Non-Farm Payrolls overlooked as Draghi fills QE3 void
City Index September 7, 2012 11:15 PM
<p>The Fed is no longer the only firefighter in town. Draghi’s OMT does for the markets what Bernanke’s QE was trusted to do (See more […]</p>
The Fed is no longer the only firefighter in town. Draghi’s OMT does for the markets what Bernanke’s QE was trusted to do (See more below).
The August jobs report was the opposite of the July report, as both Non-Farm Payrolls and unemployment declined after both increased in July.
August unemployment declined to 8.1% from 8.3% due a decline in the labour participation rate reaching a 30-year low at 63.5%. The BLS warned that the decline in the labour force stemmed from education workers declaring themselves unemployed after taking lump-sum payments, which made ‘the small growth in payrolls … not consistent with an ever-declining unemployment rate’. Non-farm payrolls slowed to 96K from a revised 141K, while US manufacturing shed jobs for the first time in 11 months.
The markets may end up in the red later on today due to the payrolls disappointment, but the decline in unemployment is likely to offset the ensuing ‘negativity’. The retreat back to the April lows of 8.1% increases chances of a sub 8% break ahead of the presidential elections.
Non-Farm Payrolls not bad enough for September QE3
Falling unemployment rate, improving services ISM and rising retail sales are among the few variables standing against a September QE3. Fed Chairman Bernanke will prominently reiterate the Fed’s readiness to unload QE3 at this month’s FOMC meeting in the event of future deterioration in conditions. The markets will likely continue avoiding 7%-8% declines off their recent highs upon the realisation that both the ECB and Fed are able to deliver monetary stimuli, instead of only the Fed as was the case over the last 2 years. The perception that there are two capable firefighters in the global monetary system increases the potential for S&P 500, Dow 30, DAX 30 and FTSE 100 to attempt 1465, 13900, 7700 and 5865 respectively by late Q4.
Final words on Draghi
Although ECB president Draghi’s bond-purchase programme may not be a direct solution to Europe’s high debt/low growth problem, it buys invaluable time for national governments to pursue their austerity policies by keeping yields in check and equities supported.
The remarkable aspect of Draghi’s programme is its ability to do for markets (and the euro) what the Fed’s QE3 was anticipated to do. By combining conditionality, sterilisation, and unlimited purchases into the Outright Market Transactions programme, Draghi has integrated monetary policy into fiscal policy.
EUR/USD breaks an important 12-month trendline resistance (1.2745), calling in place the 200-day moving average (1.2840). The last time the 200-DMA was probed was in October 2011, but only temporarily, as optimism ahead of a Sarkozy/Merkel Summit ended in shambles. The ensuing market sell-off and spike in peripheral yields paved the way for LTRO-1 in December, which put in the floor for equities.