8th November 2010 by Shaun Richards
On Friday we returned to looking at economic developments and discussion of the US Federal Reserve’s new monetary stimulus reduced a little. In ordinary times then investors and economists would have been focusing entirely on the non-farm payroll and unemployment figures which were due. However in this instance the Federal Reserve had got its retaliation in first! However as we go forwards these numbers are significant because in the Fed. statement we got this.
The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
So there is scope for the programme to be increased and as the mandate of the Fed. does cover explicitly cover employment then these figures will now be the most important US data release over the next few months. They were interesting with a few nuances so let’s analyse them.
US employment and unemployment in October
From the Bureau of Labor Statistics we got this.
Nonfarm payroll employment increased by 151,000 in October, and the unemployment rate was unchanged at 9.6 percent.
So at this point we clearly have employment numbers which are improved on the recent trends and to add to this more hopeful view there were also upward revisions to the numbers for August and September which were revised from -57,000 to -1,000 and -95,000 to -41,000 respectively. If we look at private-sector job creation then we saw some 159,000 jobs created in October. So at this point we have a set of employment numbers which if repeated might start to bring down US unemployment which has remained at 9.6% for 3 months now. Admittedly very slowly as we are just over the threshold but an improvement nonetheless.
In addition we got better news in what have been two concerning areas which are part-time employment and the wider measure of unemployment or U6. If we start with part-time employment we see that it fell from 9.472 million to 9.154 million showing that more people were able to get full-time jobs. As overall employment rose then we can conclude that there was a switch from part-time to full-time employment this month. This switch would have been part of the fall in the U-6 unemployment measure to 17% from the previous 17.1%. Now as the peak in U-6 was 17.4% we have not made much progress but at least some has been made. For those to whom U-6 is a new measure I have defined it in previous articles but in essence it adds to the headline figures an allowance for short-time and part-time working as it tries to measure the full effect of such types of partial unemployment.
Some discouraging signs
The report was not all good,unfortunately. The number of workers unemployed for over 26 weeks or 6 months increased from September’s 6.123 million to 6.206 million. This reversed what had been an improving trend. Also the number of people in employment actually fell from 139,391,000 to 139,061,000. The consequence of this is that Employment-Population rate fell from 58.5% to 58.3% and the Labor Force Participation Rate fell from 64.7% to 64.5%. For those worried that employment cannot be simultaneously rising and falling there are two sets of numbers here over 2 different time periods presented as one report.
There are some better signs here in these figures but we need to see one or two more before we can confirm any trends. Furthermore the improvement is not enough to make any substantial impact on US unemployment. So whilst the headline figures may have made some wonder why the Fed. had acted as it did only 2 days before when it would have been given these numbers I think that the overall report does little to dissuade those who feel that the most likely route forward is for QE2 to eventually be expanded.
There were also figures which gave us a look at the US housing market which showed that according to the National Association of Realtors “Pending home sales retreated after two monthly gains, signaling an uneven recovery entering 2011 with some near-term disruptions from the foreclosure moratorium”. I am not entirely clear exactly how the figures signal a recovery but of course they have a vested interest. The underlying point is that the index was 107.8 in September 2009 and is 80.9 in September 2010. So there are clear issues in the US housing market going forwards.
US long-term interest rates rise
I have decided to discuss these because I will come to a conclusion which may surprise some. Indeed I will be correcting a mistake I have seen in some of the media and it does have important implications. We have just seen the US central bank the Fed. announce enormous purchases of its own countries government debt in addition to its existing plans ( QE-lite) and it would be easy to conclude that all US longer-term interest rates will now be falling. However if you examine the evidence then this is not so. I did suggest this as an issue on my initial article on the Fed. actions and I wish to expand on this today.
This might seem very technical but for those who hold say the 30 year benchmark this does matter because it implies either none of these or very few will be purchased by the Fed and maybe fewer ten-years than the market had factored in. So we could see falls in their prices with the 30 year likely to fall by more.
