Jobs Turn the Tide
While always a key data point anticipated by investors, the jobs number reported Friday was one of the most eagerly anticipated data points in recent memory owing to the recent cacophony of banter about when the Federal Reserve will begin to reduce its unprecedented levels of monetary stimulus. With the near consensus jobs number delivered, investors breathed a sigh of relief that the Fed is probably no closer to tapering its program of quantitative easing (QE). Expanding employment at May’s pace of 175,000 jobs is arguably too slow to reduce the unemployment rate to levels the Fed would like to see, and in this case, was accompanied by a rise in the unemployment rate that signaled a higher rate of labor force participation. Apparently all the talk about job gains and Fed “tapering” brought would-be laborers off the sidelines, producing the juxtaposition in data. While US stocks posted gains on the week, the sell-off in bonds continued, pushing the yield on benchmark 10-year Treasuries up to 2.17 percent.
Slower for Longer
For our part, we believe Fed interest rate policy will remain highly accommodative for the foreseeable future, and that reductions to QE are probably farther off than the consensus believes. Fed Chairman Bernanke is a student of the Depression, and is well aware of the adverse consequences of prematurely tightening monetary policy. Furthermore, he has witnessed firsthand the deflationary malaise of Japan, which is only now beginning to respond to unconventional monetary stimulus. We would argue that when the Fed ultimately begins to remove the punch bowl of monetary stimulus, it will be for the right reasons – multiple months of 200,000+ job gains and an unemployment rate materially below today’s 7.6 percent rate. A rebound in housing and higher stock prices have induced a wealth effect that is supporting growth in consumer spending, and higher US energy production is improving the US trade picture. But these positives are being tempered by higher income and payroll taxes that, combined with reduced government spending, have created fiscal headwinds dampening the pace of job creation.
In a week of light news flow from corporate America, AT&T’s announcement of better than expected wireless subscriber additions in the second quarter-to-date highlights some interesting undertones. What normally would be viewed as good news might end up being so for AT&T shareholders, just not right away. In today’s environment of promotions and subsidy-driven smart phone plans, adding more subscribers typically dings near-term earnings, with payoff happening over the course of the wireless customer’s contract. Predictably, many analysts on Wall Street reduced AT&T’s second quarter earnings estimate because of this news, but AT&T management continues to guide full year 2013 financial results in line with previous expectations. Why the disconnect? AT&T plans to use its prodigious cash flow to repurchase stock. So while reported net income in 2013 may actually undershoot original forecasts, per share earnings should meet expectations on fewer shares outstanding. This example is noteworthy only inasmuch as it highlights the increasingly common practice of major US companies “manufacturing” EPS numbers to overcome challenges posed by a slow growth economy. Against this backdrop, AT&T shares underperformed, falling 1 percent on Friday.
Our Takeaways from the Week
- Stocks recouped early week losses as a “Goldilocks” jobs number rejuvenated investor spirits
- The debate goes on about when and how fast the Fed will taper its QE program