Markets Lower, But Showing Surprising Resilience Given Dismal Labor Report

November 6, 2009 – The markets are opening lower this morning on the worse-than-expected Nonfarm Payrolls report.

The Labor Department said the economy lost 190,000 jobs in October, lifting the unemployment rate to 10.2%, the highest level since 1983. Expectations were for 175,000 jobs lost. 7.3 million people have lost their jobs since the start of the recession. In October, the number of unemployed persons increased by 558,000 to 15.7 million. In order to get back to that point, employers would have to add back 500,000 jobs per month for the next 14.6 months.

So many pundits and economists are telling us that we are out of the recession. To be sure, the economy did expand in the Q3 so technically they are right. But that is all just a result of the government’s debt spending, which is not, in itself sustainable. With unemployment continuing to rise and now over 10%, we don’t see consumers being in a position to contribute to driving the economy any time soon, which will continue to put pressure on the government’s stimulus program.

The outlook for the holiday season is still negative, but employers will do some seasonal hiring so the numbers will likely be impacted accordingly, but expectations are generally that the unemployment rate will likely continue to increase in the coming months.

In terms of other key economic data on tap today, the Federal Reserve will release the consumer credit report for September which is likely to show that consumers reduced their borrowing for the eighth straight month, with credit falling by $10 billion at an annual rate of decline. Given this morning’s employment data, we would expect borrowing to continue to contract for the foreseeable future.

Also on tap, are business wholesale inventories for September from the Commerce Department. Expectations are that businesses cut inventories for the thirteenth straight month, and in September by 1%. Expectations are also that wholesale sales increased by 0.6%.

Interestingly, the dollar is stronger against the euro this a.m. with the euro trading at $1.4859. The reason this is surprising is that with the economic data so dismal, we would expect the increased likelihood of maintained stimulus (debt) spending and interest rates to remain low (no support for the dollar). We would expect the dollar to continue to weaken on this news. The dollar index is at $75.73. We continue to expect this to slide to the $72-$73 level.

Gold is up $5.90 to $1,095.20. Look for gold to push through $1,100 this morning. A bullish consideration, in our opinion, for gold is that gold has been on a tear without any signals of inflation. With the outlook for U.S. debt continuing to be driven by expectations for further spending and less government revenue, the dollar will continue to be under pressure and this will inevitably usher in inflation. We haven’t seen it yet, but it will come. When it does, gold this will be a major catalyst for higher gold prices.

Oil prices are down $1.79 to $77.83. This morning’s economic data is weighing on prices, after rallying yesterday on a report from the Energy Department that inventories declined by 3.94 million barrels last week, higher than the 1.5 million barrels forecast. A softer dollar will also continue to buttress oil prices.

In terms of what we expect in today’s session, stocks are moving lower on the unemployment data but what is surprising at the open is that the selloff is not more pronounced. We are seeing pundits on Bloomberg and other outlets telling us that we should discount the report but we can’t see any reason why to do so.

However, given the asymmetric view of the economy that Wall Street has been taking since June, we wouldn’t be surprised to see traders shrug it off, waiting for the next signal of recovery. This morning’s data reinforces our view that the economy still is facing significant headwinds and corporate earnings will have a hard time justifying current valuations if consumers aren’t able to spend. This just seems to us to be common sense.o