According to the US Treasury the recent closing yield low for the 30 year government bond was 3.52% back on the 31st August of this year. This if you remember was when the US economy was weakening and expectations for the easing just announced felt like they were rising by the day. As I type this the 30 year yield is 4.13% for a rise of 0.61% since then.As you can see not all longer-term yields are falling and the longest has been on a rising trend for a while.
Why is this?
There are two main causes I feel.
1. In an era of “front-running” central banks, investors (particularly those who listen to Goldman Sachs) expected more of the current measures by the Fed. to take place at this maturity.
2. Building inflation fears.
What economic impact does this have?
We may be seeing one in the currency markets where the US dollar is recovering a little. Those who wish to take advantage of these higher longer-term rates may be willing to forgo the currency hedging and buy them in US dollars. This would coincide with the views of many technical analysts (chartists) who have felt that the US dollar is due something of a rebound.
We may see an impact on the other maturities for US bonds. Will rates start to rise for shorter-dated maturities?
However you put it this is something of a failure for the concept of Quantitative Easing as one of the ways it is supposed to work is to reduce longer-term interest rates. Is its effect starting to wear off? If so what implications are there for the US economy?
At this stage I pose these factors as questions because we are still new to QE2 and its implications. I do notice however that the Chairman of the US federal Reserve seems troubled by the response to his moves as he keeps updating us on his thoughts in what might be considered a “purdah” period.
The Euro zone and its continuing problems: Ireland
Being a rugby fan and also an economist I did spot something on Saturday. When Ireland played South Africa Lansdowne Road was by no means full. For those unfamiliar with the sport in ordinary times the Irish national stadium is packed and full of Irishmen baying for the blood of the opposition creating a fantastic atmosphere. However in a new ground with a capacity of 50,000 it was not much more than two-thirds full. I think perhaps we got there a symbol of the current state of Ireland and her economy.
This morning it appears that the opposition have decided not to support the four-year plan for the Irish budget which was announced last week. Also there has been a devastating summary of the Irish position in the Irish Times today by Morgan Kelly. For regular readers of my blog there is little new as they will be aware that I recommended that Ireland should go to the IMF back on the 17th September. However there are some nice if chilling turns of phrase in his article which include.
It is a testament to the cool and resolute handling of the crisis over the last six months by the Government and Central Bank that markets now put Irish sovereign debt in the same risk group as Ukraine and Pakistan, two notches above the junk level of Argentina, Greece and Venezuela.
Ireland faced a painful choice between imposing a resolution on banks that were too big to save or becoming insolvent, and, for whatever reason, chose the latter. Sovereign nations get to make policy choices, and we are no longer a sovereign nation in any meaningful sense of that term.
From here on, for better or worse, we can only rely on the kindness of strangers.
I find the rugby analogy works well. Because one of the issues with the low attendance for the rugby was the high ticket prices which involved having to buy a ticket for several internationals. So we are back to authorities being out of touch and living in the past with reality not catching up at all. One area where reality is very painful is Irish government bond yields which have continued to surge. Her ten-year maturity closed at 7.6% and is this morning at 7.75%. However there are just as significant moves occurring at the shorter end. The yield on her shortest-dated bond (as opposed to bills) has gone above 4% to 4.12%. As this bond matures in November 2011 it shows that Ireland is losing control as the official ECB central bank rate is still 1%.
We will find out soon how much support the European Central Bank has been providing Ireland via its securities Markets Programme. there have been plenty of rumours of it being active.
Credibility of Economic/Financial Statistics
There have been several issues on this front recently. Two have come from Europe with the Irish move on Promissory Notes that I discussed last week and the way that the President of the ECB Mr.Trichet has refused to reveal details of the Greek use of derivatives to misrepresent her financial statistics. This is not good.
You may also wonder why I have not mentioned the UK Producer Price numbers from Friday. This is because they are now on a new basis and I need some time to make a comparison.
This morning a UK Company ROK has announced that it is in financial difficulties which is surprising as it had said that things were fine only in September. I still remember the rights issue made by Royal Bank of Scotland in 2008 which was followed a few months later by its collapse and the way the company Connaught hit trouble recently.
In summary we are in danger of a loss of credibility all round.