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Tapering? Bonds and gold say ‘yes.’ Stocks not so sure

The stock market has a wishy-washy view of the U.S. jobs report compared to the definitive views of, say, the bond market and gold.

The U.S. Labor Department reported on Friday that payrolls expanded by 195,000 positions in June, 30,000 above economists' expectations. Even more positive, payrolls gains in April and May were revised upward by a total of 70,000. And while the unemployment rate merely held steady, at 7.6 per cent, this was due to more people looking for work.

The report is upbeat for Main Street. But what about Wall Street, where economic improvements bolster the Federal Reserve's intention to wind down its bond-buying stimulus program known as quantitative easing, or QE?

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The bond market is confident the jobs report will push the Fed into shifting its monetary policy. The yield on the 10-year U.S. Treasury bond surged to 2.7 per cent on Friday, to a fresh two-year high, up about 20 basis points. The gold market appears equally convinced that the era of easy money – and the threat of spiralling inflation and the demise of the U.S. dollar that were supposed to go with it – is drawing to a close. Gold slumped to $1,214 (U.S.) an ounce, down $36, approaching its June low and closing in on a three-year low.

But the stock market isn't so sure about the Fed's reaction, or at least it hasn't yet figured out if the tapering of Fed stimulus is good or bad when it accompanies an improving economy. Initially, U.S. stocks moved higher with the jobs report, then retreated into the red. In late-morning trading, the S&P 500 was up 4 points, to 1,620 – up, but hardly celebratory.

Here are a few thoughts from observers on how the jobs reports fits in with Fed policy.

Avery Shenfeld, CIBC World Markets: "...the stable unemployment rate extends the clock for reaching the levels needed to wind down QE. That combination, more QE and decent growth, should be viewed as a plus for equities."

Stéfane Marion, National Bank Financial: " This report is by and large consistent with a tapering of QE by the federal reserves. The yield on 10-year Treasuries is moving up, a situation that will impact negatively dividend-yielding stocks."

Jennifer Lee, BMO Nesbitt Burns: "It wasn't a mind-blowing 'Wow, I didn't see that coming!' kind of number but U.S. nonfarm payrolls painted a pretty optimistic portrait of the labour market and leaves the call for the Federal Reserve to begin slowing their asset purchases in the fall intact."

Paul Dales, Capital Economics: "Any doubts (or hopes!) that the Fed wouldn't follow through on its plan to taper QE3 later this year in response to some of the recent weaker activity data were dealt a major blow by the 195,000 increase in payroll employment in June. The resulting 20 basis point leap in 10-year Treasury yields suggests the markets are fast adopting our view that QE3 tapering will begin in September."

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More


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