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Last Updated : Jun 07, 2013 07:18 PM IST | Source: CNBC-TV18

Why positive US non-farm payrolls may be taken as negative

US employers created 165,000 jobs in April, more than most analysts expected, and the unemployment rate slipped modestly to 7.5 percent, a four-year low, according to official data.

Strange as it may sound, a significant improvement in the US non-farm payrolls for the month of May could lead to a negative reaction in the markets. That's the view coming from Mark Matthews of Bank Julius Baer who believes the market may translate a good number as a cue for the Fed to close the tap of quantitative easing (QE) or at least reducing it for sure. 

The non-farm payroll data for May is seen improving to 167,000 from 165,000 in April. The unemployment rate is however seen unchanged at 7.5 percent after it slipped from March levels of 7.6 percent last month.

Below is an edited transcript of the interview on CNBC-TV18.

Q: All eyes seem to be on that payroll data that comes through this evening. What do you think the market will react like assuming the figure is not according to estimates? Will they expect to see an extension of the liquidity programme or will they expect to see some kind of contraction happening as early as June?

A: The forecast is for 175,000, which is up slightly from April at 165,000. So if it comes at 100,000, for example, it is a very bad number. Only 100,000 new jobs created then ironically the market would go up because people would then think the Federal Reserve would change its mind about taking away quantitative easing (QE) or reducing it.

If it was a good number, say about 200,000, strangely the market may not like that because it would think that the Fed will pursue a less active monetary policy.

Q: How are you feeling about this raging debate about liquidity because the observation seems to be that the Fed is extremely sensitive to how the market is reacting to their commentary and that may actually shape the decision on whether or not to stop the liquidity flow?

A: I guess the Fed always realised that when it did say it was going to start rolling back the QE programme, the market would start looking far into the future and realizing what that really means is eventually they (Fed) are going to start raising interest rates. Even if that still year and half to two years from now, the mere fact that this is changing—it has so many implications for so many asset classes around the world—we are going through this choppiness now.

It is ironic because (if) the Fed is now confident enough to start talking about reducing the QE that must mean the economies getting better and yet the market is going down. I mean less liquidity but better economic fundamentals. So there is the choppiness of adapting to a new reality.

Q: In the near term, do you sense a wave of risk-off especially with regards to some of these assets like emerging market equities?

A: This is clearly what is happening because since Ben Bernanke made his speech on May 22, I don’t think he said actually in the speech, but during question and answer he said that they would look to reduce the asset purchases in the upcoming meetings if the data supported that.

Well, since then, the S&P 500 is down over 2 percent and yet emerging markets are down over 5 percent. Clearly, yes, there has been a de-risking in these emerging markets.

Q: Central banks tend to also move in the same direction in terms of their policy. Would you say if the Fed decides to tweak its liquidity policy around, it's likely the Bank of Japan or the Eurozone chooses to do that as well because those sources of inflows for emerging markets have been quite strong?

A: No I don't think so. In fact, the Bank of Japan will maintain its asset purchases. I am quite sure about that and the Europeans have not really changed. They cannot until the German elections are out of the way on September 22. But you will not necessarily see more money supply in Europe but some form of helping out the peripheral economies.

But that won't happen until late September.

Q: Performances across equity markets have been quite disparate. The US market has been strong; Japan has been extremely volatile and many Asian markets have actually delivered negative returns for the year. What is your sense of how the second half may shape up to be like equities? Do you think they will all move in one direction now or will it still be extremely polarized performances?

A: Clearly, things have become very discombobulated and there is so much volatility particularly in the currencies, more so in the dollar. Increasingly people are just standing back and saying, “I don't want to participate in this market. It is too hard to understand. It is summer anyway, so a lot of people go on holiday. My sense is that the US has held up better for the very simple reason that as I said earlier the Fed would not talk about reducing the amount of asset purchases if they did not feel that the economy is getting better.

In Asia nothing has gone wrong, but clearly, these markets have gone up a lot markets like the Philippines, Thailand, Japan. So I guess people feel that the world is just getting stranger with this Federal Reserve tapering, one should better take money off the table while one can. That probably will continue to be the trend. I don’t expect a calamity but I think the trend has changed. We are going to remain choppy. I don’t see any upside—its either flat or down.

Also Read: Societe Generale bullish on US; bearish on EM, rupee

First Published on Jun 7, 2013 12:47 pm
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