INVESTMENT REPORTER
The markets are wrestling with a problem: If the recovery has begun, where are the jobs? One answer says jobs are a lagging indicator and the unemployment rate will begin to decline in the next few months. Another says the recovery will turn into a double dip recession.
On Friday, investors favoured the former response, getting more comfortable with the idea that interest rates aren't going up any time soon with so many people out of work.
That thinking will get put to the test over the next few trading sessions, during a week light on new economic data. We'll see U.S. import and export trends released on Friday, along with the University of Michigan's monthly consumer sentiment survey. And on Thursday the U.S. Treasury will give a monthly update on the ballooning size of the federal deficit. But the true meaning of the jobless numbers are going to overhang the market all week.
Investors became more comfortable with the idea of high unemployment and booming markets in the 1990s when the phrase "jobless recovery" entered the lexicon. But can that notion hold up today, when so many of the economic numbers have grown alarming.
Consider that as the U.S. economy was losing nearly three million jobs this year, the Dow Jones industrial average soared 55 per cent and the broader S&P 500 index rocketed 60 per cent.
The latest jobless figures released Friday in both the U.S. and Canada were disappointing. Canada's jobless rate jumped to 8.6 per cent from 8.4 per cent, while unemployment in the U.S. reached double digits, climbing to 10.2 per cent from 9.8 per cent. Worse than that, the underemployment rate, which considers people who have quit looking as well as part-timers looking for full-time work, struck a record 17.5 per cent. And that's with President Barack Obama's $787-billion (U.S.) stimulus package supporting the economy.
How do companies sell their products when so many people are worrying about keeping their jobs or getting a new one?
Economists suggested that Friday's 3 per cent drop in oil prices resulted from the jobless figures, with investors worrying that U.S. demand will weaken. But the same day, shares of Macy's Inc., the second largest department store in the U.S., rose 6 per cent after bullish comments from JPMorgan Chase & Co.
The seeming disconnect between individual economic hardship and the market's wealth results partly from the actions of the world's main central banks. U.S. Federal Reserve chairman Ben Bernanke indicated that rates won't rise until there's improvement in what the Fed called "resource slack," which includes both underutilized equipment in factories and unemployed workers in the market.
So investors will draw confidence from the latest unemployment figures, because they mean that the Fed won't move to protect the greenback. Low rates and a weak dollar should extend the run for stocks, commodities and even gold, which struck a new high on Friday.
But the disconnect cannot continue for long.
"If we don't get the upturn we anticipate for U.S. employment in 2010, America's economy will wither as the boosts from fiscal stimulus and inventory restocking run dry later next year," warned Avery Shenfeld, chief economist at CIBC World Markets. "And as we saw in 2009, far too many Canadian jobs depend on America's fortunes to put our unemployment troubles behind us on our own."
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COMMODITIES
The price of natural gas looks like it may have reached a bottom based on the price ratio of oil to natural gas. In recent weeks, the ratio has collapsed from a high of almost 36 to almost 16, but it still remains at a 25-year high.
"The price ratio is not sustainable," said Rasim Jafarov, an associate economist with DundeeWealth. "I firmly believe natural gas has reached a bottom."
