This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Jobs Report: Fed to Stay in 'Easing' Mode

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Lena Komileva

NEW YORK ( BBh FX Strategy) -- There is no "W" scenario priced into the markets, but the disappointing May jobs report will fuel the emerging debate about whether the U.S. economy is entering a "soft patch" or reverting to a more sustainable, lower pace of growth as the income and wealth effects of the Fed and the fiscal stimuluses begin to wane.

After a series of weaker-than-expected U.S. growth figures, the wide margin of the negative surprise in the May employment figures will solidify fears that market expectations overstate the underlying trajectory of the economy. Given that the key question for risk sentiment concerns whether the economy can generate enough income to plug the gap left by the end of the Fed's quantitative easing (a cyclical peak in the size of the Fed's balance sheet after this month) and fiscal tightening in the second half of the year, this is a bearish signal for equity and commodity markets and for cyclical G10 currency majors.

From the Fed's perspective, a rise in the unemployment rate from 9.0% to 9.1% and a dip in wages growth from 1.9% to 1.8%, merely a rounding error of 0.1 percentage point away from the cycle low of 1.7%, depicts a picture of continued disinflationary pressures as the waning recovery momentum is by far insufficient to close the output and labor gaps in the U.S. economy. The current picture of the economy's structural health is further clouded by the directional analysis -- with respect to the forward direction reflected in the report, both the output and the income analysis point to a more sustained slowdown ahead.

From the perspective of output trends and labor demand, the slowdown was most pronounced in the dominant private services sector, traditionally a cyclical bellwether of overall labor demand and a signal that this probably marks the beginning of a more fundamental slowdown rather than a temporary blip related to auto-sector supply-chain disruptions after the Japan disaster. From the income side, following on yesterday's first-quarter productivity figures, the wages data suggest that U.S. real labor compensation is set for a third consecutive quarter of contraction, opening a growing income/liabilities gap on consumer balance sheets given depressed home values. This is bearish for consumer sentiment and consumption and the underlying inflation trend.

Overall, the figures indicate the Fed will remain in quantitative-easing mode longer than the market expects. With two fed fund rate hikes priced in for 2012, the continuation of bullish-curve-flattener trades (and the erosion of the U.S. forward rate advantage against the rest of the world) is bearish for the dollar. Furthermore, the slowing economy complicates the contentious issue of the debt ceiling and the need for fiscal tightening. While there is no question about the market's desire to fund the U.S. fiscal gap, especially as a slowing recovery shifts investors' focus back to capital risks and increases demand for U.S. Treasuries, a worsening outlook for U.S. public finances will further dent the dollar's relative advantage as a safe-haven major.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,356.87 +288.00 1.69%
S&P 500 2,012.89 +40.15 2.04%
NASDAQ 4,644.3120 +96.4780 2.12%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs