How the jobs report keeps interest rates low

For most of the weekend, the question was how much Friday's relatively OK jobs report would affect markets this week.

The short answer might still be positively. The report showed the unemployment rate falling to 7.7% in November from October's 7.8%. But the decline was for all the wrong reasons: More people stopped looking for work.

As important was a gain of 146,000 in payroll employment. But the gain wasn't enough to suggest the economy was on the verge of taking off -- certainly not with the fiscal cliff dominating all the talk in Washington, D.C. and beyond.

Futures trading suggested a lower open for U.S. stocks on Monday, a reaction to political turmoil in Europe.

The jobs report probably ensures the Federal Reserve will not change its plans to keep interest rates at historically low levels until mid-2015. That is, nearly at 0% to 0.25%.

That's great for stocks. It's great for home buyers and home sellers seeing a bit of a housing recovery; mortgage rates are under 3.5%. It's great for companies looking for cheap financing.
It is, of course, horrible for savers.

The Fed's Federal Open Market Committee meets Tuesday and Wednesday and will announce its policy decision early Wednesday afternoon. The statement will be followed by a Fed forecast on how it sees the economy over the few years. Then, Fed Chairman Ben Bernanke will hold a news conference.

One thing markets will want to hear from the Fed or Bernanke is if the central bank has an idea of what will cause it to boost interest rates. Most Fed watchers assume an unemployment rate under 7% will put the world on notice that short-term rates will move higher, if they move at all. But the Fed hasn't been specific about what will trigger a rate increase.

The other thing that will generate lots of excitement in financial media is what the Fed will do after one of its bond-purchase plans expires on Dec. 31. The Fed will probably continue to buy in bonds and mortgage-backed securities to keep rates low in a new round of so-called quantitative easing. The odds are they'll stay low regardless.

The jobs report did nothing to suggest the Fed might feel the need to throttle its pump priming. The number of unemployed workers fell by 229,000, but the labor force fell by 350,000, Friday's report said. And the number of employed workers fell by 122,000.

Pockets of serious weakness persist. Unemployment among teenagers seeking jobs was 23.5% and has changed little in the last year. It was 13.2% among African-Americans, 10% among Hispanics and 12.2% for people with less than a high school diploma.

The alternative unemployment rate that accounts for people unable to find work, who have dropped of the work force or who have been forced to take on part-time work was 14.4%, down from October's 14.4% and 15.6% in November 2011. That's better than the peak rate of 17.2% in October 2009 but nowhere there the low of 6.9% in December 2000.

There was a slight decline in employment of workers in residential construction to 552,800. The total employed in residential construction is still down 469,200 from its peak in April 2006.

At the same time, only 6.8% of white workers and 6.4% of Asians were unemployed. Only 3.8% of those with a bachelor's degree or higher were unemployed.

If you look at payroll employment, the picture gets sunnier. A gain of 146,00 jobs overall and a gain of 147,000 jobs in the private sector. Both were better than expected and continues a streak in which about 150,000 jobs are added to the economy each month.

But even here, things aren't quite that sunny.

Revisions reduced reported gains in September and October by some 49,000 jobs. (The Labor Department revises the prior two months' data with each report.)

Manufacturing employment fell by 7,000, even as the auto industry added 9,700 jobs. Employment dropped in primary metals, machinery, computers, semiconductors and furniture-making.

But the retail sector gained 53,000 jobs, with particular strength in clothing stores. The sector has added roughly 104,000 jobs since September and 183,000 jobs since November 2011.

Superstorm Sandy had little effect on joblessness and employment. It did, however, have a real effect on the economy. It prevented 369,000 people from going to work for a week, maybe longer. While these workers probably have all gone back to work, it will take time for spending patterns to reassert themselves.

The Fed's decision is the market's big event for the week. There will also be important reports on retail sales on Thursday and wholesale and consumer inflation Thursday and Friday. In addition, the debate on taxes and spending and the worries about the fiscal cliff will also weigh on investors.

How the markets react during the week to Italian Prime Minister Mario Monti's announcement Saturday night that he would stand down after a new budget is passed will grab headlines.

Also creating a frenzy in Europe was former Italian Silvio Berlusconi's announcement he wants his old job back.

Italian stocks opened sharply lower on Monday.

For all the fiscal cliff worries last week, the Dow Jones industrials ($INDU) and the Standard & Poor's Index ($INX) finished higher for a third straight week. The Nasdaq Composite ($COMPX) and Nasdaq-100 ($NDX) indexes fell after two small weekly gains.

Much of the decline was due to weakness in Apple (AAPL), which fell 8.9% for the week. Its Friday close of $533.245 was down 24.1% from its Sept. 19 peak close of $702.10.

The key earnings reports are Dollar General (DG) on Tuesday; Costco Wholesale (COST) and Joy Global (JOY) on Wednesday; and tech-component-maker​ Ciena (CIEN) and homebuilder Hovnanian (HOV) on Thursday morning and Adobe Systems (ADBE) after Thursday's close.

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