Leveling the Playing Field

January 13, 2014

_______________________________________________________________________ See? We arent the only ones that failed to meet expectations. - Dallas Cowboys on Fridays NFP NFPs showed a gain of 74k jobs last month vs a forecasted 170k, the lowest gain in two years. Additionally, nearly half of the gains were temp positions! The BLS blamed the cold weather. I was in Chicago for a few days and can attest that it was cold enough to shut down some workers, like construction. But if Hurricane Sandy didnt have a material impact on hiring last year, Im not sure I can buy what the BLS is selling about cold weather crushing hiring last month. That being said, the BLS data suggests there could be a rebound next month of up to 75k jobs. This type of weak release is precisely why we thought the Fed would hold off on tapering. Our newsletter in mid-December (the one where we predicted the Fed would NOT taper), said Compounding this is the fact that November and December have the highest seasonality of any months and we can expect a sharp reversal in January and Februarys reports. And the FOMC members know this. We were wrong about tapering, but sure enough the seasonality volatility is in full swing. Markets responded immediately following Friday mornings disappointing release, sending the 10 year Treasury down to 2.85%. With the technical range at 2.70% - 3.10%, there is still room for rates to move lower. If hiring was this weak, we could certainly be in store for more weak data in the weeks ahead, such as retail sales and housing starts. Just as we discounted last months incredibly strong NFP, we dont think Fridays print means the economy is faltering. The long term averages are still just under 200k jobs gained a month. But next months release just gained some significance. From a tapering perspective, this disappointing number shouldnt cause the Fed to amend its tapering pace of $10B per month.

Perhaps the more notable release on Friday was the absurd drop in the UR from 7.0% to 6.7%. Again, the economy only gained 74k jobs last month, and yet the UR dropped by 0.3%. The culprit, as always, is the participation rate. We had been predicting a change in the Feds forward guidance language for some time, and the last FOMC meeting finally touched on this by saying it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%, especially if projected inflation continues to run below the Committees 2% longer-run goal.

The Fed initially targeted 6.5% just over a year ago, but it became evident by the midpoint of last year that the economy would hit 6.5% sooner than expected and entirely for artificial reasons. Now 6.5% is right around the corner, and hitting it next month doesnt seem unreasonable. The Fed will continue to distance itself from the 6.5% threshold, but markets have already discarded it as meaningless. Perhaps the takeaway is that the Feds challenges will be to amend its forward guidance language to a more qualitative measure. Heres how the commitment to ZIRP has changed over the years. December 2008: Fed cuts FF target to 0%, exceptionally low levels for some time August 2011: at least mid-2013 January 2012: through late 2014 September 2012: through at least mid-2015 December 2012: UR at 6.5% January 2014 and beyond: TBD Under Greenspan, the Fed was about as forthright as Bill OBrien to a PSU recruit. Bernanke wanted to increase transparency, but obviously has no blueprint. I think the failed experiment with the UR may sting for a bit and Yellen may choose to go back to a stated timeline rather than being tied to an economic release.

LIBOR Outlook This isnt moving anytime soon. Enjoy 0% floating rates for another year. Youre welcome. Fixed Rate Outlook With tapering a known quantity, the data will drive market movements. We believe there is still room for rates to move lower; however, absent bad news the bias is towards higher rates. Continued weakness in the data could quickly reverse this. Last spring the data weakened over the course of several months and the 10yr Treasury dropped to an all-time low. We may not see the bottom again, but if we get a string of weak releases, the 2.70% bottom end of the range could be tested. Rates can definitely push higher, but Fridays disappointing job reports probably keeps a lid on them until at least the next report in early February.

This Week About a million data releases this week and numerous Fed speeches should keep volatility up.

Generally, this material is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Your receipt of this material does not create a client relationship with us and we are not acting as fiduciary or advisory capacity to you by providing the information herein. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice. This material may contain information that is privileged, confidential, legally privileged, and/or exempt from disclosure under applicable law. Though the information herein may discuss certain legal and tax aspects of financial instruments, Pensford Financial Group, LLC does not provide legal or tax advice. The contents herein are the copyright material of Pensford Financial Group, LLC and shall not be copied, reproduced, or redistributed without the express written permission of Pensford Financial Group, LLC.