On Thursday the U.S. Labor Department reported jobs "created" of 288,000 and the unemployment rate to 6.1% from 6.3%. While those figures were received with "joy", looking behind the numbers paints a rather different picture of the labor situation in the U.S. Americans who had left the job force returned in great numbers as their unemployment benefits expired.
However, the jobs they found were of much lower quality and remuneration than they had hoped for.
Nevertheless, the part time jobs and those of lesser quality constitute "employment." The 6.1% rate has finally returned to that of 2008 and provided the markets with a degree of relief. While the "direction" of the labor situation appears to be improving, one must consider that the true measure of the labor situation contains elements such as "underemployed" and workers returning to the job force which could account for the 6.1% rate. Taking the underemployed as well as factoring in those whose benefits expired, the calculation of the rate could see the number closer to 12%. For that reason and the ongoing concern related to mortgage and credit defaults leads us to suggest a conservative posture as relates to investments.
We look forward to the upcoming earnings reports for a clearer view of the overall economy and the prospect of true jobs improvement. Another concern is the continuing crises in Eastern Europe and the Middle East.
Interest Rates: September Treasury bonds (CBOT:USU14) closed Thursday at 135 03/32nds, down 5/32nds but traded as low as 134 11/32nds early in the session. The Labor Department report showing 288,000 jobs created initially led investors and traders to think the Fed might start to raise rates earlier than expected based on the "glowing" labor report. That was not the case since the "reality" of a 6.1% unemployment rate does not take into consideration the "underemployed" and a return to the jobs force by those whose unemployment benefits had expired. We continue to favor spread transactions in bond options and project a sideways action in a range for bond prices and yields.
Stock Indices: The Dow Jones Industrials closed Thursday at 17,068.26, up 92.41 points and for the week gained 1.3% and a new record. The stronger than expected jobs report prompted renewed buying and shortcovering in equities. The S&P 500 (CME:SPU14) closed at 1,985.343, up 10.81 points and for the week also gained 1.3% establishing another new record high. The tech heavy Nasdaq closed at 4,485.93, up 28.19 points and for the week gained 2%. While the jobs report was viewed as positive it did not give rise to concerns of the Fed changing their rate policy. The 2.9% decline in the GDP was a more important indicator to us and we believe the "euphoria" tied to the jobs report will soon "dissolve."
Our expectation for a sharp correction remains intact and our admonition to holders of large equity positions to implement risk strategies also applies. Risk hedging strategies include futures and options in equity indices as well as "collateral" applications such as interest rate and currency futures and options. The basis for all financial instruments continues to be the U.S. interest rates and its implications for the dollar as well as the economies of the U.S. trading partners.
Currencies: The September U.S. Dollar Index (NYBOT:DXU13) closed Thursday at 80.265, up 28 points tied to the better than expected U.S. jobs data and the "possibility" of change in Federal Reserve rate policy. We do not agree with that assumption since Fed Chair Yellen had made it clear in recent statements that short term improvements in the U.S. economic picture would not necessarily change policy. The Euro closed at $1.3612, down 46 points, the Swiss Franc 52 points lower to $1.1201, the Japanese yen lost 34 points to 0.09791c, the British Pound lost 9 ticks to $1.7144, and the Australian dollar lost 89 points to 93c. Only the Canadian dollar managed a gain closing at 93.85c, up 28 points. While we remain negative on the U.S. economy, the implications for continued concerns over Europe and the Middle East favors the U.S. on a relative basis. Stay with the dollar.