SCOREBOARD: USA on the way

The growth in US jobs prove the Federal Reserve and the Reserve Bank have got the sums wrong on the stimulus and interest rate cuts have been overplayed.

Jack Welch, ex GE CEO, might think the numbers are being manipulated but in the absence of that the US jobs figures were strong. I’d go with that. They were fantastic actually and commentary and conspiracy theories like Jack’s show the depths people will fall to in talking the economy (global and domestic) down.

The unemployment rate dropped to 7.8 per cent in September from 8.1 per cent the month prior and an expectation of 8.2 per cent. This was on the back of very strong jobs growth of 873,000. The good news is that the participation rate rose to 63.6 from 63.5 annually -- almost 3m jobs have been created. Which is very strong.

Payrolls themselves were up 114,000 which was lower than expected but the result was accompanied by upward revisions to prior data. So far and for the last 3 months payrolls have increased by 140,000 per month which is just above the pre-GFC average -- and they were the boom times people. By extension then, jobs growth is back at boom time rates. Unless of course you don’t consider the years from 2003-07 as a boom.

Put simply, the US jobs data is critical. It highlights the flawed assumptions both the US Federal Reserve and our own Reserve Bank are operating under. First, it is inconsistent with the view of Bernanke and others, that the US economy is growing at a pace that is too slow to produce solid jobs growth and reduce the unemployment rate. The data shows why this has been wrong - that is, unless you subscribe to the view of Jack Welch.

The truth is that the model Bernanke and his followers have relied on has been wrong from day one -- and these jobs figures are just the latest proof.

Unfortunately for the RBA, the data also highlight why, again, the analysis they provided or the justifications they made to lower rates are as flimsy as previous episodes. As I have pointed out before, the global economy looks to be accelerating rather than slowing and US economic data certainly backs this case. Unfortunately the RBA’s track record is as questionable as those domestic economists who have continually pushed for lower rates.

Recall late last year and earlier this year the RBA cuts rates on the pretext of weak domestic growth. Domestic growth was strong and actually accelerated. For mine, policy is exacerbating the business cycle rather than smoothing it.

Think back to 2008 -- the RBA hiked rates too excessively. Then in 2009 they cut rates too aggressively. I would argue that now in 2012 they are over doing it again. This is not a good track record and stumbling around in the dark is not a good way to conduct policy.

And for no good reason. It simply is not needed. I think more than ever the country needs stability -- a steady hand. Not panic. Or ‘insurance’ as it’s now called. That card has been overplayed.

For whatever reason the market didn’t get much of a lift from the strong jobs report. The looming US earnings season perhaps. Stocks were mixed and commodities were belted – crude down another 2 per cent. It doesn’t look like it will be a great start to the week then and I’m not sure if there is any real hard hitting data or news that will change that.

For Australia the key dataflow includes the confidence indicators from NAB (business) and Westpac (consumer). Recall that confidence has in fact been weaker since the RBA’s easing cycle, as has lending, which highlights again the flawed assumptions the RBA and others are operating under. Hopefully the ECB’s decision to buy European bonds can offer some respite and buttress confidence a bit. Certainly the fact that global equities have had a solid run should help to offset the RBA’s ill-considered measures.

Thursday brings the domestic employment report and the expectation here is that employment will rise about 3000, while the unemployment rate is forecast to rise to 5.3 per cent from 5.1 per cent. I don’t have a problem with those forecasts and think in general, a modest increase in the unemployment rate -- to maybe 5.7 per cent over the next six months - is probably about right.
That is still an exceptionally low unemployment rate by the way.

In addition to that we have a couple of RBA speeches this week (Tuesday and Friday, while the RBA governor appears before the House of Reps Economics committee today to tell Australia what we knew about the corruption scandal at one of the RBA’s subsidiaries). There are a few other minor releases but in general they aren’t market moving and have little relevance as lead indicators.

On the global front there isn’t too much that’ll rock the market either. It’s the Columbus day holiday today in the US for a start and for the rest of the week there isn’t much data – small business optimism on Tuesday, the Beige Book on Thursday morning. Thursday night yields jobless claims and the trade balance, while on Friday we get producer prices and consumer confidence.

I’d watch Turkey and Syria very closely as things seem to be deteriorating quite rapidly and obviously Europe is still there.

Latest news flow is that Greece may run out of money by November. We’ve been here many times before and such headlines don’t seem to move the market much these days. There are a few meetings worth watching as well – European Finance Ministers, Spanish and French leaders and then German Chancellor Merkel travels to Greece. Looks like it’ll be a track two then this week - Europe imploding.



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