The economic news continues to be terrible. The knee jerk reaction; sell off the equity markets run into U.S. treasuries. This type of action would only make sense to the person who ran directly from his cabin into the galley on the Titanic and felt he had gained safety. Furthermore, this fatuous trade into T-bonds has place a brainless bid into the U.S.$.

Allow me to be extremely clear, the worse the economic numbers are the more stimulus will be needed leading to an even bigger debt burden. This is ultimately not good for T-bond prices. However, when T-bond prices ultimately collapse is not easy to foresee because of Fed intervention. On the other hand, for the U.S.$ the picture is vivid. Negative economic news means further Fed intervention which strengthens the case for an even weaker U.S.$….

ECONX Employment Report Weakens Significantly
The employment report came in worse than expected in September. The consensus expected the labor situation to improve and projected payrolls to decline by only 175,000. Instead of an improvement, payrolls fell 263,000 — worse than even the ADP employment report projected.

The unemployment rate declined 0.1 percentage points to 9.8%, exactly what the consensus was expecting. However, the unemployment rate is very misleading. The civilian labor force declined 571,000 in September compared to an increase in the labor force of 73,000 in August. If the labor force held steady in September, the unemployment rate would have increased to 10.2%! …

Total private weekly hours worked declined 0.1 hours to 33.0, below the consensus expectation of 33.1. Further, hourly pay only increased 0.1%, also below consensus expectations. The drop in hours worked and the lack of a strong increase in pay pushed weekly earnings down 0.2% and will lead to lower consumption from people that have maintained their jobs over the last month…

Looking at the payrolls a little more closely, there is no sign of an improvement in employment in the near future. Government payrolls declined 53,000 as state and local government budget cuts forced out workers. Construction and manufacturing employment declined by a combined 115,000. Service-providing firms shed 147,000 jobs as retail trade lost 39,000 jobs, business and professional service lost 8,000 jobs, and leisure and hospitality employment declined 9,000. Only the education and health service sector posted positive employment gains, but the increase was extremely small with only 3,000 new jobs.

…So, after a week of hawkish comments from various Fed governors what do we hear in the wake of these negative economic numbers? Don’t forget, the G20 meeting is now a distant memory….

Fed’s Pianalto says pace of Fed pullback depends on how econ conditions unfold – DJ

DJ reports the pace at which the Federal Reserve will withdraw its support from the economy when the time is right depends on how economic conditions evolve, said Sandra Pianalto, President of the Federal Reserve Bank of Cleveland.

Responding to audience questions after delivering prepared remarks at the Down Town Association in New York, Pianalto reiterated her view that the Fed’s current accommodative policy is appropriate, and said that at this point it is difficult to determine just how fast the Fed will eventually remove its easy policy. “It’s going to rely on how economic conditions unfold,” she said. “We’ll continue to monitor how economic conditions unfold and then act appropriately.” Pianalto reiterated comments from her prepared remarks that she anticipates a gradual recovery and bumps along the road. She said she hopes “they’re just bumps and not shocks,” because “another shock could be very detrimental.”

Fed’s Rosengren says Fed will stay until clear econ can keep improving without help – DJ
Rosengren says expects to see positive growth in Q3, Q4

…All of the above thoughts lead us to the obvious question: what is next for the equity markets? Is the sell off on the negative news a beginning of an October rout or simply another normal retracement? Well, we will of course need to monitor the uptrend and see if support holds. However, for now I will simply comment that the credit markets are not confirming the weakness in equities as of yet. Mike Johnson form M.S. Howells says it best when he wrote this morning….

….Credit sell-off confirmation is nearly non-existent. TARP-Supported Preferred Equity Index (TSPEI) was only down 0.05% on Thursday with KEY, JPM, HBAN, GS, BK, C, and USB preferred equity members all posting gains. Given the low after tax cost of debt financing and the minuscule returns available to executives hoarding cash, we expect to see an increase in the number of executives announcing new debt-financed equity buybacks this earnings season.