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Daily Market Commentary

Jobs are all the talk this morning.  US Nonfarm payrolls came out weaker than expected at 18,000 new jobs created for December.  70,000 was expected (and 114,000 were created in November) making this number in "thud" territory, much like Wednesday's ISM report.  This is more ugly economic news that points to further rate cuts from the Fed.  In fact, the odds of a 50 basis point rate cut at the Jan 30 meeting (as measured by Fed Funds futures action) has more than doubled to 25% since last week. 


                Employment is a lagging indicator, as it's difficult to fire someone.  Head counts are reduced after the losses are taken, as we are now seeing from the big US financials.  The current weakness in jobs numbers results from the beginning of the subprime crisis several months ago.  The question now is, how long will it last?


  Expect the Fed's current lingering concern about inflation to fade at the next couple of meetings.  Without growth in employment, inflation in the short term will fade significantly, regardless of what energy prices are doing.  Longer term trends are still arguable (as in - are we still in a disinflationary cycle that has lasted the past 25 years), but in the short term, it's hard for inflation to persist when consumers don't have money to spend.



  The sentiment in the market has changed somewhat.  Several months ago weak-ish releases like this were cheered by the equity markets as it was a sign that the Fed would ease and increase the availability of credit.  Now, however, the tone is decidedly more bearish.  Government bonds rally and equity futures drop on a release like this.  Corporate credit spreads widen somewhat, and the TED spread has also moved out a little this morning.


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