All About Jobs

So, today is the big day for the short term. Much is riding on the US jobs data due out at lunch-time today. Expectations range from 30,000 to 120,000, which is why the short-term market is completely dependent on the result.

Ironically, with employment already so high, the real economic implications of this number are less significant. Jobs growth has continued against many expectations this year. There are certainly some complications between how many are out of work and how many are looking for work, but even if real unemployment is higher than the data show, the recruitment picture cannot remain rosy indefinitely.

If today’s number is high, then the argument that the Fed does not need to cut will gain solid ground, and not before time – the market’s recent insistence to price three cuts has had little relationship to underlying economics.

Perhaps the most important debate now is whether lower rates are really good for equities. If the Fed is pushed into cutting, many have argued that this is supportive for equities prices – and the recent equity market rebound appears to be based on just this expectation. But, history shows that declining interest rates are not automatically good for equities.

In the current case, a cut in interest rates may well be short-term supportive, but I consider it long term neutral. Only the fact that the US economy’s natural growth rate has declined is supportive of a positive medium-term impact from a September cut. This fact (more than the sub-prime malaise) explains my belief that there will be cuts this year. Thanks to a slowing natural growth rate US rates have been tightening, even without the Fed acting. To call them restrictive might be excessive, but given market dynamics, they are now clearly the wrong end of the neutral range.

At the moment, I remain of the view that I have had for several weeks:
> The sub-prime crisis is unlikely to unravel the entire economy;
> The credit crunch will not be fixed with a lower Fed funds rate, but with supportive liquidity it will work itself through, over the next month or six weeks;
> Equities markets are experiencing a healthy and overdue correction;
> Short-term risks are significant, but it’s about finding a time to buy not sell.

We are still long, but we continue to hold most of our cash. We expect another drop to come, if it does then it will scare a lot of investors, we will buy on the panic. If it doesn’t come, then we will have missed some alpha, but we prefer to stay cautious for now.


James Beadle
Portfolio Manager
Pilgrim Asset Management
j.beadle@pilgrim-invest.com