General
Friday's jobs data showed a drop in the unemployment rate to 7.8%. Federal Reserve officials have said they want to see a substantial decline in the U.S. unemployment rate before they will even consider easing up on their open-ended bond buying program. Analysts at Nomura Securities said in a report that every one-tenth percentage point drop in the unemployment rate would shorten the Fed’s buying by about one month. Friday’s data therefore “implies a three to four month reduction in QE3-related buying,” they wrote in a report since the unemployment rate fell 0.3% from 8.1% to 7.8%. This could be the cause of Friday's overall negative tone in the markets.
But there is also the argument that one of the reasons the unemployment rate has fallen from its prior 9.8% peak is an exodus of people from the work force which are then not counted as unemployed. A number of people have simply given up trying to find work. Further, when your unemployment benefits run out after two years, you aren't unemployed or part of the workforce anymore, according to the official (U3) unemployment statistic. That inevitably leads to a falling unemployment rate. In this case, the 7.8% unemployment rate would deserve a huge asterisk, and the lifespan of QE should therefore continue to be "long and "properous"." (Yes, a double quote especially on "properous".)
The debate over the "accuracy" of Friday's 0.4% downside plummet in the unemployment rate may provide useful fodder for the financial and political cable TV channels, but the market's reaction likely tells most of the story in this regard. Despite such a "blistering" improvement in the alleged unemployment rate, the market's reaction was decidedly muted to negative on Friday, and it strikes us that if this number is in fact a sign of President Obama's brilliant economic policies then the market would have rocketed to the upside on Friday. The market continues to issue its verdict on this supposed decline in unemployment this morning as U.S. futures are down while European bourses declined over 1%, on balance, overnight.
Tom Porcelli, Royal Bank of Canada’s chief U.S. economist in New York, says the unemployment rate is a “head fake.” He goes on to note that, "The U.S. economy should be advancing at a rate of about 3.9 per cent yet the economy is only growing at an annual rate slower than 3 per cent in seven quarters through the one that just ended in March. The unemployment rate and the real GDP growth rate between 1950 and 2008 correlate, showing that the U.S. economy should be advancing at a rate of about 3.9 per cent. That’s known as recovery velocity, and the U.S. economy managed that 3.9% pace for a few quarters in 2009 and 2010, but it didn’t hold, suggesting that the link between the unemployment rate and GDP might be broken."
Stocks/ETFs
The breakdown in Apple (AAPL), which logged its first close below the 50-day moving average on Friday could continue this morning as a move below Friday's intra-day low at 651.28 would constitute a 50-day moving average violation and hence a sell-signal for this big-stock NASDAQ bellwether.
Silver and gold continue to find resistance at their recent highs, around 173-174 for the SPDR Gold Shares (GLD) and around 34 for the iShares Silver Trust (SLV), and both are moving lower this morning pre-open. Sharp pullbacks in the precious metals are to be expected, with silver historically being two to four times more volatile than gold. Investors, however, should act in a prudent matter by not allowing their precious metals ETF positions to become too "top heavy" with the purchase of shares at higher prices within their current consolidations.
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