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Decent Payroll Clears Way For Christmas Rally on Better European News

Employment Situation

Released on 12/2/2011 8:30:00 AM For Nov, 2011
Prior Prior Revised Consensus Consensus Range Actual
Nonfarm Payrolls – M/M change 80,000  100,000  131,000  90,000  to 175,000  120,000 
Unemployment Rate – Level 9.0 % 9.0 % 9.0 % to 9.1 % 8.6 %
Average Hourly Earnings – M/M change 0.2 % 0.3 % 0.2 % 0.1 % to 0.2 % -0.1 %
Av Workweek – All Employees 34.3 hrs 34.3 hrs 34.3 hrs to 34.4 hrs 34.3 hrs
Private Payrolls – M/M change 104,000  117,000  150,000  115,000  to 190,000  140,000 

Source: Bloomberg.

This month´s payroll numbers were a definite positive for the stock market. The headline employment number came in at an increase of 120,000 on the month – slightly below market expectations of a rise of 131,000. However, the employment numbers for the previous two months were revised upwards by a net total of 72,000, proving an overall positive tone. The unemployment rate also unexpectedly fell to 8.6%.

Overall, the monthly trend in these numbers still points to an anemic labor market. However, we are certainly not seeing any worsening in the trend and it looks like the deterioration seen in the late summer may well be behind us. Alongside other data, all of this suggests that we are probably looking at an economy that is likely to avoid the onset of another outright recession. Given the worries and concerns priced into the market, such a reading should give us a decent leg up in stocks.

Following what is likely to be a decent market rally on these numbers, the market´s attention will no doubt turn to events in Europe as we move towards the continent´s December 9th crucial political summit.

In terms of the European debt crisis we are undoubtedly on the edge of a very large precipice. However, it is precisely in front of such a precipice that finally the necessary political action may well take place. We are obviously  unlikely to see a final solution to Europe´s deep structural problems. However, measures are available which, with international support, have the capacity to buy Europe a significant period of time to do the real work. And if we see those measures put in place, we should at least also see a significant year end relief rally in the global stock markets.

There is little point in trying to predict the fine detail of the likely measures to be adopted. However, reading the political tea leaves there is a good argument that action on the following broad areas looks likely -

  • Closer fiscal union in the 17-nation Euro zone – requiring both Treaty changes and a possible new Treaty between core EMU members.
  • Once such an agreement on a new ‘fiscal compact’ has been delivered, ECB President Mario Draghi has already hinted that the ECB will be able to support developments with some degree of additional financial commitment. This will probably involve ramping up its bond buying program. 
  • However, a much more powerful development is also possible through the European System of Central Banks (ESCB) – with the ECB allowing individual member Central Banks to make direct bilateral loans to the IMF for use in aiding Europe´s governments. Recent discussion suggests that such loans could amount to around Euro 200bn.
  • The IMF would then be able to oversee a substantial program of assistance for European countries affected by contagion – with the usual associated IMF conditionality applying (allowing a degree of oversight that would be politically difficult within Europe alone).
  • All of this would of course come alongside the already agreed deal to leverage the EFSF, which may well also create a vehicle to allow contributions from ‘co-investors’ and other countries globally.
In the end, globally co-ordinated support for Europe looks likely, involving both the IMF and a range of countries on a bilateral basis. However, before the rest of the world is likely to act, they will want to see Europe take decisive and convincing action on its own. Within Europe, the ECB and broader ESCB will also need to see Europe´s governments act first to strengthen financial oversight. It will also want to feel assured that it has been left to make its own ‘independent’ decision on the nature of its involvement. And finally, Germany will want to see such an agreement as discussed above on stronger financial oversight within EMU before agreeing to anything.
This is a not insignificant chain of conditionality that must be satisfied before we see the kind of decisive action that is likely to convince the markets that a breathing space is warranted. However, it seems a reasonable bet that we are now about to see these conditions being met.
The end result may not exactly be the ‘bazooka’ much talked of in the media. However, taken together, the likely measures should represent a decent collection of fairly serious weaponry. All of this suggests that the risk reward favors remaining long the stock market (SPY).
Disclosure: I am long the US stock market via selected stocks.