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Here We Go Again?

04/08/2013

The Labor Department released its March payroll data this past Friday. Let’s take a look at the data…

•  March nonfarm payrolls were a disappointing +88,000, far below last month’s +268,000 and consensus estimate of +190,000
     o  Fewest jobs created since June 2012’s +87,000

•  The unemployment rate (Figure 1.1) fell to 7.6% from 7.7%
     o  Lowest rate since December 2008

•  March private payrolls were +95,000, well below last month’s +254,000 and consensus estimate of +200,000
     o  February private payrolls were revised higher from +246,000 to +254,000
     o  February nonfarm payrolls were revised higher from +236,000 to +268,000

•  The underemployment rate fell to 13.8% from 14.3% last month

•  The labor force participation rate (Figure 1.2) surprisingly fell to 63.3% from 63.5% last month
     o  Lowest rate since May 1979

After spending much time digesting the internals of the report, I expect it is important for investors to focus on two conditions:

1.  Fed’s 6.5% unemployment rate guidance The labor force participation rate (LFPR) has now fallen to its lowest level since May 1979. Candidly, I am very surprised that this month the LFPR did not stabilize as workers perceived the past few months of labor reports as mildly optimistic and thus returned to the workforce more confident to successfully find employment.

Confusion now prevails for investors. Can the FOMC truly taper off its monthly $85 billion asset purchase program purely on a declining unemployment rate? Or will they, as I suspect, have to remain committed to continuing their monthly purchases understanding that the unemployment rate is declining without structural improvement for the U.S. labor market?

Investors should ignore the 7.6% rate; so will the FOMC. Do not expect anything other than the FOMC remaining on hold with its historic easy monetary policy at its upcoming April 30-May 1 meeting.

2.  Does the March payroll data suggest another Q2 economic contraction & market correction? Certainly, given the early April economic data, my concern is elevated, however, not yet confirmed with evidence.
My Q2 2013 playbook, “The Short Squeeze of Pessimism,” will be released this week.  Within it, I highlight four conditions to focus on that would confirm a fourth consecutive year of Q2 disappointment, which has equated to economic contraction and a market correction in each of the past three years.           
                       
Four conditions to monitor:

1.  SPX technical formation of 1530.94 on a closing basis
2.  Upcoming earnings
3.  Japanese yen
4.  FOMC policy

STRATEGY: In the near term, the SPX technical formation and the upcoming earnings season will most likely dictate the Q2 correction answer. Either way, the investment strategy remains consistent: focus on opportunities that look favorable in a “bond friendly world.” The yield on the U.S. 10-year Treasury (Figure 1.3) closed on Friday at 1.7128%, below its 2013 opening price of 1.7574%. Consistent with that theme, the utilities, health care, and consumer staples sectors continue to perform.

Figure 1.1 U.S Unemployment Rate, July 2009 to Present

Source: Bloomberg

Figure1.2 U.S Labor Force Participation Rate, January 2009 to Present

Source: Bloomberg

Figure 1.3 U.S 10-Year Treasury, April 2012 to Present

Source: Bloomberg

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