A New Twist On The Goldilocks Economy
Markets are nicely higher this morning after investors cheered this morning's jobs report. Nonfarm payrolls rose 175,000 in May vs. expectations for 159,000. The unemployment rate ticked up a touch to 7.6%.
In a normal recovery, 175k new jobs would not be enough to get excited about. It certainly doesn't paint a picture of a robust economy, which used to be able to add 300-400k jobs per month. But this is anything but a "normal" recovery. Investors today are more worried about the Fed taking their foot off the gas and tapering back their bond purchases.
So today's luke warm jobs report fits into a new sort of Goldilocks scenario where it isn't so hot that the Fed feels pressure to stop its QE program, but it also isn't so bad that it looks like the economy is weakening.
Also, the unemployment rate ticked up to 7.6%. The Fed has said they want to see it near 6.5% before they think about raising rates. Given that so many people have dropped out of the labor force, we could see some of those folks re-enter as the economy strengthens. That would lengthen the time it might take for the unemployment rate to get down to 6.5%. Adding 175k jobs a month just isn't going to cut it. And youth unemployment remains extremely high.
Most folks are talking about the end of this year for the Fed to begin tapering its bond purchases, but not until mid-2014 before they curtail the program altogether. And that assumes that the economy continues to improve.
Asian markets were mostly lower overnight. Japan was down as much as -3.0% before a notable spike from the lows that was attributed to a large ETF purchase by the Bank of Japan. Japan's finance minister also said pension funds would be allowed to diversify away from bonds.
European markets are higher today. Germany's Bundesbank lowered its GDP outlooks for 2013 and 2014, with next year's growth projections coming down to 1.5% from 1.9%.
The 10-year yield is moving higher today on the jobs data to 2.14% so far. Last week's highs were around 2.21%.
The volatility index is plunging today, down -7.5% to 15.35. We have been highlighting that 15 level and if we get a couple of closes back below 15 that would increase the probability that the recent pullback is over.
Trading comment: We said that as the S&P 500 came down to its 50-day average and tested the 1600-1605 level we wanted to be buyers. So far that has worked out well, as the SPX bottomed right at 1600 yesterday and rallied into the close. Today it is up another 1% nearing the 1640 level. We could see some resistance at the 1645 level where the overhead 20-day average resides. But its still early in the day, and we would also like to see a strong close today as opposed to the market fading into the close.