Here comes the first Weekly Wrap of this new year. But nothing has changed, this week again, the market‘s still revolved around the Fed and the unemployment numbers. The Fed minutes are always closely watched as it uncovers more details about the last FOMC meeting and then prove more forward looking that the laconic FOMC statement. Now, what the markets did not expect was that the Federal Reserve officials would start squabbling about how to proceed with the program involving mortgage-backed-securities purchases. On the other hand, the market was definitely uncertain about the unemployment numbers; the range given by Bloomberg surveyed economists was indeed wider than usual, between -100K and 85K, with an average at -4K. And, the winners are…the pessimists: the BLS reported today from the Establishment survey that total nonfarm payroll employment declined by 85,000. Meanwhile, the unemployment rate remained constant at 10.0 percent. What a week! Let’s analyze this.

Housing:  again the black sheep 

As James noted on Monday, this week was rich in economic data. More particularly, on Wednesday, the highlight was the Mortgage applications. The Mortgage Bankers Association (MBA) announced for the week ending December 25, 2009 that Mortgage Applications drop by 22.8 % from the prior week. For the week ending January 1, 2010, the index increased 0.5 percent on a seasonally adjusted basis. Applications are more than 25 percent below their level at the end of 2008, the banking group said. And worse, the four week moving average is now at the lowest level since November 1997. In the past the MBA index was somewhat predictive of future sales – and was one of the favourite indicators of Alan Greenspan.

Moreover, more bad news are still coming from the commercial real estate market. For the first time since the industry began forming commercial mortgage-backed securities (CMBS), delinquencies reached above 6%, whereas it stood at only 1.21% in December 2008. And look at this graph from Paul Krugman, prices are still coming down (and I agree with Paul this was indeed a “broad based” bubble!)  

Fed: Does one view fit all?

Given those data, no wonder that some Fed officials are ill-at-ease about the forthcoming expiration of the different support programs. The tax credit for home buyers is scheduled to end on April 30. And the Fed $1.25 trillion mortgage-backed assets program is winding down and scheduled to end by March 31.

But, the Fed officials were even worried back in December according to the Fed minutes: “a few members” of the Federal Open Market Committee believe that “more policy stimulus” may be desirable. On the other hand, one member took an opposite view, saying that the “quantity of planned asset purchases could be scaled back” because of continuing improvements in the economy. Closing the liquidity facilities is the second step of the QE exit strategy. The market and even the Fed may have thought that this would be run smoothly. But, the fact that the Fed navigates in unknown territory will spur many debates among its members. And clearly the housing data are not going to make its job easier.

Employment Report: Reaching “Deception Point”  

Another report that is given the Fed a hard time is the employment report. After the positive surprise last month (we even have job creation according to the revised number), we reach deception point today.

Establishment Survey

According to the BLS website, total nonfarm payroll employment edged down in December (-85,000). The change in total nonfarm payroll employment for October was revised from -111,000 to -127,000, and the change for November was revised from -11,000 to +4,000.

On the bright side, the report notes that during 2009, monthly job losses moderated substantially. Employment losses in the first quarter of 2009 averaged 691,000 per month, compared with an average loss of 69,000 per month in the fourth quarter.

Moreover, temporary help services added 47,000 jobs in December. Since reaching a low point in July, temporary help services employment has risen by 166,000.

I’ve already explained the importance of the noise embedded in those data and the unreliability of this first release. Moreover, I also pointed earlier that the Labor Department would plan to revise the job figures by subtracting more than 800,000 jobs. According to Bloomberg, those revisions to the payroll data will be announced in February. Don’t forget to fasten your seat belt.

Household survey

As for the Household survey, the BLS reported that the unemployment rate remained flat at 10% (Unemployment rates in Europe and US are now equal).

There are several striking numbers though. First, the employment-population ratio declined to 58.2 percent (the percentage of the working age population in the labor force). And the Labor Force Participation Rate fell to 64.6. The latter is striking since it implies that 660K people left the labor force in one month, which is equivalent to what we observed in one year! (from Nov 08 to Nov 09 ).

I’ve noticed several times the discrepancy between the Establishment survey and the Household survey. But now we have some consistency between the two: they both lie. The upcoming revision of the nonfarm payroll is fully in line with people abandoning the labor force. When the job market starts to recover a lot of those people will reenter the labor force. If they become employed right away (thanks to some jobs targeted programs?), this will ease the pressure. On the other hand, if they enter the labor force to get the unemployment benefits (another increase this year?) that will keep the unemployment rate elevated for some time. 2010 : a jobless recovery year?  Very likely.