Jobs Report and QE2

Surprisingly the BLS reported today that jobs gained 39,000 and the unemployment rate moved up to 9.8%, the highest rate since April.  Private payrolls gained a mere 50,000 compared to expectations of upwards of 160,000.  Both jobs and the unemployment rate were worse than every single economist estimate, which has us noting that economists and forecasters as a group are an optimistic group.

Here are the details of the jobs report this morning:

• Payrolls increased 39,000, less than the most pessimistic projection of economists surveyed by Bloomberg News, after a revised 172,000 increase the prior month, Labor Department figures showed today in Washington.
• The jobless rate rose to 9.8 percent, the highest since April, while hours worked and earnings stagnated.
• The unemployment rate was forecast to hold at 9.6 percent, according to the median prediction of 83 economists surveyed by Bloomberg. Estimates ranged from 9.4 percent to 9.7 percent.
• Overall payrolls were forecast to climb by 150,000, according to the survey median, with estimates ranging from 75,000 to 200,000.
• The report also showed an increase in the number of long-term unemployed Americans. The number of people unemployed for 27 weeks or more increased as a percentage of all jobless, to 41.9 percent, the highest since August.

Keep in mind, were it not for millions of people allegedly dropping out of the labor force over the last year as their benefits ran out, the unemployment rate could be over 12%.

So with this poor jobs report shouldn't the markets be declining in reaction?  Shouldn't the market sell off on the bad news?  The answer would normally be yes - however, with the Federal Reserve providing QE2, market participants believe lower employment growth means more QE (maybe even QE3), which adds a underlying layer of support to the market and keeps investors confident in the economy and capital markets.

While adding some confidence to the capital markets, QE2 has not helped the interest rate picture.  Interest rates, across the board, have actually been spiking since the announcement of the QE2 program on November 3.  See chart below.



It turns out (as many believe) the Federal Reserve is more or less powerless to lower rates from prevailing levels.  QE2 was likely not really designed to drive rates down from current levels but merely to try to prevent a dramatic rise in interest rates and to promote more stability in the capital markets.

So the paradox we discussed in October regarding interest rates is beginning to be resolved.  Excess liquidity provided by the Fed is now starting to create expectations of future inflation and causing bond yields to rise (prices drop), whether or not this is the beginning of a new trend remains to be seen.