August non-farm payrolls not enough for a ‘twist’

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The August non-farm payrolls report was a bit of a disaster, and it materially increases the probability that the Fed will do something further to boost the economy at their next window (September 21) – however I doubt that it will be sufficient, by itself, to motivate the Fed to further ease monetary policy.

Given that Bernanke already pushed through an easier stance at the August meeting, over the top of three dissents, I think that it will take either more bad data, or some time, to obtain a majority in favor of additional easing.

The signposts are easy to identify: the hawks would be less hawkish if the next CPI print showed further easing of inflation pressures (August CPI is 15 Sep); the doves would have stronger evidence that this was not a once off due to August’s political debacle if the weakness in the August manufacturing indices persisted / worsened (we see the September Empire and Philly surveys prior to the September Fed meeting).

If both happen, there is a chance of a ‘twist’ (the FOMC extending the duration of the SOMA portfolio) following the Sep meeting; but you probably need all three data points to line up to get action in September.

So what was Friday’s employment data?

The August establishment report showed that the level of employment is ~126k lower than expected (0k v. mkt +68k in August, plus June revised down 26k and July revised down 32k). The household survey, by contrast showed a 331k gain, and an increase in participation, and as such the unemployment rate held steady at 9.1%

The cyclical industries shed jobs (retail, manufacturing and construction employment all fell), and the employment DIs slumped (total -5.2 pts to 52.2 pts; Manu -14.8 pts to 42). Wages fell 0.1%m/m – a good reason to believe that core inflation will decline in due course – and hours worked fell 0.3%m/m, meaning that income formation recessed by ~0.4%m/m in August.

The only bright spot in the establishment survey was the increase in temporary employment — it built on last month’s +1.2k with a +4.7k in August. With a bit of luck, that may portend improvement … But there needs to be a lot of improvement to do anything about the massive output gap.

If you combine the recent inflation tax with sluggish wages growth, and the hangover of poor investment decisions (many paid way too much for their home), it is easy to see why demand remains sluggish. There is not all that much the Fed can do about this, but if it gets worse I think they will try boosting confidence by making their gun go – pop!

I don’t think QE2 was big enough to have a meaningful impact on the economy, so I doubt a duration extension would significantly alter the economy’s medium term path – but it might just boost confidence a little.

It is for this reason that I think if the Fed starts down this path they will eventually have to expand their balance sheet by buying more assets outright — only massive QE would materially change the outlook, and that is not on the table, so all of the options work via a confidence channel.

Thus, to work, policy has to pass the ‘can I explain it to my mum’ test …and duration extension doesn’t pass that test.

Perhaps the Fed is already on the slide toward QE3 — the bond market certainly traded that way on Friday night. The US treasury curve bull-flattened on the release, and with no supply this week I see no reason for the trade to unwind when the market re-opens.

Given the focus on Fed policy, Fed speakers will take centre stage this week. I expect the Pres. Kocherlakota will have lost a few of his hawkish feathers, and that (ex Fed) Kohn, and Pres. Williams and Pres. Evans will all be (typically) dovish.

Big Bernanke speaks on Thursday regarding the outlook, and the market will be looking for a promise of more help – but I think he will disappoint. He is the chairman of the FOMC and they haven’t met since he last spoke, so he cannot very well commit to further easing.

Ironically, to do so may reduce the probability of it occurring.

Anyhow, with Ben disappointing Thursday, and the large delta supply the following week (3yrs plus reopened 10yrs and 30yrs) I suspect this week’s yield lows may well be a short term selling opportunity.


  1. At this stage any additional monetary easing has limited impact on the economy. The impact is limited to a higher the stock market. That’s the only economic indicator Ben is looking at. He has no longer influence on any other aspect of the economy with rates already at zero for several years. So watch the stock market. If it drops significantly, that’s when the fed will do something. Ben is a masterful tactician and knows how to please Mr. Market.

    1. Targeting the equity market is not as bad an idea as most make out. Recall Tobin’s ancient paper on the subject. It is just that if done directly it is too much like picking winners.

      Sent from my iPad

      1. Yes, good or not good, that’s pretty much what’s left in the ZIRP economy.
        Obviously the problem is going to be later on: how to unwind all the monetary stimulation. It’s going to be a very long road to a full recovery. It will take years. Probably the US will never get back to before GFC levels (especially unemployment), not in this generation. I am afraid some of the jobs are gone for good.

        1. I do not think the fed is ever going to sell those assets. They should, however, be able to get unemployment back down. Took us 20yrs after the series of stuff ups in the 80s … Which culminated in our own mini financial crisis of course. It may take them 30yrs or so?

          Certainly a long time.

          I think the fed knows this and that is why they are wary of simple output gap style analysis.

          Sent from my iPad

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