There was much anticipation in advance of Friday’s Labor Department employment report for February. The report has a reputation for often coming in with a big surprise in one direction or the other that creates a dramatic market response. This time it did not. The consensus forecast was that 213,000 new jobs were created in February, and the unemployment rate would remain at 8.3%. The actual report was that 227,000 new jobs were created, and the unemployment rate remained at 8.3%.
It was not a big surprise, but even so, it was a positive report for sure. But market reaction was surprisingly muted.
The big news in Europe was that officials in Greece were successful in coercing holders of Greek debt into swapping their old bonds for new bonds valued at much less, amounting to a ‘voluntary’ loss of roughly 70% on their investments. It was a major hurdle that had to be cleared in order for Greece to obtain its second massive bailout of the last two years.
It was also positive news. But market reaction was muted.
Why weren’t these reports, one showing continued strength in the U.S. economic recovery, the other pushing the concerns about a messy Greek default further into the background, greeted more robustly by markets?
Because the game has changed.
Last October the worry was that the significant summer slowdown had the U.S. economy sliding into recession again, and in Europe that another bailout of Greece was not going to happen.
At that point, improvements in U.S. economic reports unexpectedly began to show up, as did indications that eurozone officials were determined to find a way to save Greece from default after all. They became game-changing reports. The scary global market declines of the summer began to reverse, and global markets were soon in impressive rallies.
As it became ever more evident that the U.S. economic recovery was exceeding expectations, and that the Greek crisis was going to be resolved favorably, those positive outcomes were increasingly factored into stock prices.
However, recent economic reports reveal how much the game may be changing again.
As we all know, European countries began imposing harsh austerity measures on their economies last year, in an effort to begin cutting into their record debt levels. Some economists, including the U.S. Fed, warned it was too soon in the anemic global recovery to do so.
By late last year economic growth in Europe was already losing the conflict with the harsh austerity measures. The economies of the 17-nation eurozone shrank 0.3% in the fourth quarter, and the European Commission forecasts a recession of the same magnitude will continue this year.
The International Monetary Fund recently warned that “The global economy is at a precarious stage and downside risks have risen sharply.” The IMF cited the economic slowdown in Europe as the likely catalyst, warning it would also “drag China’s important growth lower”.
So perhaps the negative news from China this week should not be surprising. With roughly 20% of its exports normally going to Europe, China’s industrial output slowed in January and February to its lowest level since July, 2009.
Meanwhile Japan, the world’s second largest economy, reported its trade deficit hit a new record high as its exports slowed. And Brazil, the world’s 7th largest economy, reported its GDP growth rate slid to just 1.4% in the fourth quarter from a year ago, and blamed the developing recession in Europe.
In the U.S., mixed in with the still mostly positive economic reports in the headlines have been reports that Durable Goods Orders unexpectedly fell 4.0% in January after rising 3.2% in December, factory orders unexpectedly fell in January, as did Construction Spending, while the ISM Mfg Index unexpectedly declined in February.
And this week it was reported that the U.S. trade deficit widened by 4.3% in January to its largest gap between imports and exports since October, 2008.
So the game is possibly reversing from last October, when the surprise reports began showing the U.S. economy was improving impressively and might even manage to become the salvation of the entire global economy.
Now worries are increasing that the rest of the world may drag the U.S. down.
The Fed has said it stands ready to provide another round of stimulus if the economy falters again. But the market is worried that the strong jobs report on Friday may influence the Fed to wait longer than it might have if another round of stimulus becomes necessary.
That was the problem in each of the last two summers. The Fed waited until the stock market was down 20%, on the verge of dropping into a bear market, and the economy was on the verge of sliding further into recession before it stepped in with QE2 in 2010, and ‘Operation Twist’ last year.
Surely that won’t happen again, in this, an election year.
However, that concern may explain the market reactions to Friday’s big positive news events, that the employment picture in the U.S. improved faster than forecasts again in February, and that Greece cleared a major hurdle in resolving its debt crisis.
Those are probably no longer the front-burner concerns.