On Friday night we had April’s US employment numbers. They showed that the economy added just 115,000 jobs during the previous month.
That may not sound too bad, but doesn’t go very far across a population of 312 million people recovering from a financial crisis.
The other problem is that this is now the second month in a row that these numbers have been a bit ‘soggy’.
From October of last year to this February, the monthly job numbers seemed to be gathering momentum. After being up and down like the proverbial for the last two years, they finally seemed to be forming a trend.
But these last few months have put the US economic ‘recovery’ into question.
This is a big reason why the US markets fell so badly on Friday night. The S&P500 fell 1.61%. And the Dow Jones Industrial Average fell 168 points, or 1.27%. Where the US markets go, the Australian market follows. This morning the Aussie market is down more than 1%.
Unfortunately, this rule works much better when the market falls than when it rises.
What is strange is that even though April’s employment numbers were disappointing, the US unemployment number actually FELL from 8.2% to 8.1%.
This has been falling steadily for months now. It was 9.1% just 6 months ago. But the market wasn’t impressed, and with good reason. The number is pretty meaningless, as it ignores those people that have given up looking for work.
My good pal and colleague, Murray Dawes, the editor of Slipstream Trader, has been following this for his subscribers, so I picked his brains for you this morning. Here’s a snapshot of our chat this morning. I started off by asking him what the job numbers meant for the markets…
Murray: ‘Friday night’s data has put the nail in the coffin of the idea that this recovery is gathering steam. The numbers are even worse if you dig a little beneath the surface. The BLS (Bureau of Labor Statistics) keeps fudging the numbers to make them look better than they are. For example the participation rate fell yet again by 0.2 to 63.6%. It is now at its lowest level since 1981. By lowering the participation rate the unemployment rate falls. Therefore the reported unemployment rate dropped 0.1 to 8.1%. This figure is a mirage. Without the falls in the participation rate the US unemployment rate would be well over 11%. The household survey said that the number of people employed actually fell by 169,000. The situation is much worse than it appears.’
Alex: ‘So Murray, you’ve been expecting the market to turn down for a while now, and Friday night’s drop in the US markets was fairly meaty. You have been telling your readers to short the market in preparation for this. Just how bearish are you now?’
Murray: ‘I have a strongly bearish view. In Slipstream Trader we currently have the biggest short position that I’ve had for over a year. US markets are having a false break of last April’s high and my immediate target for the S+P 500 is 1280-1300. That’s 7% below current levels. But that’s only an initial target. If Europe unravels the S+P 500 could head even lower – unless [US Federal Reserve chairman, Ben] Bernanke waves his wand and prints more money.’
Alex: ‘The Australian market is down on the back of the US data, but wouldn’t you say yesterday’s French election result is having an effect too? It’s ‘Au revoir’ to Mr Sarkozy, and ‘Bonjour’ to Presidente Hollande. As France is the second biggest economy after Germany, what do you reckon this election result means for the mess that Europe is in?’
Murray: ‘The elections in Europe are just a continuation of the change of leadership that’s occurring across the whole Eurozone as a result of the crisis. I don’t think France will be saved by installing a tax-and-spend socialist. The reason they are in the mess they’re in is because of the Welfare State paradigm. Now they want to do more of what caused the problem. Expect to see yet more ‘can-kicking’ at every opportunity until the whole thing blows sky high. Watching the bond market’s reaction to the French election will be interesting.’
The New Dynamic in Europe
The relationship between the outgoing Sarkozy and the German Chancellor, Angela Merkel, has been a cornerstone of how Europe has handled the crisis. But President Hollande was voted in on a mandate of renegotiating this relationship, and their countries plans for Europe.
Symbolically, his first meeting as President will be with Merkel, so he’s not wasting any time.
Those European bond markets Murray mentioned start trading later on today. The Spanish yields in particular had been worrying the markets as they jumped in the last few months. They have since pulled back. But that could change with so much uncertainty around Europe.
One thing looks certain. The market will see a lot of volatility in the coming weeks. And if there’s one thing traders like, its volatility. For traders that’s great news as it gives them the chance to profit from both rising and falling prices. To see where Murray thinks the market is heading next, check out his stock market update on his YouTube channel tomorrow, for a special update on the French elections, US employment data and the significance of the US market breaking through a key technical level.
Dr. Alex Cowie
Editor, Diggers & Drillers
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