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What does Friday's Jobs report mean to QE2?

04/04/2011

• Nonfarm Payrolls increased to 216,000 from last month's 192,000
• Private Sector Jobs increased to 230,000 from last month's 222,000
• The Unemployment Rate declined to 8.8% from last month's 8.9%, now at a two year low

COMMENTS:

Q. Is the U.S labor market in the initial stages of a recovery?     A. YES

The Evidence

  1. Government payrolls, which falsely suggested an improving labor market last year, declined for a 5th straight month. That translates into the current encouraging payroll increases being supported by the private sector. Strength in private sector jobs is the most critical ingredient to a labor market recovery.
  2. Private sector job growth indicates that small and mid-size companies are adding jobs at a modest pace. It also suggests that capital is available for "new businesses" to be created and thus hire. Continued private sector job growth must be supported by the mandatory job hiring that new business creates.
  3. I do not expect any acceleration in government payrolls. Local budgets are in a belt tightening phase and hiring will be constrained for the remainder of 2011.
  4. I do not view this positively surprising report to be a one-off.  Rather, I expect continued private sector job growth, in particular in late Q3 and Q4.

     

     

 

Q. Does this mean an early exit from QE2?           A. NO

The Evidence    

  1. Prior to the end of QE2 on June 30, two FOMC meetings will take place - April 27 (Includes Bernanke Press Conference) and June 22.<
  2. Ending the program on June 30 and NOT continuing to expand the size of the Fed's balance sheet equates to 75 bps of tightening.
  3. The housing market is entering the spring selling season in a rather precarious position.
  4. I do not expect an early end to QE2 based solely on a modest improvement in the job market. The housing market remains much too weak. Housing prices remain near their post credit crisis low. The housing market cannot handle the 75 bps tightening any sooner. IT WOULD BE A MISTAKE for both the economic recovery and capital markets recovery to end QE2 prior to June 30.

     

     

 

Q. Is QE3 coming?            A. NO

The Evidence

  1. Rising oil prices and global food prices combined with QE3 would equate to inflation beyond what the global economy can handle.
  2. There is an absence of political will domestically for further "free money."
  3. Global central banks are tightening - the ECB will raise rates in a few days - should the U.S. embark on QE3, the value of the U.S. will decline in a "riotous" fashion.

     

     

 

U.S. Unemployment Rate  April 2007 - April 2011


Source: Bloomberg

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