MARKET STRATEGIST, GFT
EQUITY markets are attempting to shrug aside the civil unrest taking hold across north Africa and the Middle East. Yet the attendant rally in crude oil has taken both Brent and WTI contracts well above $100 per barrel, and this is not looking like a temporary phenomenon. Despite this, stocks rebounded towards the end of last week as investors focused on US jobs data and began to look forward to a strong non-farm payroll number.
Ultimately the report was a disappointment. Although the headline gain of 192,000 jobs was only slightly below the consensus expectation, there had been late whispers that it would come in nearer 250,000. The unemployment rate fell to 8.9 per cent, but the labour force participation rate is stuck at 64.2 per cent, which is a 25-year low. More worryingly, in a country where around 70 per cent of economic activity is driven by consumer demand, average earnings fell.
The Federal Reserve has a dual mandate to maintain price stability and ensure maximum employment. Fed Chairman Ben Bernanke spoke on a number of occasions last week and reiterated his views on both inflation and jobs. By looking at the Fed’s preferred measures, core CPI and the PCE, the chairman still sees no evidence of inflation becoming a problem in the foreseeable future, no matter what has become evident elsewhere in the world. Bernanke also said that he expects the unemployment rate to remain high for years to come, with private sector employment in 2010 barely accommodating fresh entrants into the labour market.
Since November last year, equities have been lifted by the New York Fed’s near-daily $8bn permanent open market operations. This is scheduled to run out at the end of June, by which time $600bn of stimulus (on top of the $1.7 trillion from QE1 and “QE lite”) will have been pumped into the markets via the primary dealers.
With his comments on unemployment and inflation, Ben Bernanke seems to be setting the stage for a further round of Fed asset purchases once QE2 ends this summer. This should keep equity investors happy. However, he’ll have to deal with growing anger at home and abroad as people baulk at his never-ending debt monetisation which manifests itself in spiralling food and fuel prices.