The jobs report surprised to upside today. Non-farm payrolls grew by 195,000, versus the 165,000 consensus estimate. The unemployment rate remained unchanged at 7.6 percent. Stocks surged at first, then retreated off their highs. Oil was up, copper was down. Many traders say today's report is the death knell for gold. Yields on the US ten year note surged 23.59 basis points. On FX, the dollar was way up against everything, including MXN and CAD, two currencies which usually benefit from good US jobs numbers.
The decline of the Peso and Canadian Dollar and inconsistent movement in industrial commodities are strong signs that markets remained perplexed by an opaque Federal Reserve. Stronger than expected US jobs numbers have until today been highly supportive of both MXN and CAD, major US trading partners. Furthermore, strong employment ought to lead to higher demand and therefore higher prices for industrial metals. But today, Copper fell sharply.
More evidence is emerging that conviction is low, and many investors are looking to sell on the slightest hint of the Fed winding down stimulus. When good news is bad news because it may portend higher interest rates, a serious disconnect has occurred in the communicative channels through which the Fed is transmitting is monetary policy. If the Fed tightens policy because of stronger fundamentals and a more robust job market, returns on stocks should be higher because corporate earnings are up. Commodity prices should be higher because demand for oil and industrial metals is up.
Finally, markets seem to distrust the Fed on two fronts. First, they do not believe that the Fed will know the appropriate time to tighten. Investors are still nervous, and cannot imagine an economy where rates rise because business and consumers are willing to pay higher interest because of renewed confidence and higher incomes. It seems that in today's world, economic growth only comes from stimulus, and higher rates must mean lower asset prices. On a related note, the market cannot even agree on what tighter monetary will look like. Despite substantial efforts by Chairman Bernanke himself, markets aren't buying the idea that the total size of the Fed's balance sheet is what is driving interest rates. Therefore, as pointed out by many, it is becoming increasingly clear that any "tapering" of Fed asset purchases will cause a large rise in longer term rates. A de facto tightening of monetary policy.
In sum, today's mixed reaction to good NFP numbers reveals a persistent underlying fear that the Fed's exit strategy will slam markets.
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