GBR Market Wrap: Eurozone Crisis Continues; U.S. Unemployment May be at Turning Point

In this Week’s Issue: November 4, 2011

• Weekly Snapshot
• Weekly Barometers
• Weekly Chart
• Recommended Read: Bonds Beat Stocks
• A Picture Perfect Central Bank Intervention

Weekly Snapshot
• Greek Prime Minister George Papandreou survived a crucial vote of confidence
• U.S. non-farm payroll employment continued to trend up in October (+80,000)
• U.S. unemployment rate was little changed at 9.0%
• The unemployment rate in the Euro zone was 10.2% in September, the highest since 1998
• Fed downgrades its growth forecasts; it expects GDP to rise by just 1.7% this year
• Chinese residential real-estate prices fell a monthly 0.23% in October
• MF Global filed for bankruptcy on Monday leaving about 150,000 accounts in limbo
• U.S. consumer confidence down 6.6 points in October. It now stands at 39.8 (1985=100)
• Japan intervened against the rise of its currency, selling about ¥7 trillion ($89.7 bn)
• New ECB head Mario Draghi lowers interest rates a quarter-point to 1.25%

Market Barometers

Weekly Chart
With all eyes on Europe again this week, investors could have easily overlooked the much more important economic data affecting the U.S. economy, namely the employment report that came out Friday morning.  The U.S. economy only added 80,000 jobs – somewhat disappointing on first glance. However, employment numbers for August and September were significantly revised upwards leaving us with a specter of hope that October may have a similar upward revision going forward.

Although the unemployment rate remains stubbornly high, there are few encouraging signs. First, the trend is going in the right direction. Some might suggest that it takes another four years to get back to the employment level of 2007, but it looks like the worst is behind us and the longest employment recession since WWII is losing steam. Job creation will clearly be an important component of the next presidential election and that should bring about additional jobs programs.

Although still unacceptably high, the number of long-term unemployed (six months or more) fell to 3.8% of the labor force. Given the right combination of jobs programs and real incentives to work plus real disincentives not to work, that number could come down as fast as it went up. Let’s hope that our political leaders will hear this and get the incentives right.

Recommended Read: Bonds Beat Stocks
Please consider: Say What? In 30-Year Race, Bonds Beat Stocks. Cordell Eddings suggests that “the biggest bond gains in almost a decade have pushed returns on Treasuries above stocks over the past 30 years, the first time that’s happened since before the Civil War.” I haven’t had the chance to check the math on this yet, but if it is correct, we might have to rewrite some of our finance text books.

A Picture Perfect Central Bank Intervention
Last week we hinted at a possible central bank intervention as the Japanese Yen approached yet another all-time record against the U.S. Dollar. The Bank of Japan dutifully obliged and sold almost $90bn worth of Yen (¥7 trillion) to weaken their own currency and support the dollar. Here is a picture perfect chart of the impact of a central bank intervening in the currency markets. The short-term effect was swift and powerful (about 400 points in three hours), however, it remains to be seen how effective this intervention will be in the medium- to long-term.

Good luck and good investing!