A Sigh Of Relief

By: Michael Ashton | Wed, Mar 31, 2010
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First things first: for my money, the last 20 minutes of "Armageddon" is probably the most effective emotional cinema there is.

That is in stark contrast to the boring spectacle of the market in the middle of Employment week. There was a chance at some excitement today with the ADP report; had that number been strong, then I thought we could see rates move significantly higher. However, versus expectations for a gain of 40,000 jobs, we got -23,000 with a further mild downward revision to last month's number. Well, isn't that a fine kettle of fish? With expectations from the bow-tied set for Non-farm Payrolls on Friday running near 200,000, a significant undershoot on ADP will be cause for some soul-searching. Add the expected 75,000 Census hires (not included in ADP) to the -23,000 and you get up to the neighborhood of +50K; after that, it becomes an article of faith that weather only affects the BLS count and not the ADP count. And how much will that weather-related snap-back be?

Deutsche Bank, which I pilloried in this space last month when they forecast 350,000 for March Payrolls, is standing by their forecast. If we get close to 350k jobs, even counting weather pay-back, you will be able to knock me over with a feather. Though they had some company in their original forecast (although no one quite so high, many people saw a big weather effect), I would expect that their company is going home for the evening right about now.

It isn't just the miss on ADP that should make one skeptical that the ranks of the jobless are suddenly going to be deserted. There has been almost no meaningful improvement in Claims this year, and typically a precursor to strong hiring is that firms stop laying folks off (the improvement from the peak Claims numbers, as I've written previously, is mostly a mere correction to pre-Lehman rates and thus an unwinding of the acute stress of the financial crisis rather than a sign of fundamental healing). On Monday, the "Jobs Hard To Get" response in the Consumer Confidence report remained mired in the 40s, continuing to show few signs of a broad improvement although we can probably say comfortably that things have stopped worsening.

It may seem unrelated, but think carefully on this: a number of companies have been reporting anticipated charges to earnings that they are taking as a result of the passage of the healthcare bill (I thought this was supposed to save everybody money?). Companies which were aware of the probable cost to them of the new mandates...$250mm here, $1bln there...are less likely to have been aggressively hiring until they knew exactly what the cost of hiring was. That uncertainty is now gone, but it wasn't for most of the month of March.

Stocks did what we would expect them to do when confronted with a downward growth surprise, and the S&P closed a teensy bit lower (-0.3%) to end the quarter. ADP is usually just the prologue, of course, and if Payrolls actually confirms Payrolls down around, say, 100k then stocks may finally begin to reprice to the tepid outlook somewhat. Meanwhile, bonds did well with TYM0 +10/32nds and the 10-year yield at 3.83%, but that's still not far enough away from support to make bulls feel very comfortable, I'll wager!

But good news there is (pardon the Yoda-ism). The first quarter is over. Japanese year-end is past. The Fed has stopped its buying, and the world did not end. I will add the caveat "yet," but clearly the biggest risk is in the days right around quarter-end. Give me another week and I'll really breathe a sigh of relief, but March 31st and the days leading up to it were the days I was most concerned about.

I still don't know how the Treasury is going to sell the trillions they need to sell and roll while the Fed is no longer taking competing paper off the Street (and is thinking about putting it back on the Street, supposedly), but there has been no immediate debacle. I know: I am easy to please. Anything less than Armageddon is appreciated (hmmm, I hadn't meant to tie that back to Armageddon; it just happened).

Tomorrow, the Labor Department could make Deutsche Bank feel a little more comfortable with their forecast if they announce Initial Claims of lower than the 440k consensus. That represents only a modest improvement from last week's 442k, but "only a modest improvement" is what is warranted. I am not sure how much information would be contained in a 430k number - not much, given the volatility of the data - but it would give both bulls and bears something to hang their respective hats on going into Friday. As it is, there is much more balance in the risks after today's ADP data, which mostly means that if Deutsche is somehow right there will be much more carnage. It's like pairing your queens on the turn when someone else has a flush - that queen improves your hand enough to make you want to stick around but ends up costing you money.

Also tomorrow, the ISM (Consensus: 57.0 from 56.5) is due. The regional surveys have been mixed, with Chicago today weaker-than-expected and Milwaukee stronger. Nearly unchanged makes sense.

 


 

Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA
E-Piphany

Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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