A maverick without a cause became a man without a job Friday, as Treasury Secretary Paul O'Neill announced his resignation. Due to his outspokenness, O'Neill raised the ire of both Bush administration officials and Wall Street participants, and ultimately found himself without support from either constituency. The disconnect between O'Neill and Wall Street (some say between O'Neill and reality) is best summed up by the notion that perhaps the most enduring memory of his tenure as treasury secretary will be his trip to Africa with rock star Bono. Stocks rebounded from early losses, while Treasuries slid in the wake of the news, which was quickly followed by the resignation of Lawrence Lindsey, head of the White House's National Economic Council. Rumors of changes in the Bush economic team have been circulating for some time, and Friday's much-weaker-than-expected unemployment report for November may have been a trigger for the shake-up. The government reported nonfarm payrolls shrunk by 40,000 last month, the largest decline since February and belying expectations for a rise of 35,000. Meanwhile, the unemployment rate rose to 6%, the highest level since April, and vs. expectations for a tamer climb to 5.8% from 5.7% in October. "It's no coincidence
O'Neill resigns on the day the jobs market falls flat on its face," said William Sullivan, senior economist at Morgan Stanley. "Given his rather upbeat assessment of the economy , it's clearly out of synch with the realities of the current environment, and it made sense to tender his resignation on this day." Because of his persistent and often wildly optimistic view of the economy, O'Neill wasn't an aggressive supporter of additional economic stimulus, and thus became a pariah within the Bush administration. O'Neill "was concerned about increasing the deficit, while the conservative leadership in the GOP and President Bush had a more aggressive fiscal agenda," Sullivan said. "They want to use the GOP-controlled Congress to provide tax relief to ramp up economic growth in 2003. It didn't appear O'Neill was an aggressive advocate of that."
Indeed, O'Neill initially doubted the benefits of the Bush tax cuts of 2001, described an ill-fated House version of a stimulus bill earlier this year as "show business" and more recently questioned plans for additional tax cuts and other stimuli. In reaction to his resignation, the stock market and dollar rallied off an early morning slide spurred by the jobs data, while the Treasury market rescinded some of its early gains. As of 12:48 p.m. EDT, the Dow Jones Industrial Average was up 0.06% to 8617.87 vs. its early low of 8501.86. Similarly, the S&P 500 was up 0.3% to 909.05 after having traded as low as 895.96, while the Nasdaq Composite was higher by 0.5% to 1417.16 vs. its nadir of 1391.10. Stocks got a lift from hopes O'Neill's replacement will be a more ardent and effective supporter of more tax cuts and additional stimulus. Stock proxies may also have gotten a lift from buyers emerging as major averages breached technical support/psychological important round numbers of Dow 8500, S&P 900 and Nasdaq 1400. The dollar followed a similar path, dropping sharply in the wake of the weak employment report and then recovering some lost ground on word of O'Neill's pending departure. The U.S. Dollar Index was lately down 0.66 to 105.53, but well off its early low of 104.95. From the earliest days of his term, O'Neill rattled currency traders by seemingly departing from the longstanding "strong dollar policy" of his predecessors, Robert Rubin and Larry Summers. "Secretary O'Neill created confusion about his commitment to the strong dollar policy," Sullivan recalled. "He came from the manufacturing sector and some felt he was simpatico with requests from the industrial sector for a weaker dollar. There's a sense Bush will install a firmer advocate of the strong dollar policy like Rubin."
However, Ashraf Laidi, chief currency analyst at MG Financial Group, described Lindsey as "the last bastion of the strong dollar policy" and said his resignation "could be potentially dangerous for the greenback." The White House must strive to avoid the interpretation that it no longer supports the strong dollar and/or "that it is allowing a free fall in the currency," Laidi added. "Such event could trigger supply shocks in Europe and Japan and severely impede the world recovery." No replacement for O'Neill or Lindsey has yet been named. The bond market, conversely, surrendered some early gains, with the price of the 30-year bond rapidly dropping from 107 6/32 to 105 8/32 following O'Neill's resignation announcement. The price of the 30-year bond was lately off 5/32, while the benchmark 10-year note was up 8/32 to 99 4/32, its yield dipping to 4.11. O'Neill's resignation "raises prospects the Treasury debt management team is willing to reinstall the 30-year bond auction," Sullivan said. "The market in a knee-jerk
reaction adjusted the yield curve for the prospect of the resumption of the 30-year bond auction." New issuance of 30-year bonds was suspended on Halloween 2001. Many observers believe the U.S. government has done itself a disservice by eliminating its ability to issue long-term debt at historically low rates.