Tomorrow’s payrolls report could be a disaster

train wreck

Let’s be clear: it is impossible to predict economic numbers. But prediction is not the job of a speculator. More importantly, one has to evaluate the impact of good or bad news. I can’t predict future events, but I can predict (with a certain probability) how the crowd might react to a positive or negative event. And I believe that it is very likely that either good or bad news from tomorrow’s non-farm payrolls report will be interpreted as bad news.

The positive event would be a better than expected payroll number. Mr. Market is already concerned of a possible end of QE3. In February I discussed how strongly Fed operations have influenced stocks. The current correlation between market gains and the Fed’s POMO activity is scary.

But what about a weaker than expected payrolls number? I think market sentiment is shifting towards the notion that more QE wouldn’t help the economy. We experienced negative market reaction after positive economic news earlier this week when ISM numbers were released.

The basic issue is that the Fed cannot do the government’s job and bring structural changes to the US economic and taxation landscape. I believe the central bank should not have that dual mandate, because it keeps the pressure off the government to get stuff done. That’s, by the way, a Republican position (GOP vs. the Fed). For the record: I’m neither Republican nor Democrat, I’m German.

Granted, you could argue that the ECB’s single mandate (just responsible for controlling inflation) hasn’t been successful either. Short-term, I agree. Long-term, we’ll see. Countries like Italy, Spain and France need to liberalize their labor markets and, believe it or not, at least Spain has started to do just that. Germany went through this process 10 years ago and look how the economy is doing today: the unemployment rate stands at 5.4%. You will not go through the pain of change if you can rely on the low-interest rate drug. Maybe the market will realize that tomorrow.

Meantime, I’m mostly in cash.

Photo Credit: robynejay