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Payroll plunge worries Wall Street

Although the stock market seemed to shrug off Friday's surprisingly weak jobs report, you'd be wrong to think investors aren't worried.

The timing of the report, which showed that the economy added a paltry 74,000 jobs in December, is awkward. After months of signaling that they were set to start winding down its bond purchase program, which has been in place since 2008 to boost economic growth, Federal Reserve officials finally pulled the trigger last month. In doing so, they expressed confidence that the economy was strong enough to support the withdrawal of stimulus.


Now policymakers are scrambling to explain what, if any, change the latest job numbers have on the policy outlook. Federal Reserve Bank of St. Louis President James Bullard, considered a policy "dove," told reporters last week that the Fed is focused on the nation's falling unemployment rate, now down to 6.7 percent unemployment, rather than the weak pace of job-creation in December. As as result, the central bank is likely to continue reducing its bond purchases at its next policy meeting on January 28-29, he said. 

Federal Reserve Bank of Richmond President Jeffrey Lacker, considered a policy hawk, warned investors not to overreact to one month's data, saying it takes a few quarters of data to determine any sustainable change in trends. He also expects another $10 billion taper at the January Fed meeting. 

Yet while investors on Friday seemed to chalk up the December payroll report as a fluke, other markets aren't feeling so carefree. Treasury bonds surged higher, pushing yields down, in what could be the first significant upside breakout since April. The yield on 10-year Treasury bonds has been struggling to break away from overhead resistance at the 3 percent level.

That fact that yields are rolling over again here should be interpreted as a vote of no confidence in the economy by the fixed income market. This is corroborated by what's happening in bond market-derived inflation expectations: They dropped hard on Friday, which suggests people are suddenly feeling less confident in the robustness of the economy.  

And while industrial commodities have been very weak, with crude oil plunging below the $100 a barrel level late last month and not looking back, precious metals are perking up again as gold challenges its 50-day moving average for the first time since September.

This could be a reflection of rising expectations that the Fed will pause in scaling back bond purchases. That would hurt the U.S. dollar and a positive for medium-term inflation expectations. Both would benefit precious metals prices going forward.

In either case, the price action reflects weakening faith in the strength of the economy -- a weakening faith that could soon spread to stocks as well.

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