Welcome to 2014! A quick aside before getting into the Week That Was: our website will be going to placeholder status shortly, however, the Week That Was section will remain accessible. We are revamping the site entirely to reflect the enhanced capabilities of our firm. Now on to the markets.
The markets were basically flat today with the Dow slightly negative, and the S&P 500 and Nasdaq both up slightly. The flat markets were due to the flat jobs reports, or more precisely, the weak jobs reports.
We believe the next few employment reports will be more important than normal for the simple reason that they could influence the early stages of the Fed's Quantitative Easing tapering process. Based on a reading of the FOMC's December minutes it seems reasonable to believe that the Fed will continue the tapering process if payroll gains at least maintain the pace they were at when policy makers initiated tapering. That pace computes to a 3-month moving average of about +193,000 jobs. Given that assumption, how does the December report measure up?
Not so good on first glance, and the two headline numbers are what contributed to the mixed markets today. The non-farm payroll numbers was quite soft at +74k, but the unemployment rate dropped to 6.7%. Looking past the headline numbers, the Bureau of Labor Statistics (BLS) acknowledged there were substantial weather impacts to both the Household and Establishment surveys. The "weather worker" data shows that 273k workers had a job but did not show up for work due to inclement weather. The 10-year average for this is 166k. Furthermore, 1,693k workers had reduced hours due to the weather versus a 10-year average of 679k. Meanwhile, the reduction in the unemployment rate was primarily due to weaker participation, which is not they way you want to lower unemployment.
The Fed will likely not be too impressed with the employment data from December, even considering the weather impact, which might lead one to conclude that tapering will be...tapered, or, rather the Fed hold off on further QE reductions until the next round of employment data. While this may be true, it is important to remember that this weak December data comes against a backdrop strengthening economic data that has led many forecasters to raise their GDP targets. Thus, the Fed may consider December an anomaly, which makes successive employment reports that much more important.
Next week we will be watching Tuesday's Retail Sales Report, Wednesday's Producer Price Index, Thursday's Consumer Price Index and Jobless Claims, and Friday's Housing Starts.
Enjoy your weekend!