asset management

Market Letter (Apr 06, 2012)

Markets today: Labor Markets: Mar Non-farm payrolls stunned on the downside (120K vs. 205K [est] & 227K [Feb]) as private sector job creation plunged (121K vs. 215K [est] & 233K [Feb]), trailing by a wide margin the gains seen in the recent ADP report on private employment (209K [Mar]). Revisions to prior two months added only a modest 4K: Feb (9K) and Jan (13K). Mar marks the eighteenth straight monthly increase in payroll employment, which has grown by 2.936mn (or 163k per month) during this period. Its 3-month moving average now stands at 212K (34K). Within private payrolls, the Goods-producing sector added 31K jobs (2K), as payrolls in manufacturing (37K; 6K) and mining (1K) rose, while those in construction fell further (7K). However job creation in the Service-providing sector decelerated sharply (90K vs. 204K), as all its constituents except Financial Services (15K) printed weak. Unexpected negative swing in Temp hiring (7.5K vs. 55K [Feb]) and slowdown in transportation/warehousing (3K vs. 14K), extended and faster decline in Retail Trade (34K vs. 28.6K [Feb]), and retracement from the Feb spike in healthcare and social services (26K vs. 52.8K) accounted for the negative surprise in todays payroll data. In the government sector, Federal jobs flat-lined due to postal lay-offs (2K), while State jobs grew for a second month in a row (2K). Local government layoffs however continued (3K), led by education. Nonetheless, government job losses have moderated sequentially. On a 12-month roll those now total 200K (vs. 322K [Mar11]). Both average workweek (34.5; 0.1hr) and manufacturing workweek (40.7; 0.3hr) edged lower, but factory overtime remained unchanged (3.4hr). Average hourly earnings however rose to $23.39 (0.2%) and its accelerating YoY gain (2.1%) is narrowing the gap with headline CPI (2.9% [Feb]). Household Survey reported a surprise dip in Unemployment Rate (8.2% vs. 8.3% [est & Feb]), as the number of employed dropped at a slower pace (31K) than the size of the labor force (164K). Number of unemployed also declined (12.67mn; 133K), of which those who have been jobless for 27 weeks or more fell to 5.308mn (118K), or 42.5% (0.1%). Interestingly, the number of workers marginally attached to the labor force (2.352mn; 256K) as well as involuntary part-timers (7.67mn; 447K) too fell sharply, the latter pulling down the broad measure of unemployment/underemployment to 14.5% (0.4%). At an aggregate level, labor force participation (63.8; 0.1%) and employment-population ratio (58.5; 0.1%) edged down slightly. Consumer Credit: Feb Consumer Credit slowed more than anticipated ($8.7bn vs. $12bn [est] & $18.6bn [Jan]) to its lowest level since Oct, as credit card debt fell further ($2.2bn vs. $3bn) and non-revolving credit moderated. NY: Equity futures sold off instantly upon the release of the Mar Employment report. Treasuries witnessed a massive curve flattening in abridged trading. Dollar lost ground to EUR and GBP and took a severe beating from JPY, as safe haven flows lifted JPY in crosses. However it rose against CAD and MXN. All markets re-open on Mon after Easter. Weekly Close: Dow (13060, 0.65%); S&P (1398, 0.4%); NASDAQ (3080.5, 0.48%); R2K (818, 1.7%); VIX (16.7, 7.8%); 10yr (2.055, 15.6bp); 2/10 (174, 14bp); FN4.0 (73, 4bp); EUR (1.3096, 1.9%); DXY (79.8, 1%); CRB (306, 0.6%); Oil (103.31, 0.3%); Ngas (2.09, 1.7%); Au (1628, 1.4%); Ag (31.73, 0.8%); Cu (3.796, ---). Macro Outlook: We are intrigued by todays payroll data, especially with regard to private payrolls. While we could explain away its divergence from estimates, including our own, in terms of calendar effects induced by unseasonable weather and data pivots, we still have to respect the tape because it is the truth, at least for now. Even as it may provide more fodder for the structural versus cyclical unemployment debate, there is little doubt that there has been some quiet thawing in the labor markets over time, perhaps more noticeably from last Nov. Numerically, private payrolls have had a growth streak that has lasted for 25 months now and added 4.05mn jobs (or 162K per month); with a 3-month moving average of 210K (38K), which though far from sufficient, is what is keeping the wheels of employment turning. Government payrolls during the same period have gone only one way down. But they seem to be bottoming of late, so much so that their 3-month moving average showed a modest uptick of 1K per latest data.

This proprietary and confidential document is a market commentary meant for informational purpose only and not an advice or solicitation or an offer to enter into any transaction.

Marco Polo Asset Management

75 Broad Street, New York

asset management

Our models had predicted a stronger payroll number taking into consideration a number of input variables, such as claims (notably during the survey week), Fed communications and regional surveys, PMIs, forward looking confidence measures, consumer spending and retail sales, credit and monetary aggregates, etc. as well as serial correlations. While our forecast did not materialize, there is clearly some disconnect between NFP and ADP, as well as between strong retail (and same store) sales and sharply weak retail trade jobs, temp hiring, etc. Besides, workweeks contracted and overtime stagnated, while hourly earnings rose. Together those point to lower levels of productivity. At the same time, economic growth forecasts ranging from the Fed to private sources peg 2012 GDP to around 2.5%. In such a scenario, job creation in the economy will have to come in at a much higher rate than what the March number currently states. Also, our own GDP forecast for 2012, where we use a blended approach, is tracking 3% at this stage, with some upside risk. Therefore we expect March payroll number to be revised up and do not think it presages the path of employment growth in the months ahead. We remain more sanguine on that front. Portfolio Strategy: Risk-off sentiment is set to plow through the markets following payroll data. Earnings season would be the nearterm catalyst for risk. That being said, market sell-off at this stage could be relatively short-lived in our view. While renewed chatter over QE3 is not the least of the factors that guides this view, we also see growth outlook, sticky consumer spending, continued moderate credit expansion, and decent equity valuations as important variables that would support capital allocations into US equities and fixed income. Additionally, performance chasing, relative stability in funding markets, larger EU liquidity firewall, LTRO backstopping auctions, positive PMI surprises from China, and stimulus in Japan serve as useful backdrops. Into next week, we expect 1333 on S&P to hold post 1375 and Treasuries to push higher with 10Y holding ~1.90. We remain long swap spreads at the front-end of the curve as a macro hedge. Next couple of weeks may also give insights into possible allocation shifts, which we look forward to. Shiva Ganapathy (See marcopoloam.com for more)

This proprietary and confidential document is a market commentary meant for informational purpose only and not an advice or solicitation or an offer to enter into any transaction.

Marco Polo Asset Management

75 Broad Street, New York