MARKETWATCH: October 4-8

There’s a chill in the air – and not just from the weather. Today’s weak job market news for September (the tough employment situation appears to be stuck, with possible deterioration ahead) has flamed market expectations that the Fed would provide additional support for the economy through more quantitative easing, even though top Fed officials appear to have disagreements over whether and how to proceed, which they are airing publically. 

In response to the weaker than expected unemployment data, prices on the benchmark
10-year Treasury bond gained ground. In mid-morning trading Friday, yields (which move in inverse proportion to bond prices) headed below 2.35%, the lowest yield since the some of the worst financial crisis turmoil in early 2009. The 30 year mortgage has also hit a low, but bottlenecks in the housing mortgage market are limiting the stimulative effect of lower rates. How powerful can monetary policy be in the present situation?
In the meantime, there is a fiscal stalemate between Congress and the White House until at least the early November election, which is putting the burden on the Fed to make any change in the policy mix to address the economy’s weakness. From a practical point of view, to help businesses reasonably plan their 2011 payrolls, recent press reports note that Treasury usually provides firms with tax withholding tables by mid-November so that any changes can begin from the start of the new year. Fiscal policy uncertainty will soon start to have a noticeable chilling effect on economic activity.    
International factors are also moving front and center, particularly as the key currency and trade countries gather in Washington for the annual meetings of the International Monetary Fund and World Bank. In recent weeks, we have seen include sharp currency movements affected by a relative shift in central bank stances (or expectations of stances), as markets increasingly think the Fed will undertake additional quantitative easing, the ECB is not expected to ease and markets continue to work through the recent large move by the Bank of Japan. As economic growth is faltering globally, worries over competitive currency moves to increase competitiveness via export growth have increased. China’s rebalancing has been a big issue for the U.S.