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.