Leveling the Playing Field

November 11, 2013

_______________________________________________________________________ Happy Veterans Day to all the former and current service members and their families. Thank you for your service. Markets are closed today, so today’s newsletter is going to be short and sweet. Friday’s headline NFP release showed a gain of 204k jobs last month, all the more impressive when the market had fully priced in a disappointing number around 100k. Again, strong NFP = tapering, so yields spiked immediately and the 10T hit 2.74%. But before you go all-in on a December tapering, please note that the participation rate dropped to its lowest level in 35 years after 932k dropped out of the workforce last month. In the last year, over 3mm people have dropped out of the work force. Using the labor force participation rate from 2008 would yield an unemployment rate over 11%. The quality of jobs is likely to garner additional inspection going forward. Nearly half of all the jobs added last month came from hospitality and retail, which are not generally considered high quality jobs with big spending impacts on GDP. These jobs also comprised nearly all of the 60k revision upward from the previous two months. GDP hit 2.8%, crushing the consensus forecast of 2.0%. Suddenly the Fed-speak earlier in the week about tapering carried more weight. Would the Fed taper at the December meeting? While the headline number looks great, the reality is that it was boosted by inventories building. Perhaps the more salient number is the final sales number, which reflects GDP ex-inventories, which came in at 2.0%. This is basically the same as the 2.1% number from Q2. And don’t forget the Fed’s preferred measure of GDP is the exinventories measure, so this is the number that should really be driving tapering expectations, not the headline number.

On the tapering front, we’re not buying a possible December tapering. The Fed is driven by trends, not one number. And the Fed has even admitted an increased focus on the quality of the job growth rather than just a simple drop in the UR. The Fed will continue to use its platform to try to convince markets that tapering is not tightening and all comments will be closely analyzed for possible tapering implications. Fed Governor Lockhart said “I would not take consideration of a December taper off the table.” But he also noted that the FOMC will not react “to just one po sitive monthly number” and that the Fed will remain data-dependent. Thanks for clearing that up. Richmond Fed President Lacker said the government shutdown alone isn’t enough to warrant the delaying of tapering, while SF President John Williams said the recovery is “frustratingly slow” but that the FOMC’s “monetary policy medicine is working”. Great, thanks for coming out. Our conclusion is that the economy is improving, but that the news isn’t as rosy as some of the headlines would suggest. And equity markets should be completely disregarded as wind socks for the economic winds - Bernanke’s printing presses have rendered those observations obsolete. In an interesting report, Citi suggested that consumer confidence is about to nosedive. UofM Confidence had its lowest reading in three years and the graph from Citi’s report below doesn’t bode well for the next few years.

Interest Rate Outlook Yields jumped across the curve, but most notably on the long end where the 10T jumped to 3.74%. For many of the issues we listed above, we don’t believe this is the first step in a march towards a 3.00% 10yr Treasury in the coming weeks. There is a significant resistance level at 2.76% and too many outstanding items like debt ceiling, government shut down, Fed transition, etc for the Fed to taper right now. This view could change if the Fed strengthened its tapering language or if significant progress was made on the fiscal front. We can get to 3% without tapering talk, but we won’t break through it until tapering is fully priced into expectations.

This Week Markets closed Monday for Veterans Day and the rest of the week is pretty quiet as well. Yellen’s Senate Confirmation Hearing begins Thursday. There will be plenty of grandstanding, but we’re unlikely to gain any insight into tapering plans. Quite a few Fed speeches, but nothing on the calendar looks like a likely policy discussion.

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Economic Calendar
Economic Data Day Monday Tuesday 7:30AM 8:30AM Wednesday 7:00AM 2:00PM Thursday 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM Friday 8:30AM 8:30AM 8:30AM 9:15AM 9:15AM 10:00AM 10:00AM Time Report Markets Closed for Veteran's Day NFIB Small Business Optimism Chicago Fed National Activity Index MBA Mortgage Applications Monthly Budget Statement Initial Jobless Claims Continuing Claims Nonfarm Productivity Unit Labor Costs Trade Balance Import Price Index (MoM) Import Price Index (YoY) Empire Manufacturing Industrial Production Capacity Utilization Wholesale Inventories (MoM) Wholesale Trade Sales (MoM) -$104.0B 330k 2875k 2.0% 0.4% -$39.0B -0.4% -1.6% 5.00 0.2% 78.3% 0.4% 0.3% 93.5 0.18 93.9 0.14 -7.0% -$120.0B 336k 2868k 2.3% 0.0% -$38.8B 0.2% -1.0% 1.52 0.6% 78.3% 0.5% 0.6% Forecast Previous

Speeches and Events Day Tuesday Time 1:00PM 1:50PM 7:00PM Wednesday 8:45AM 7:00PM Thursday 9:00AM 10:00AM Report Fed's Kocherlakota speaks on Monetary Policy Fed's Lockhart speaks on Economy Fed's Fisher speaks on Monetary Policy Fed's Pianalto speaks to Women’s Conference Fed's Bernanke speaks to Town Hall of Teachers Fed's Plosser speaks on Monetary Policy US Senate Banking Committee Confirmation Hearing for Yellen Washington, DC Place St. Paul, MN Montgomery, AL Australia Philadelphia, PA

Treasury Auctions Day Tuesday Wednesday Thursday Time 1:00PM 1:00PM 1:00PM 3-year Treasury 10-year Treasury 30-year Treasury Report Size $30B $24B $16B