNBC, showed payroll growth remains much too weak. 

Strange on a down session, but basic materials and energy were the best-performing sectors.   Despite stocks pulling back, commodity prices in general gained ground, and this helped the aforementioned sectors hold up.  Financials, health care and telecoms led the market lower.

On Friday we talked about how stocks got a boost from news/rumor that more G-20 nations expressed interest in providing support (via the IMF, not directly) to Europe.  Well, by the time Friday morning rolled around, the meeting ended with no deal – which frankly should be the market expectations by now.  In fact, the news/rumor now is that few G-20 members want to participate.  As a result, Italian debt got assaulted, a sell off that sent Italian 10-year bonds to the highest yield (6.40%) yet.  If these bond price remain depressed, the focus is going to move from a tiny Greek economy and onto the eurozone’s third-largest. 

And that’s exactly what has the market down this morning in pre-market trading.  Italian bonds are selling off some more, their 10-year yield is 6.53% as I type – again a yield over 6% is seen as to high a cost of money considering that the Italian economy has shown virtually no ability to grow for 20 years. 

The Europeans have done this to themselves.  They essentially rendered CDS (default insurance) worthless as they’ve worked to orchestrate a “voluntary” default in Greece.  As a result, it doesn’t trigger a CDS event, thus those who bought insurance are not actually protected.  And when traders can’t hedge, then they’ll just sell – and that’s what’s going on in Italy, the eurozone’s gorilla in the room, right now. 

Market Activity for November 4, 2011

Sector Activity for November 4, 2011

October Jobs Report

The Labor Department reported that total payrolls rose just 80,000 in October (95K was expected), but the prior two months were revised higher by 102,000.  As a result, the three-month average comes in at 114K/month.  That’s better than the 95K/month the average came in at for the three months ended September.

Private-sector payrolls rose 104,000 last month, but the September reading was revised up very nicely – coming in at +191K vs. the 137K increase previously reported.  This brings the three-month average to 122K/month.  Nice upward move, by we need at least 300K/month to get the jobless rate to even a still high 7% over the next couple of years.  That 300K/month from the private sector is particularly important right now as state and local governments are forced to cut jobs. 

Good-producing industries cut 10,000 payrolls as construction slashed payrolls by 20K and manufacturing added just 5K.  

Service-providing industries added 114,000 jobs, led by a 32K increase from business services (15K being temp. jobs), education & health added 28K and leisure & hospitality added 22K. 

The official unemployment rate ticked down to 9.0% from 9.1% on September as the Household Survey (separate from the payroll survey, but used to calculate the unemployment rate) showed an increase of 277,000.  Since those re-entering the workforce only rose 181,000, the unemployment rate fell. 

Outside of two months (Feb. and March 2011) when the jobless rate dipped below 9%, the unemployment rate has been stuck at this elevated level for longer than at any time since the Great Depression – averaging 9.4% over the past 29 months. 

Two quick points on the jobless rate:

First, Household employment (which includes the self-employed) has increased for three-straight months, up 1.006 million over this period.  Economists like to say that after three months of nice increase in this number, the labor market is on track to improve.  However, I’ll point out that we saw a four-month streak of 955,000 increase at the beginning of the year only to see the reading give more than half of those gains back in the following four months.  So I’d caution to get too excited about the Household number just yet.

Second, 181,000 people re-entered the workforce.  With the participation rate sitting at just 64.2%, it will take the re-entry of five million people into the labor force to get us back to the modern-era average participation rate of 66%.  Thus, we’ll need a couple of years of roughly 300K/month job growth to absorb these people and get the jobless rate moving lower. 

The U6 unemployment rate fell to 16.2% from 16.5% -- this captures those that are available for work but didn’t look for a job in the past four weeks (the official jobless rate excludes these people) and those working part time for economic reasons (they want full time work but can only find part time).  More part-time workers found full-time work in October. 

The long-term unemployment situation improved, but remains extremely troublesome. 

The average duration of unemployment fell to 39.4 weeks from 40.5 in September.

Those out of work for at least six months (defined as the long-term unemployed) fell to 5.840 million, down 366,000 over the past month.  As a percentage of the total unemployed, that figure is 42.4%.

Average hourly earnings rose 0.2%, up just 0.1% over the past three months and +1.8% over the past year.  Inflation has increased 3.0%-3.9% (depending on the gauge) over the past 12 months.

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Have a great day!

Brent Vondera, Senior Analyst