Notes From Underground

The U.S. unemployment report will be issued on Friday  at the regular time: 7:30 CST. It seems that the consensus is for 210,000 nonfarm payroll, a rate of 8.9 percent and an increase in hourly wages of 0.2 percent. It seems that a 300,000-plus number is in the cards which is why the FED Presidents that are not of the perma-dove camp are ramping up the anti-inflationary rhetoric. Today, Minneapolis FED President KOCHERLAKOTA caused a late move in the DOLLAR, METALS and SHORT-DATED interest rates as he raised the possibility of the FED raising rates by 75 BASIS POINTS. The DOLLAR had been lower all day as month- and quarter-end positioning allowed the power trend funds to push their profitable positions in the desired direction, but KOCHERLAKOTA did cause a late reversal with his aggressive comments.

It seems that the Minneapolis FED president acknowledged that the QE2 program had been more successful than he first thought and based on some type of adherence to the TAYLOR RULE the FED would have to move to raise short term rates to 1 percent by the end of 2011. The March 2012 EURODOLLARS dropped seven points as the market paid its respects to the new found assertiveness. The equities which were still open really did not pay much attention to the comments and that is probably the correct action.

If the economy is stronger than previously thought, a 1 percent Fed funds rate should certainly not curtail the post-Jackson Hole rally. The unemployment numbers take on new meaning for if the NFP prints above 300,000, then the short-rate futures will be sold but the LONG DATES should hold after an initial selloff. The equities (S&Ps) will be sold but should rally as the day proceeds for healthy job growth will give substance to Bernanke’s monetary policy.

The DOLLAR also will rally because of the short positioning of the market. Many traders/investors have rightly positioned out of DOLLARS because of the continued QE2 FED policy and the reliance on the DUAL MANDATE. Tomorrow’s unemployment rate will be interesting  for if the rate moves higher with a large NFP, it will be deemed positive as potential employees are returning to the workforce. One other caveat: Watch the private sector employment versus public sector to see if state and local governments are still shedding jobs because of budgetary stress. If a larger then anticipated number appears with public sector layoffs it will be a very positive sign for the economy as it will mean that public sector layoffs become less going forward as increased private sector jobs mean a growth in tax revenue.

I know that the 2/10 yield curve is my bellweather but even a quick move from 265 to 230 ought not to curtail the EQUITY rally for that is an historically steep curve. Remember, just prior to Jackson Hole the EURO CURRENCY was at 125.00 and the 2/10 yield curve was in the 190’s–and, oh yes, the S&Ps were around 1040. A 2/10 at 230 is just a blip on the CHARTS.

Tags: Dollar, equity, Euro, Eurodollars, Fed, interest rates, Kocherlakota, metals, NFP, QE2, Taylor rule

This entry was posted on March 31, 2011 at 7:54 pm and is filed under Currency, Federal Reserve, unemployment, United States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.