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Jobs Report Brings Back Taper Issue

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Friday, November 8, 2013

This morning’s surprisingly strong U.S. jobs report adds to the broadly positive tone of all recent economic data, likely putting the December Taper issue front and center all over again. The market’s initial reaction to the payroll data, with stock futures going down and treasury bond yields going up, points to that Fed-centric thinking.

Before we talk some more about the U.S. jobs 'shock', let’s not lose sight of the positive data out of China today about the country’s all-important trade sector. Chinese exports showed better than expected momentum in October, allaying some of the fears raised by the unusually weak export numbers in September. Along with China, we also got export data for Korea and Taiwan today that showed similar strength. Today’s data takes us back to the promising trend line that had started forming from the August and July trade numbers but was distorted by the surprising decline in September. The steadily improving U.S. economic picture, as evident from recent ISM, GDP, and today’s jobs report and favorable outlook for Europe all bode well for China’s trade sector.  

On the U.S. jobs front, the October non-farm payroll report came in better than expected, contrary to what everyone was looking for. Not only did the October ‘headline’ number come significantly above what the market was looking for, but the numbers for preceding two months were revised higher.

Some are referring to the jobs gain as unusual, not reflective of ground realities, and likely to be revised down in the coming months. But I don’t see it that way, as all recent economic data has not been showing any meaningful impact from the government shutdown. Thursday’s Q3 GDP report wasn’t expected to have any effects from the shutdown, but it nevertheless showed a lot of resilience, even though the growth was coming from less desirable areas. But the two ISM surveys were very strong and didn’t show any shutdown-related effects. Importantly, the employment components of both surveys had shown improvements, essentially foretelling what we found in today’s jobs report.  

A charitable view of this report can be that it isn’t way off the past year’s trend line. The headline gain of 169K in August compares to the preceding 12-month’s average of 184K. Consensus expectations hadn’t budged much following Thursday’s inline ADP reading, but many had been looking for a much stronger number given the momentum in the two ISM surveys and the very low level of Jobless Claims.

Those data points appeared to show that improved economic growth could more than make up for the rising interest rates as a result of changes to the Fed’s QE program. The Fed is likely fine with this environment and will move towards ‘Taper’ later this month, but the stock market may not get the economic and earnings growth that it has been pricing in.

The jobs ‘shock’ will likely be the dominant theme for the stock market today, but we will witness the first ‘normal’ trading for Twitter (
(TWTR - Free Report) ) after the stocks more than +70% pop on its trading debut. It goes without saying that the New York stock exchange did an excellent job of handling this hot IPO, clearly differentiating itself from Nasdaq’s mishandled Facebook (FB) debut. In other corporate news, shares of Disney ((DIS - Free Report) ) and Priceline () will be in the spotlight after better than expected results from the companies after the close on Thursday.

Sheraz Mian
Director of Research

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