Experts Talk Market Volatility, Greek Fallout, U.S. Jobs
Businessweek.com compiles comments from Wall Street economists and strategists on the key economic and market topics of May 7.
Kim Rupert and Michael Wallace, Action Economics
Treasuries have caught a bid after yields jumped a couple of basis points following the better-than-expected jobs data. Some traders focused on the less impressive stats out of the report, including the flat earnings figure and the rise in the unemployment rate. But mostly the recovery in Treasuries is a result of ongoing uncertainties over the situation in the euro zone periphery [amid] skepticism the Group of Seven industrialized nations will come up with anything meaningful for the near term. According to U.S. officials, they seem to believe after today's conference call that euro zone officials now have a better appreciation for the problems and are examining all options.
Meanwhile, [credit] spreads have blown out again, volatility is rising, while losses in stocks have deepened.
Nick Bennenbroek, Wells Fargo Bank
Currencies are for the most part correcting Thursday's moves, in what nonetheless remain very volatile trading conditions. Most European currencies are higher, including the euro, with regional data firm and the German Upper House—importantly—approving the bill on financial aid for Greece. European leaders meeting in Brussels today, and there is a press conference scheduled for tonight European time. The pound is sharply lower, however, with the U.K. general election resulting in the hung Parliament that opinion polls had predicted.
While FX markets are reversing some of yesterday's moves, stresses are still very evident in regional money and bond markets—interbank money-market rates are up, and some peripheral bond yields are still moving higher. Added to today's mix are very strong employment reports from the U.S. and Canada, a factor that is reinforcing the gains seen in commodity and emerging currencies. While the gains in European, commodity, and emerging currencies are welcome, we will be more convinced about the sustainability of these moves should conditions in European bond and money markets start improving as well.
David Joy, Columbia Management
The sell-off in the U.S. comes in response to fears that the debt crisis in Greece could spread beyond its borders to other over-indebted nations within the European Union. But more than that, investors look at the indebtedness of the U.S. and wonder if such an outcome could happen here. The answer is that, theoretically, it could—unless we get serious about reducing our own budget deficit and the rate of growth in our public debt.
But the situation in the U.S. is very different from Greece. Our economy is stronger, more diverse, and is growing. Our access to international capital markets remains solid. Greece is small, its economy is contracting, and it does not enjoy competitive access to global funding markets. That should not result in complacency about our situation, however. We would be well-advised to get our own house in order—the sooner, the better.
The more immediate concern of the crisis in Greece is its potential impact on the budding global economic recovery. These events are deflationary. They will dampen what is already expected to be a sluggish recovery in the EU this year. The flow of credit could be impaired once again if European banks turn cautious. European banking exposure to Greek debt is in the vicinity of $200 billion—not an insignificant amount, but manageable. Should a contagion spread to Spain, it would be a different story. Bank exposure to Spain is in the range of $800 billion.
In addition, investor psychology has been improving recently. U.S. retail flows into domestic equity funds were just now beginning to turn positive, more than a year after the market bottom. This crisis, and Thursday's sell-off, will undoubtedly put a dent in that improving sentiment.
However, these events, and Thursday's plunge in particular, do not mean the end of the global recovery. In fact, it likely means the maintenance of an accommodative monetary policy for an even longer period. Furthermore, many investors had been looking for a correction somewhere along the way, since we had not had one during the entire recovery from the March 2009 lows. And many of those investors were looking for a correction as an opportunity to recommit to equity markets. That is not to suggest that we can definitively say where this episode bottoms out.
David H. Resler, Nomura Securities
The long-awaited jobs recovery is under way and gathering some steam. That's the takeaway from today's report from the Bureau of Labor Statistics showing that U.S. nonfarm payrolls rose 290,000 [in April] and included a 231,000 jump in private-sector payrolls. Both were the biggest monthly gain in four years. Moreover, revisions to both February and March show that employment increased in those two months by 121,000 more than the previous estimate. Adding to our enthusiasm, the [payrolls] gain was broad-based and included a 44,000 rise in manufacturing employment, the biggest monthly increase in nearly 12 years.
Construction employment increased by 14,000 after a 26,000 increase in March, the first back-to-back increases since July/August 2006. However, all the job gains here came in nonresidential construction jobs while residential construction employment fell by about 11,000, suggesting the housing recovery has not yet gained the traction that the manufacturing sector has. Most service-producing industries reported increased hiring with private-sector payrolls up a total of 166,000.
One surprise to the downside, however, was that the Census-related hiring was just 66,000, much smaller than most forecasters had expected. It now looks likely that the decennial Census hiring this year will be considerably smaller than in 2000.
Somewhat tempering the tone of the employment picture, the jobless rate unexpectedly rose from 9.7 percent to 9.9 percent. The increase however reflects an underlying development that is not altogether bad news. Namely, the improving job market appears to be coaxing more workers back into the labor market as the labor force participation rate jumped 0.3 percent to 65.2 percent.
Overall, this report establishes a persuasive case that the long-awaited jobs recovery is under way. That will help ensure continued income growth to support spending and a self-sustaining economic recovery.