Stocks weren't the story on Thursday. Treasuries were.
Longer-dated maturities got clipped pretty good. The 10-year note dropped 18 ticks while the 30-yr bond dropped more than a point. Most reports are attributing yesterday's losses to an acknowledgment in the FOMC Minutes that "several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet."
Frankly, we think the business media is jumping to some faulty conclusions about that statement, suggesting it is the first shot across the bow that the Fed is going to be pulling back its accommodation sooner rather than later. It is a peculiar view that we are not sold on given the following:
- We are confident Fed Chairman Bernanke, Vice Chairman Yellen, and New York Fed President Dudley aren't among the "several others"
- Less than a month ago, the FOMC, with the exception of one member, voted to expand the Fed's asset purchase program and to establish economic thresholds to help determine the timing of future policy moves.
- We remain a long way still from the primary economic threshold of a 6.5% unemployment rate.
- The fiscal drag on the economy is going to retard the pace of improvement in the job market
- It is not a surprise that "several others" would express their reservations knowing that Dallas Fed President Fisher, Philadelphia Fed President Plosser, and Kansas City Fed President George (an FOMC voter in 2013) are several members known already not to be fans of the added quantitative easing
It is worth noting that the majority of yesterday's losses in the Treasury market occurred before the minutes were released. Nonetheless, it was evident that the Treasury market did not like what it heard as longer-dated maturities dropped to their session lows in the wake of the minutes being released.
In a certain sense, it was the equivalent of kicking a man while he is down. The yield on the benchmark 10-year note has risen 24 bps to 1.94%, including added losses this morning, since the start of the year and is at its highest level since May.
At the same time, the US dollar has strengthened against several major currencies, including the euro and the yen, while commodity prices, and gold in particular, have backtracked on the dollar's strength.
We may not agree with the media's conclusions about the FOMC Minutes, yet some markets seem to be buying it for the time being. The stock market, however, doesn't look as sold on the idea.
Granted stocks moved off higher levels after the minutes were released, but a mere 0.2% decline in the S&P 500 on the heels of a 4.3% gain over the prior two sessions didn't exactly send a message of fear and loathing that the Fed is going to be pulling its support soon.
To be sure, the December Employment Situation report supports that line of thinking, having revealed a 7.8% unemployment rate that was unchanged from November after taking into account updated seasonal adjustment factors for the household survey.
The overall report fit the same mold we have seen for a while of being good, but not great. Nonfarm payrolls increased by 155,000 (Briefing.com consensus 150,000), which was basically in-line with the average monthly gain of 153,000 for 2012. Revisions to nonfarm payroll data for October and November were minimal.
Private sector payrolls jumped by 168,000 in December, which was higher than the Briefing.com consensus estimate of 145,000. The construction industry accounted for 30,000 new jobs, with rebuilding efforts from Hurricane Sandy playing a part. The average workweek ticked up 0.1 to 34.5 hours (Briefing.com consensus 34.5) while hourly earnings rose 0.3% (Briefing.com consensus 0.2%).
Long-term unemployed workers (27 weeks or more) accounted for 39.1% of the unemployed versus 40.0% in November. The U6 unemployment rate, which also accounts for discouraged workers, held steady at 14.4%.
The S&P futures ticked a little higher and the Treasury market pared some of its losses after the employment report, which carried a mixed message of stable job growth that is good but not good enough to make a meaningful dent in the unemployment rate. In that vein, it was also good but not good enough in our estimation to convince the Fed to withdraw its accommodation anytime soon.