Monetary Policy Easy Way

Online, December 26, 2010 (Newswire.com) - When the employment report for September was published it was generally perceived as showing that the U.S. employment situation is not improving or actually worsening. The contrary conclusion could however be reached from employment data from the household survey (See Employment Is Rising Fast) and from other indicators (See Follow up: Employment Is Growing Fast). On that basis one could also conclude that the stock market will break out of its three months trading range on the upside.

The October employment data indicated that our interpretation was right. Not only was the increase in payrolls (+151,000) much larger than average expectations, but prior months data were revised up (+110,000). More recent data also point to a stronger economy. Thus, the latest PMI index (Oct) and Philadelphia Fed manufacturing index (Nov) were up (chart 1). The Fed manufacturing production (Oct) and the Chicago national activity index (Nov) increased (chart 2) and most other regional Fed surveys were up. Retail sales were also stronger than expected. Finally, initial unemployment claims recently broke to the downside
All of these would have been proof enough that the economy is accelerating sufficiently to get us out of the soft patch, were it not for a long string of geopolitical, international, domestic political and legal developments that are threatening the budding acceleration. These include: 1. The democrats failure in the elections weakening the present administration, 2. The failure of the U.S. in the G20, 3. The stuttering Obama trip to Asia, 4. The attack on the Fed's QE2, weakening the last institution the US public could rely on, 5. The foreclosure problem and the involvement of the attorneys general in it, 6. The lawsuits against the banks that produced the MBSs, led by Fannie and Freddie, 7. The refusal of China to float the Yuan, 8. The tightening of monetary policy in China and the drop of the Shanghai index, 9. The Ireland/Spain problem, 10. The North/South Korea fight, etc.

Against this background it is possible that the economic improvement will fail. More likely it will just be delayed. And the same applies to the stock market rally.