Well, there was no shortage of major economic headlines that came out this week. Our biggest day was on Wednesday, and that’s where my perplexity is highest. For one, going over everything that happened, and the emergency funding deals that were put together by the Fed, the Bank of Japan, the Bank of Canada, the Bank of South Korea, the European Central Bank, and the Bank of Switzerland; I still can’t justify how markets soared 4-5%. Well, of course I can understand why it happened (at this point, investors will jump the gun for any hint of a bail-out). But in all reality, I can’t see how cutting emergency lending rates on the dollar is cause for 4-5% gains. Don’t get me wrong, it’s a step in the right direction, but I just can’t justify such incredible gains on it. Although, there’s also a very good chance that those gains were needed. European woes, and more importantly, European rumors, have been roiling the markets for months now. Many would say that a lot of the negative outlook on Europe has already been priced into the markets. So, with this coordinated response by the Central Banks above (which is one reason why markets went so high, was simply due to the coordination), investors probably realized that an outright collapse of the Eurozone is probably farther off than first anticipated. In addition, solid economic data coming out of the U.S hasn’t gotten that much attention. I think that, if you blend all these things in together, you can slowly justify Wednesday’s gains.
Now let’s take a closer look at the U.S; in particular, the labor market situation. I wrote an article earlier on about how the job situation might be better than we initially thought. To give you a refresh, there are two major surveys that go into the monthly jobs report; and one of them is more or less, a lagging indicator (the house-hold survey). The house-hold survey is a smaller survey in comparison to the business unit survey, and that’s why the business unit survey gets more attention. But the thing is, the business unit survey doesn’t pick up on entrepreneurial development nearly as well as the household survey does, and that’s where I believe the key lays. With any economic rebound, entrepreneurial development will be the lead frontrunner when it comes to the creation of jobs, and I think this is exactly what is happening. We’re seeing a growing trend of better than expected data, and that’s where the household data proves to be accurate (when it can create a 3+ month trend). And it has.
Not only was November’s job report better than expected (120,000 jobs were added), what’s more important is the revisions that have been made to previous months. This is where I see the household survey proving its worth; while back in August and September, this survey was putting up more promising numbers. And now, those numbers seem to be right. Overall, the U.S. economy has now officially added 534,000 jobs in the past four months. Revisions were made to October (100,000 from the previously states 80,000), September (210,000 from a previously stated 103,000), and most important of all, August (104,000 jobs added in comparison to the previous report of zero jobs added). All and all, this shows me that the household survey is proving to be right: our jobs situation, which currently stands at 8.6%, might be better than we initially thought. Now that’s not to say its good, but again, it is better than we thought (and that’s always a good thing).
Taking a closer look at Europe, which I’ve been doing for a while now, I’m still very much on the line on whether or not I’m bearish or bullish on this situation. Part of me says, unless a common Eurobond is issued, there will still be much more damage to come to this continent. And then, another part of me says to look at the recent coordinated effort by these central banks as a very large step in the right direction towards staving off a Eurozone collapse. We’ll never know as much as these central bankers know, and for them to come together like the way they did on Wednesday shows that they may very well have what it takes to save the Eurozone. But again, this could very much be wishful thinking.
Looking over at our beloved friend across the sea, China’s central bank just recently cut the reserve ratio for banks by 50 basis points. The reserve ratio is a limit that details how much a bank must hold in capital reserves. Theoretically, by making this cut, this should inject about $60 billion dollars (U.S) into China’s economy. This may or may not be a cause for concern. For one, this is simply a monetary policy tool that will allow China to stimulate more demand. But here’s the thing, with a storm brewing over China’s commercial and residential real estate markets, it might not be the best idea for China to ease regulation on their banking system; especially in regards to reserve ratios. If real estate markets start to collapse, banks are going to need every dime they have to deal with that storm. Although, there’s one important factor: I forget who said this, but somebody once said that ‘China is like an elephant riding a bicycle. Once it slows down, it falls off. And it falls hard.’ By stimulating more economic demand right now, China may be preventing the elephant from falling off the bike.
For the week to come, technical analysis is showing us that markets are very much ‘over-sold’. Expect for some corrections to be made, and for the market to even out (seeing a little more red ink than black). Although, depending on what comes out of Europe, you could see some major market volatility. I’m not even going to try and speculate that right now though.