Why Tomorrow May Be The Most Important Day For QE3

Whether we get a third round of quantitative easing or not remains to be seen, but tomorrow could be the most important day in having a say yes or no. Tomorrow is the August Nonfarm payrolls report, to be released at 8:30 a.m. There is a wide range of consensus estimates for the numbers of jobs created in the month of August, but the average estimate is 70,000 jobs created during the month. Economists are expecting 110,000 jobs created in the private sector, with public payrolls continuing to contract on austerity measures. Just today, we had two revisions sharply lower, with Societe Generale lowering its estimates for August to just 9,000 jobs created. It originally expected 67,000. We also had news from Goldman Sachs this morning which slashed its estimate from 50,000 to 25,000. In a research note, Goldman wrote, "ISM stronger than expected in August, although details of the report are softer than the headline suggests...We are lowering our forecast for tomorrow's nonfarm payroll report to +25k, from +50k previously. The main reason is the accumulation of evidence of weak hiring in late July and August: a sharp deterioration in perceptions of job availability in the latest Conference Board survey, a drop in today's ISM manufacturing employment index, another drop in job advertising, and a soft ADP report. Layoffs seem to have remained low, given steady jobless claims in the 410,000 range, although even here the recent pickup in layoff announcements is a concern." This morning we did see some better than expected economic news, with August ISM beating expectations. It came in at 50.6, on expectations of 48.5. Despite the beat, the underlying numbers were very soft, and it definitely seems as if the economy is weakening. Yesterday, we saw Chicago PMI beat expectations, but it was the lowest reading since late 2009. Initial jobless claims remain stubbornly over 400,000, and continuing claims picked up sharply this week. The Fed has a dual mandate, to keep inflation in check and maximize employment. At Jackson Hole, Federal Reserve Chairman Ben Bernanke did not explicitly say QE3 is coming, but did say the Fed will do all it can to help the economy. In recent days, Chicago Federal Reserve President Charles Evans has come out and basically called for more easing, and Minneapolis Fed President Narayana Kocherlakota has changed his tune on more easing. Kocherlakota dissented at the last meeting. If we get something around the 70,000 jobs that are expected to be created, this could be equity negative, as it could take pressure off the Federal Reserve to do a third round of quantitative easing. In July, there were 117,000 jobs created. This was better than expected, but still not even close to what the country needs to keep up with population growth. It is actually about half of it. No matter what happens tomorrow, we still have banks seeing that a third round of quantitative easing eventually happens. Goldman has a report that QE3 happens, as does Bank of America. J.P. Morgan has finally come into the QE3 camp, and also expects something to happen. With the Federal Reserve expanding its September meeting to two days and the revelation that QE3 was discussed as potentially happening at the August meeting, it almost seems like a certainty at this point. The form it will take is still up for debate, but tomorrow's Nonfarm Payroll report could be the nail in the coffin. If it comes in much better than expected, perhaps it happens, albeit later in the year. If it comes in ugly, QE3 may be right around the corner. The world and the markets will be watching at 8:30. It should certainly make for an interesting Labor Day weekend. ACTION ITEMS:

Bullish:
Traders who believe that QE3 happens either way might want to consider the following trades:

• Precious metals should soar if QE3 happens. Consider the SPDR GOLD ETF SPY or the iShares Silver Trust SLV.

• Depending upon the form, it could benefit the long end of the yield curve. Consider iShares Barclays 20+ Yr Treas.Bond ETF TLT.

Bearish:
Traders who believe that QE3 does not happen may consider alternate positions:

• Traders appear to be "gaming" the Fed, in anticipation of QE3. If the jobs report is better than expected, equities could drop as they are held to their own accord, and not given a lifeline by the Fed. The U.S. dollar UUP could see a bit of an increase, on better than expected economic data.
  
  

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