The headline figures from the November US labour market report may look good on paper, but if you dig deeper then the picture looks less rosy. The drop in the unemployment rate to 7.7%, the lowest level since the start of 2009, was down to a drop in the participation rate of the workforce, which fell to 63.6% from 63.8%. Thus, the unemployment rate is not falling because there are more employed people, but instead because there are less unemployed people.
Likewise, the 146k increase in NFP’s for November, which is well within the range of the last 5 months, was well above expectations of 85k and was puzzling for a couple of reasons. Firstly, some large corporations have recently announced they would be cutting jobs in Q4. Anecdotal information also suggests that corporations may be stalling their hiring programmes until there is some clarity about the growth outlook for the US next year and the resolution of the Fiscal Cliff issue. Secondly, super-storm Sandy didn’t have a meaningful impact on the national data, according to the Bureau of Labor Statistics. However, state employment data is released on December 21st, if this suggests that the North East’s employment picture was affected by the storm then November’s NFP number could be subject to revisions in the future.
Added to this, the NFP data has been a bright spot in an otherwise dismal week for US economic data. The manufacturing ISM for November fell into contraction territory, dropping from 51.7 in October to 49.5. The non-manufacturing ISM registered a slight rise, but not enough to pick up the slack from the manufacturing sector.
Political deadlock in Washington may start to spook the market as we get closer to the fiscal cliff that the US will hit on 31st December unless a deal between Republicans and Democrats is reached soon. If $600bn of tax hikes and spending cuts hits the economy early next year then the US is expected to plunge into recession. However, discussions have stopped in recent days and there are no signs that either side is willing to give up enough ground to reach a deal.
Weak underlying growth combined with fiscal cliff fears are likely to keep the FOMC on its guard when it concludes its meeting next week. The market expects the FOMC to expand QE3 to make up for the end of Operation Twist, which expires this month. The market is looking for new purchases of approximately $25-45 billion per month. There is a chance that the Fed may choose larger rather than smaller purchases due to the risks facing the economy as we move into year end. Thus, the spike higher in the dollar on the back of the payrolls data may not last.
Watch the gold price if the FOMC does decide to boost QE3 this week. The yellow metal has acted like the ultimate QE3 trade since August this year. After rejecting $1,800 at the start of October, the yellow metal has been stuck around $1,700 for the past week. We may see a knee jerk reaction higher on the back of the FOMC meeting. Resistance lies at $1,750 then $1,795 – the high from October.