Past performance is not indicative of future performance is an old, well touted adage that may now apply to job growth. According to the latest jobs figure, the fewest number of Americans have applied for unemployment benefits since before the start of the Great Recession. This psychological significant number may point to a growing underlying trend that jobless claims are drifting lower. This comes after a sluggish start to the year in which bad weather was attributed to a number of underperforming sectors. However, the question remains whether this is truly the beginning to employment strength or another ebb in the growth vs. correction discussion. Victoria Stilwell of Bloomberg has more on U.S. jobs growth;
“Jobless claims decreased by 32,000 to 300,000 in the week ended April 5, the lowest since May 2007. Fewer dismissals will help pave the way for a pickup in hiring as demand recovers from harsh winter weather, providing a bigger boost to the economy. Federal Reserve policy makers are monitoring progress in the labor market as they continue to scale back their bond-buying program based on an improving economic outlook.”
“The U.S. should lead global growth this year thanks to a longer-period of record-low interest rates orchestrated by the Fed, stronger private demand and the end of a fiscal drag that slowed economic improvement in 2013.”
Downside risks are clear and can still hinder the kind of growth desperately needed at the moment. A series of weak Chinese figures, frothiness in the major stock indices, and a sudden rise in interest rates domestically and in the EU have the potential to lead credence back to the pullback argument. These figures also come on the heels of major stock tumbles lead by the Tech and Bio sectors and the unofficial start to quarterly earnings-reporting. A focus on upcoming economic indicators and the beginning of earnings season could shape the road ahead as we emerge from the winter months. With the economy on a precipice, With the economy on a precipice, continued strength in jobs numbers and a healthy stock market correction will return the U.S. to the global growth engine.
Whether it is a sluggish Chinese economy or the Federal Reserve’s new chairman, raising interest rates and inflation concerns appear to highlight global economic news. Arguably the largest concern over deflation risks concerns the 18-nation economy that comprises the euro zone. However as inflation in the area weakened to the slowest pace in over four years, the ECB kept interest rates unchanged, citing signals that point to a gradual recovery. However with unemployment rates near record highs, policy makers have begun a debate over the utilization of QE-style tools to address the growing economic threats to the euro-area. Stefan Riecher of Bloomberg has more on the ECB’s move into uncharted territory;
“QE, or large-scale purchases of assets intended to bolster prices and economic growth, would be the ECB’s most ambitious measure yet as it grapples with inflation at just a quarter of the central bank’s goal. At the same time, the Governing Council faces substantial hurdles to develop a policy suitable for the 18-nation currency bloc.”
“The There’s been an evolution regarding QE, from a situation where there was clear, strong ideological opposition to it, to a situation now where there is support in the right circumstances.”
“Even so, Draghi signaled that policy makers don’t have a clear idea of what a quantitative easing program for the euro area might look like. He noted that the predominantly bank-financed economy wouldn’t react to purchases of government debt in the same way as in the U.S., where companies raise more funding in the financial markets.”
Any QE program focused at stabilizing and improving a large-scale economy has unprecedented risks for long-term viability. While the ECB isn’t quite at that point yet, it has taken a dramatic step forward by bringing the conversation into the spotlight. One of the greatest concerns driving this discussion is the possibility of increased unemployment levels or unsustainable long-term unemployment weakness. The longer the joblessness rate remains at record highs, the closer an EU easing policy becomes reality. This is especially true for an increasingly lost generation of European youth where one in every four 20-somethings find themselves unemployed. To prevent further damage, the ECB is justified in considering all possible solutions to its economic trepidations and must strive for the path that returns inflation to a manageable 2% level.
Was it a significant insight at the direction of the Fed or a rookie word stumble by the new chairman? Whatever the actual intent of Fed Chair Janet Yellen was, the market interrupted her comments as referring to a sooner than expected hike in short-term interest rates. With the drawdown of Quantitative Easing expected to be completed by the fall of 2014, this timeline may put the rate hike in the middle of 2015. This subsequently caused financial markets to proceed into a multi-day tumble, prompting analysts to suspect that the ‘6 months’ remark is more hyperbole than specific direction. Ann Saphir of Reuters has more on upcoming timeline of the Federal Reserve;
“Yellen’s remarks at her first news conference as the head of the central bank pointed to a more aggressive path toward higher interest rates than many had anticipated, and bets in financial markets shifted accordingly. Prices for U.S. stocks and government bonds added to earlier losses triggered by fresh Fed forecasts that showed policymakers are inclined to raise rates a bit more aggressively than they had been just a few months ago.”
“Yellen sought to use her news conference to emphasize that rates would stay low for awhile and rise only gradually. She also said they could end up staying lower than normal “for some time” even after the jobless rate drops to a healthy level. The Fed would look not only at how close inflation and unemployment are to its goals, but how fast, or slowly, those measures are approaching those goals.”
Regardless of the timing of the first rate hike, the Fed is continuing forward with its measured tapering process as long as labor conditions proceed to advance and there is indication that inflation is rising back toward the 2% goal. However, this is not the first time that the Fed may have unintentional underestimated a market reaction. The most memorable incident was last May when then-Chairman Ben Bernanke causally mentioned that the tapering process to QE could possibly begin in one of the next couple of meetings. The swift reaction that followed, like now, is a reminder that the Fed is not completely in tune with the marketplace. All policymakers for the Fed may have to be cognizant of this when they telegraph their opinions going forward. A critical indicator of the veracity of Yellen’s comments may be a detailed analysis of the Fed presidents who are slated to present announcement in the coming weeks. This could probably determine if the Fed will walk back Yellen’s prediction or it will continue forward until the next FOMC meeting.
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