Rally into second day despite weak jobs report

US stock indices have carried yesterday’s momentum through to today, pressing on into positive territory for the week, even though non-farm payrolls undershot estimates by some margin.

Stock futures sold off briefly earlier today, after the eagerly-awaited employment report for January disappointed, but climbed strongly after the stock market opened, with the Dow Jones enjoying triple-digit gains by the early afternoon in New York.

The wider-encompassing S&P 500 performed even more strongly than the Dow on a percentage basis, rising 0.91% to the Dow’s 0.73%, while the NASDAQ 100 rose the most of the three main indices, adding 1.4%, aided by a 12.5% rise in Expedia after the online travel site reported better-than-expected fourth quarter earnings.

Non-farm payrolls came in at just 113,000 for January, well below the 185,000 that had been predicted by a Reuters poll, while the substantial revision to December’s weak level that many had been expecting never materialised. Instead December’s payroll growth was revised up by just 1000 to 75,000, remaining a remarkably weak outcome.

The January result was little better, failing to meet even the lowest estimates of analysts polled. The unemployment rate ticked lower to 6.6% from 6.7%, but labour market participation is still worryingly low at 63%.

How will this new data affect the Fed? According to Atlanta Fed President Dennis Lockhart on Wednesday, we can expect a high probability’ of $10 billion tapers at each forthcoming FOMC meeting, unless there is a major change in the economic outlook. Will two successive months of meagre payroll growth be enough to alter their outlook for the economy?

Although there have been huge gains in employment since the business cycle trough in June 2009, overall payroll employment remains some 851,000 below the business cycle peak of December 2007. That doesn’t sound so much when 100,000 jobs are being added each month, but when you factor in that more than 100,000 new jobs are required each month just to keep up with population growth, the picture suddenly doesn't look so rosy.

I think the weakness in these reports may be enough to have the Fed in two minds.

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