FYI | Dec 08 2007
By Greg Peel
And that’s how an extraordinary week ended on Wall Street – not with a bang but with a whimper.
While the official payroll figure is always an important economic indicator, last night’s number had taken on a special significance given next week’s Fed rate decision and the assertion by the Fed that it, too, would be watching the number closely. It was the water cooler topic from at least a week ago.
So when the private ADP figure came out on Wednesday at 189,000 new jobs (in the private sector alone), Wall Street was thrown into a frenzy – enough for a 300 point rally. While the ADP numbers have a history of being overstated, the comparison to the 60,000 (including the public sector) Wall Street economists had pencilled in was just too stark. The Street decided to play the bullish side while remaining open minded. Economists began to revise their own numbers back up towards 100,000.
The number duly came in at 94,000, and as such there was little reaction to be had. This was consistent with the latest adjusted consensus, so there was nowhere to go. While the number was more pleasing than estimates of a week earlier, the truth is it still represented a slowing in jobs growth from the previous month. The ADP number implied an acceleration of jobs growth, and that seemed just too farfetched in this market.
The Dow closed up 5 points or 0.04%, while the S&P lost 0.2% and the Nasdaq 0.1%. The rally had occurred earlier in the week, absorbing slighter better expectations on jobs and responding to the Bush bail-out. It was a day to leave early and do some Christmas shopping. Wall Street will now be in a holding pattern until Tuesday around 2.15pm, barring any external shocks.
And as for that all-important rate decision, a middling jobs report translates into middling expectations. Fed funds futures have fallen back to only a 25% chance of a 50 point cut in the cash rate. The popular prediction now is 25 for cash, 50 for the discount rate, and for the Fed to leave the door open for more in its rhetoric. Enough on that topic now.
Perhaps the most notable movement in last night’s market was in the VIX volatility index, which fell 9%. All of a sudden there has been an evaporation of latent fear, through a combination of a not-too-horrendous jobs number and the announcement of government intervention. Traders can now sleep at night – they don’t need to pay up big for option protection, which is ostensibly what the VIX measures.
The same was evident in US Treasuries, where yield jumps of around 10 basis points seemed significant against a non-moving stock market. But the movement into bonds has been a flight to safety, and this week the Marine Corps arrived. It’s safe to come out of the bolt hole.
Again there was evidence in the gold price, which fell US$8.00 to US$794.40/oz. With some of the volatility gone, and with the chance of a 50 point cut lessened, gold reversed Thursday’s gain. The US dollar was mixed and uneventful last night (Aussie barely moved by the close). The IMF also suggested it might sell some gold. Abraham was the first IMF head to make such a suggestion, and we’re still waiting.
Gold was also driven back down by oil, which turned around from Thursday’s gains to post a US$1.95 loss to US$88.28/bbl. The “recession is over” theme of Thursday may have been a bit of an overreaction, and a jobs number indicating slower growth is still a bearish signal. Oil did bounce hard off 87 however, which is seen as a technical support level. But as the first light snow began to fall in New York, supply numbers suggest the US is well stocked for a cold winter. Those figures, of course, could change tomorrow (and probably will).
Base metal markets were a bit more buoyant however. London metals needed to catch up with the bail-out news from Thursday, and the jobs number was benign enough not to crimp the enthusiasm. After a lot of recent weakness, metals closed up 1-3% across the spectrum, with nickel bouncing even further in late trade.
The SPI Overnight rose 2 points.
In other news last night the Michigan University consumer confidence index for December fell to 74.5 from 76.1 in November to post another post-Katrina low. This was a larger fall than expected.
Morgan Stanley surprised the market by downgrading a raft of credit card companies to Sell, including Dow component American Express. At the same time it was reported US credit card use rose by 2.3% in October to reach a mere US$2.5 trillion. Morgan Stanley is not bullish on the economy, and expects Americans to get into credit card trouble next after dealing with mortgage woes. Morgan joins Merrill Lynch in the particularly bearish camp – Fed cut or not, mortgage bail-out or not. Merrills has set the chance of a US recession at beyond 60%.
Christmas may be looking slightly more cheery, but then there’s 2008 to deal with.
