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Jobs Numbers Disappoint; Treasuries Rally

Market Digest – Week Ending 4/5

Just when it started to feel safe to say the US economy had turned the quarter, Friday’s jobs report provided a major disappointment. Employers added half of the new jobs economist had been expecting. And while the headline jobless rate ticked down to 7.6%, it was due to people dropping out of the labor force rather than genuine employment growth. Treasuries rallied, as the jobs report signaled weaker economic growth and increased the appeal of “safe-haven” assets. Earlier in the week, Japan announced a “shock and awe” stimulus program aimed at ending deflation and reviving the stagnant economy. Japanese stocks rose on the news.

Weekly Returns:

S&P 500: 1,553 (-1.0%)

MSCI ACWI ex-US: (-1.0%)

US 10 Year Treasury Yield: 1.70% (-0.15%)

Gold: $1,580 (-1.1%)

USD/EUR: $1.301 (+1.5%)

Major Events:

  • Monday – US Manufacturers reported a fourth month of expansion in March, but gains came at a slower pace than February.
  • Monday – A federal judge allowed Stockton, California to proceed with its bankruptcy filing and indicated the city may have to cut payments to its pension plan.
  • Tuesday – Unemployment in the Eurozone remained steady at 12% and a purchasing manager’s index fell to 46.8.
  • Wednesday – An ISM survey said the US service industry expanded at the slowest pace in seven months.
  • Thursday – The Bank of Japan announced an ambitious stimulus plan designed to drive inflation up to 2%. The program includes massive purchases of long bonds which will drive the Bank’s balance sheet to 30% of GDP.
  • Friday – US employers added jobs at the slowest pace in nine months, raising question about the momentum of the recovery and making it more likely Fed bond purchase programs will remain intact longer.

Our Take:

There is no sugarcoating Friday’s jobs report. The economy’s battle back to “old-normal” growth rates will be a difficult one, and this was a setback. It has been a while since the source of bad news was the US. Still, it is a mistake to get too caught up in one month’s numbers, especially when the economy is still adding jobs. Earnings season kicks off this week and will be equally telling.

The dramatic stimulus program announced in Japan will be interesting to follow. The intended bond purchases will swell the Bank of Japan’s balance sheet to approximately 30% of GDP, twice the position of Bernanke’s Fed. It is understandable why Japan seeks such bold action. Unlike the US, where the primary fear of stimulus is inflation, Japan has been mired in deflation and is actually hoping to cause modest inflation. The risk is that consumer prices rise while wages and asset values stagnate.

The outcome will unfold slowly, but will provide a valuable test case in a world where central bank leaders have perhaps become more important than Presidents (outside of potential unexpected military conflict).

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