April 6, 2010 Morgan Stanley Strategy Forum $SPY $USO

The labor market is showing signs of gradual healing. Friday's report showed payrolls rising 162,000 in March, with net upward revisions of 62,000 to Jan/Feb. Census related hiring totaled a less-than-anticipated 48,000, sothe ex-census increase in jobs totaled 176,000, versus our forecast of +150,000.The report also provided more support for the notion that the unemployment rate has peaked for this cycle. In fact, the household survey showed another month of very strong employment growth (+264,000).From a broader perspective, a pickup in employment growth is inevitable given that the economy's output has started to expand. History tells us that a rapid rise in productivity is fairly typical during the early stages of economic recovery, but this surge in productivity cannot be sustained indefinitely. Additional labor will be needed to sustain the rise in output.

US/Washington/POLITICS $SPY

         Fed's Kohn comments echo tone from recent minutes – eco still weak although slowly recovery; eco operating well below potential; inflation isn't going to be a problem; rates to remain low for extended period.  "I last spoke on the economic outlook in October, and my views since then remain largely unchanged".  Kohn notes that home sales have stalled recently.  Says while signs of recovery are emerging in jobs, "the labor market remains extremely weak".  Says core inflation rates have shown a substantial deceleration.  That said, he isn't calling for deflation – "I anticipate that inflation will remain low for a while, with core PCE inflation not likely to fall much further from the subdued pace I cited a few minutes ago".  Kohn repeats "extended period" - the Federal Open Market Committee has stated that the current exceptionally low level of interest rates is likely to be required for "an extended period" to make progress toward our legislative goals of maximum employment and stable prices.  However, he also says the Fed can't leave policy at current levels forever – "we will also want to be sure that we haven't left highly accommodative policy in place so long that economic and financial conditions become conducive to future inflation. Given the lags in the effects of monetary policy, that means we will not be able to wait until the unemployment rate is down close to its long-term level" link 

INTERNATIONAL NEWS WRAP; Euro zone inflation; Eurozone growth outlook; Greece plans to sell a global bond in dollars in late April or early May

         Euro zone inflation was much higher than expected in March; Inflation in the 16-country area was 1.5 percent year-on-year, the highest since December 2008, after 0.9 percent in February; the 1.5% compares w/expectations of a 1.1% increase.  Reuters 

         Eurozone unemployment inline - The euro zone's 10 percent jobless rate in February was the highest since August 1998 and in line with market expectations.  Reuters

         German jobs #s surprise on upside - The number of people registered as unemployed dropped by 31,000 in March to 3.568 million, defying expectations for an increase by 10,000 (DJ)  

         Eurozone – new S&P report on the region's eco growth outlook; S&P views the overall recovery in member countries as still fragile, which calls into question the single currency zone's growth model, as detailed in the article "The Eurozone's Two Growth Models Collide," 

         ECB lends banks less than forecast; The European Central Bank will lend banks less than economists forecast in its final offer of unlimited funds over six months.  Sixty two banks bid for 17.9 billion euros ($24.1 billion).  Economists forecast that it would lend 60 billion euros – Bloomberg 

What Is Wrong With the Job Market and How to Fix It Mark Zandi

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The Great Recession ended last summer, as the nation’s GDP began expanding again, but this growth has not been sufficient to stem the loss of jobs—now more than 8 million and counting—or the rising unemployment rate that now sits in the double digits.1 The job market is arguably as bad as it has been since the Great Depression, with nearly every industry, occupation, and region of the country suffering from weak labor demand. Layoffs have abated since the financial panic of a year ago, but the number of forced separations remains uncomfortably high. Even worse, hiring and job creation remain dormant.

Image via Wikipedia

Image via Wikipedia

The struggling job market is the most serious threat to the fledgling economic recovery. In a typical business cycle, recession occurs when consumer and business demand is undermined by a shock such as a surge in oil prices, a stock market crash, or—as in the current cycle—the bursting of a house price bubble. Businesses respond by slashing investment and payrolls to cut costs and stabilize profits. As they do, investors, who had driven down stock prices leading up to the recession, now bid prices up. With better profit margins and higher stock prices, businesses stop cutting and recession gives way to recovery. A self-sustaining expansion takes hold when businesses feel comfortable enough to invest and hire. In the current business cycle, profits and stock prices have risen, businesses have stopped cutting, and recovery has begun. But because employers have yet to resume hiring, expansion remains elusive.

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