US Stocks: Disappointing Job Reports Spurs Frantic Buying on Expectations of Monetary Heroin; Atlanta Fed’s 3Q GDP Chopped to .9%

US stocks experienced an incredibly wild round trip yesterday.

(from stockcharts.com)

For instance, the Dow Jones Industrials was sharply down at the early session (by 259 points), but rallied furiously back to close the day at the session high with an astounding 200.36 point advance.

The report from Reuters gives us a clue on what transpired and inspired the day’s action: (bold mine)

Bond prices climbed on Friday after a weak U.S. employment report increased worry about slowing global growth, while global equities were able to rebound from an initial selloff to close with strong gains.

The economy created 142,000 jobs in September, well short of the 203,000 forecast, and August numbers were revised sharply lower to show only 136,000 jobs, the U.S. Labor Department said.

Bond prices jumped, with benchmark U.S. Treasury yields falling to their lowest level in slightly over 5 months. The 10-year U.S. Treasury note was last up 17/32 in price to yield 1.9824 percent.

U.S. stocks managed to rebound from sharp declines, buoyed by gains in the beaten down energy and materials sector.

"These numbers are weaker than expected, but not alarmingly weak," said Brad Lipsig, senior portfolio manager at UBS Wealth Management in New York.

"The risk is that they continue on a weakening trajectory. This could mean that weakness in overseas economies is now affecting the U.S. economy."

Years of cheap central bank cash after the 2007-2008 financial crisis have supported asset prices, but recent signs of a slowdown in global economic growth, and the Fed's decision last month to postpone raising interest rates, have unnerved investors betting on a return to more normal policy. 

The weak jobs report likely pushes out the timeline for the Fed to raise interest rates for the first time in nearly a decade. Fed funds futures implied traders see nearly no chance the U.S. central bank would end its near-zero rate policy in October, according to CME Group's FedWatch program, with a hike likely to occur in March 2016.

So the initial response to the disappointing job reports had been a sell down. Apparently, the stock market realized that such bad data entailed that the FED will backed them up. This means that bad news will push back the Fed's liftoff farther down the road.

Thus, BAD NEWS is GOOD NEWS! That’s because the Fed’s monetary heroin provided by ZIRP, in support of stocks, will prevail. (add to this: Asian currencies also rallied strongly)

Nonetheless, here is what bad "job" news looks like based on Wall Street Journal’s report and charts

JOBS: 142,000

U.S. employers added a seasonally adjusted 142,000 jobs in September, well below economists’ expectations for a gain of 200,000 jobs. Payroll readings in the prior two months were also revised down by a total of 59,000. Employers added 136,000 jobs in August and 223,000 in July. The average job gain over the past three months was 167,000, a marked slowdown from the August three-month average. September marked the 60th consecutive month of job gains, the longest stretch on record.

JOBLESS RATE: 5.1%

The headline unemployment rate was unchanged at 5.1% last month, holding the jobless rate at its lowest level since April 2008. But that partly reflects a shrunken labor force. The unemployment rate is down from its peak of 10% at the end of 2009, and is just above the 5% reading recorded when the recession began in late 2007. The current rate is within the range Federal Reserve officials view as the likely long-run average.

WAGES: $25.09

Average hourly earnings of private-sector workers declined by 1 cent to $25.09 last month. That’s a 2.2% increase from a year earlier. The average work week also decreased by 0.1 hour last month, to 34.5 hours. Wages had been advancing at a modest 2% pace or barely higher during much of the expansion. Many economists blame the slow gains for lackluster consumer spending and sluggish economic growth.

LABOR-FORCE PARTICIPATION: 62.4%

The labor-force participation rate fell last month to 62.4%, after registering at 62.6% for the previous three months. The latest reading is the result of the labor force shrinking by 350,000 people last month. The participation rate—the share of the population either working or actively looking for work—has been dropping for several years and is near levels last consistently recorded in the late 1970s, a time when women were still entering the workforce in larger numbers.

