Extremes Hurt on Payrolls

Friday represents another case where what would be perceived as best for the markets would be data that indicate the U.S. economy is growing at a moderate pace, particularly in the aftermath of the outbreak of the credit crisis.

The August payroll figure has a clear set of boundaries, both above and below the consensus forecast, that would put the monthly payroll figure in the "sweet spot" in terms of the response it is apt to elicit in the financial markets.

A report that is very strong would probably muddy the outlook on monetary policy, offsetting any ebullience emanating from the sense of resilience in the U.S. economy, while a report that is very weak would add to anxieties, particularly about the chances of a U.S. recession. That would also offset any benefit to the markets of the increased likelihood of a Fed rate cut.

Readings showing gains of more 150,000 would begin to put payroll growth in territory seen as perhaps too strong for the Fed to cut rates, with optimism over the sense of resilience fading as an offset to the reduced rate cut hope the more the figure rises above 150,000. Readings showing gains less than 50,000 would put payroll growth in territory not seen in 3 1/2 years, with fears over the economic outlook offsetting any positive sentiment that develops from increased hopes for rate cuts.

A loss of jobs, which has not occurred since August 2003, could elicit a Fed rate cut as early as Friday, with the Fed using the weak data as a way to show that it is responding to the economy and not the markets. At the same time it would be preempting what would likely be a sharp increase in anxieties over the U.S. economic outlook that, if allowed to fester until the Sept. 18 FOMC meeting, would be difficult to offset with a 25 basis point rate cut on the day of the meeting. There is a history of Fed rate action in response to weak payroll numbers, and although the Fed would prefer to act only on meeting dates, in this situation the rationale for acting is compelling.

ALL TONY CRESCENZI BLOG ENTRIES | POST A COMMENT | READ COMMENTS  

---

Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.