Unenjoyment Day

Hard as it may be to believe, another US non-farm payroll day has rolled around already. Although US employment data is relatively unimportant in the current environment, where we are watching the potential collapse of the global financial system, the combination of the data and the House vote on the promise to make it another Unenjoyment Day.

While the ECB kept rates on hold yesterday, Jean-Claude Trichet appeared to have his own Unenjoyment Day. Gone was the smug demeanour and references to points on his compass; they were replaced by a grim tone, an acknowledgment that downside risks have increased sharply, and an admission that the ECB contemplated whether to cut rates this month. This is obviously quite a volte-face from his previous message; what is interesting is that he stated three times that the ECB could act at any time to ensure an appropriate outcome. This morning, he has stressed that he'll act as necessary to ensure European unity, the first real public reference to the potential fraying of the single currency area.

Now, some commenters in prior posts have maintained that:

a) Trichet didn't actually change his message
b) The ECB shouldn't cut rates
c) Interest rates have no forward-looking impact on the banking system and the real economy.

To paraphrase Willem Buiter's recent piece in the FT, Macro Man wishes them a good Depression.

For those of us who believe that the ECB should and will cut rates, focus shifts to the market implication. A rate cut could easily boost European equities, at least in the short term, so Macro Man will need to factor that into his investment calculus. Certainly the short European equity trade has gone from rewarding to intensely irritating this week.

As noted earlier this week, there should be some upside for European bonds, particularly at the short end. An obvious target for the Schatz future is 105.50, which still represents decent upside from current levels.
Moving on to the payroll stuff, Macro Man has a couple of thoughts. The decline in payroll employment has thus far been extremely modest relative to the last two recessions. Judge for yourself whether or not the current set of circumstances merit a milder than usual employment retrenchment; Macro Man knows which way he is betting.
Of course, the unemployment rate has reacted in a manner that is more consistent with the macro environment. Macro Man's favourite indicator, the "jobs hard to get" component of the consumer confidence data, suggests a further rise in the u-rate.

So why the discrepancy? Some of it could well be sampling error. We get the initial benchmark revision to the survey for the April 2007 - March 2008 year, where the BLS adjusts its previous estimates on the basis of more complete tax return data. No prizes for guessing which way these revisions are likely to point; as an example, for that period the household data averaged 58k per month worse than the payroll data. While there is no guarantee that the household data was right, of course, a downward revision of anywhere near that magnitude will certainly pain the US labour market in a different light.

Not that any of this necessarily matters for asset prices, of course; the TARP vote (and potential European bailout agreement this weekend) is likely to dominate market sentiment. It is eminently possible for the macro data to stink and for equities to rally.

To Macro Man, unfortunately, that would represent another kind of Unenjoyment Day.