The stockmarket today went straight downhill after the announcement early this morning of the surprise decline in employment in August of a net 4,000 jobs (out of a total of over 138 million) when expectations had been for a gain, in line with recent months, of a bit over 100,000. Worse, prior months’ data was revised downward by about 90,000, too.
One can speculate reasonably that this morning’s data will itself be revised either up or down in next month’s report, but by then the effect of the present data will make those adjustments, if any, irrelevant. The markets (actually, both stock and bond) have been having a tug of war with the Federal Reserve for some time now over whether the primary threat to the economy going forward is inflation or recession. The Fed blinked a bit in the face of the credit “freeze” brought on by the subprime meltdown and risk repricing of early August by lowering its own interest rate charges to banks seeking liquidity options, but has yet to change its targeted “Federal funds” rate for overnight commercial lending in the face of concerns that it would only be bailing out speculators who made improvident bets on subprime and adjustable-rate mortgages (either as borrowers or lenders or investors) — the so-called “moral hazard” dilemma.
Today’s jobs report gave the market its excuse to posture a panic mode of recession fever in a continuing effort to convince the Fed that, like inflation, even the moral hazard risk must take a back seat to the threat of an overall economic contraction as a result of the knock-on effects of the decline in housing-related commerce and finance (which are really only intimated in a small way in today’s jobs report).
The 249-point decline in the Dow and similar falls in the NASDAQ and S&P 500 indices were not literally panic selling (although some companies’ shares no doubt were oversold in the rush to the exits and will bounce back in due course). Rather, the market in its own crude way was sending a “message” to the Fed (which had just issued its periodic “beige book” report on economic activity in the various regions of the country which noted only limited effects of the housing contraction on the overall economy).
At bottom, the markets want the Fed to be just as “preemptive” — in terms of lowering the funds rate — when faced with early warning signs of recession as it has long professed to be, in terms of increasing rates, in the face of early warning signs of inflation.
But recognizing the downward drift of the US dollar’s value, one might caution the markets to be careful what they wish for. Therein lies the coming weeks’ debate — should it be a 25 basis-point cut, or 50?
The market’s message was not unlike a brush-back pitch in the late innings of Yankee’s-Red Sox game in the pennant race. Sure, the pitch may have ‘slipped’ today, but “there’s more where this came from” (if you don’t cut rates significanctly, and soon). In this sense, the jobs report was to the market a “gift that keeps on giving” for the next ten days or so until the Fed announces its decsion on rates on or before September 18.
Filed under: Uncategorized
