Good Friday’s Non-Farm Payrolls report showed that more jobs were created in March than for any month in the past three years. Private payrolls increased by 123,000 in March, the third consecutive increase. The January and February job counts were increased by a combined 62,000, putting the March gain at 224,000 when added together, including 48,000 temporary workers hired for the 2010 census. Employment of temporary workers, considered to be a leading indicator of permanent hiring, climbed in March for a sixth consecutive month but their share in the payroll count is diminishing, showing companies are becoming more optimistic.
The report will have important implications for a variety of asset classes, so let’s look at what could happen.
Stocks are likely to remain on the upswing that began in March 2009 as the S&P 500 moves inevitably to the pre-Lehman collapse level of 1250. In the beginning of the year, I said that the S&P would hit this level by the end of the first quarter and while that didn’t happen, this important benchmark is bound to be reached soon. Simply put, stocks have followed the improving trend in jobs for months and there’s no reason to believe that will change now.
In my opinion, because the recovery appears to be gaining strength, the Fed will drop the “extended period” language by the end of this quarter, possibly at the June meeting, and make its first move before the year ends. The reason is that the Central Bank moved to a 0%-0.25% interest rate policy under “emergency” conditions which no longer exist, and a symbolic move away from this extraordinary stance will act as a signal to the market that it’s gaining confidence in the recovery.
As the market moves to this perception, the dollar will gain against the pound, aussie and yen. It could move especially strong against the euro because, due to the fiscal problems affecting Greece, Ireland, Spain, Portugal and Italy, the ECB will be among the last Central Banks to make a move on rates. The yen seems destined to head towards 100 to the dollar as Japanese investors seek better returns abroad and because it should assume its role as the major funding currency for carry trades.
Rates on government debt will continue to move up as the recovery gains momentum. We’ve already see the 10 year note surpass 3.9%, and a move above 4% by the summer will no doubt be seen. That’s going to affect mortgage rates, which could finish the year around 5.5% for 30 year loans.
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