Let me add the other day’s data on job cuts from Challenger, Gray & Christmas last September

From the firm’s Press Release

The third quarter ended with a surge in job cuts, as U.S.-based employers announced plans to shed 58,877 in September, a 43 percent increase from the previous month, according to a report released Thursday by global outplacement consultancy Challenger, Gray & Christmas, Inc.

The September total was third largest of the year behind July (105,696) and April (61,582). It was 93 percent higher than the 30,477 planned layoffs announced the same.

The Top 5 industries plagued by job cuts as shown above.

All these jobs data--the seeming inflection on the rate of jobs growth, declining wages, the sharp reduction of labor participation (at record), slowing gains in employment to population ratio--hardly supports a “robust” economy or even earnings growth.

Add to this last night’s August factory order report which slumped by 1.7%. The drop, according to CNBC, accounted for the largest amount in eight months, led by a drop in demand for commercial airplanes and weakness in a key category that tracks business investment spending.

Moreover, the Zero Hedge points out that: (bold italics original): For the 10th month in a row, US Factory Orders dropped year-over-year - the longest streak outside of a recession in history. Against expectations of a 1.2% decline MoM, August dropped 1.7% which is the worst MoM drop since Dec 2014, with a 24% drop MoM in defense new orders and capital goods. Most worrying however is the rise in the inventories-to-shipments ratio once again to cycle highs after a hopeful dip lower in July.

The slump in factory orders compounds on the US manufacturing conditions based on several survey conducted by the FED.

Bloomberg notes (October 1) that “America's Manufacturers Got Crushed in September” as “Seven of these surveys have been released over the course of the month, and only one, the Dallas Fed Manufacturing Index, has exceeded economists' expectations. All these regional surveys pointed to shrinking manufacturing sectors, with some prints coming in at their worst levels since the Great Recession:

The Bloomberg explains: The Empire State manufacturing index earlier this month indicated back-to-back months of contraction, with the employment sub-index and six-month forward outlook hitting multiyear lows. In part due to a market retreat in new order volumes, the Richmond Fed's Manufacturing Survey posted its lowest reading since the start of 2013. The Kansas City Fed's index has been stuck in negative territory since March, with new orders, shipments, employment, and exports all declining in September…On Wednesday, two regional indices confirmed that the pain is widespread.”

All these points to the periphery to the core in motion where emerging market troubles have now spread to affect the core (developed economies).

And a domestic periphery-to-the-core dynamic have likewise become evident in terms of job cuts, as well as on manufacturing. Job losses have now diffused to technology, retail and industrial goods.

Incidentally the Atlanta Fed abruptly chopped their projected 3Q GDP from 1.8% to just .9% as of October 1.

Why? The Atlanta FED explains (bold mine)

The GDPNow model nowcast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 is 0.9 percent on October 1, down from 1.8 percent on September 28. The model's nowcast for the contribution of net exports to third-quarter real GDP growth fell 0.7 percentage points to -0.9 percentage points on September 29 following the advance report on U.S. international trade in goods from the U.S. Census Bureau.

Periphery to the core.

As I wrote in February 2014: 

Even when the exposure would seem negligible, if the adverse impact of emerging markets to the US and developed economies won’t be offsetby growth (exports, bank assets and corporate profits) in developed nations or in frontier nations, then there will be a drag on the growth of developed economies, which would hardly be inconsequential. Why? Because the feedback loop from the sizeable developed economies will magnify on the downside trajectory of emerging market growth which again will ricochet back to developed economies and so forth. Such feedback mechanism is the essence of periphery-to-core dynamics which shows how economic and financial pathologies, like biological contemporaries, operate at the margins or by stages.

The above only reveals of the unsustainable divergence in motion—the seeming deterioration in the real economy relative to actions at the financial markets.

Eventually soon, divergences (internal conflicts) will be resolved as convergence.