Notes From Underground: Why All the Noise From Friday’s Unemployment Data?

Friday’s jobs data was almost as the pundits had predicted. Why was there so much activity when the nonfarm payrolls and average hourly earnings and length of work week were basically the right on the consensus predictions? Yes, I’m aware that the “whisper number” was 250,000-plus due to the removal of harsh weather conditions. However, if that was the case, the dollar should have weakened and the short-end of the U.S. yield curve OUGHT to have outperformed the long end resulting in a STEEPENING of the 2/10 (none of which occurred). The 2/10 curve actually flattened as the U.S. stock markets began selling off, a drop initiated by the Nasdaq 100’s key momentum stocks. The weekly charts of the S&P and the Nasdaq took different turns as the SPOOs closed higher on the week and the Nasdaq closed lower, an indication of some reallocation from the momentum-oriented stocks to the more solid large-cap, earnings-based equities.

It’s far too early to determine if this is the beginning of a trend but it’s certainly worth watching. Also, the yield curves need to be watched for any type of movement into bonds. The 2/10 yield curve is healthy and not indicating any type of stress in the financial system. The unemployment data SHOULD have resulted in the 2/10 widening as the moderate rise in NFP since no increase in average hourly earnings plays right into Chair Yellen’s stated view about continued slack in labor markets. The question needs to be addressed: Is Janet Yellen more of a moral philosopher or a data-driven economist? Yellen’s stance on unemployment is right from a moral perspective but is it the stance that the world’s most important central banker should take in determining policy? These questions are especially important as the U.S. is the provider of the world’s currency, and, in a fiat currency world the main task for the Fed is to maintain the credibility of the U.S. dollar. (Nothing validates a central bank’s success then the preservation of its currency as a reliable store of value.) While trying to find an acceptable level of wage growth and low unemployment Chair Yellen must be vigilant in protecting the “exorbitant privilege” of the U.S. and the dollar. Markets will be on alert and the vigilance will be found in the yield curves and of course the world’s demand for alternative assets.

***Prior to the release of the U.S. jobs number, GOLD was already $10 higher following reports from Europe that the ECB had “modeled bond purchases of ONE TRILLION EUROS. Remember this is just a rumor but it did put a bid to the gold. Keep watching the GOLD/EURO and GOLD/YEN for support and resistance levels to determine if investors are really searching for alternatives to fiat currency. And pay very close attention to GOLD/EURO as its seems as if the financial community is tiring of Mario Draghi’s jawboning and calling for monetary action. The ECB has been able to satisfy itself on a full dose of sweet talk to keep the bond vigilantes constrained and nothing reveals this better than the Spanish 5-year note is yielding less than the U.S. 5-year note (Spain 1.73% vs versus U.S. 1.74%). This is an illustration of what Jeremy Stein has continuously referred to as the mispricing of risk. The Spanish yields have dropped dramatically even as the amount of Spanish debt has grown. Private sector debt is at 195 percent and public sector debt has grown to a record high 86 percent of GDP.

This represents the belief that the ECB will finance any types of systemic risk that arise. THIS IS THE EPITOME OF MORAL HAZARD and reflects the absurdity of bond prices on a global scale. While investors are chasing a few extra basis points of yield, who knows what risks reside in the portfolios of global investors? (Answer: Only the shadow lenders do!) There is so much mispriced risk in the world relative to the great uncertainties on the geopolitical horizon. Friday’s unemployment data reflected the financial vulnerabilities that exist. SPOOs may be for lovers and GOLD for haters, but for globalists it may actually be resolved through the CERTAINTY OF A LONG TIME-RESPECTED STORE OF VALUE VERSUS THE HAZARDS OF CENTRAL BANK MORAL RELATIVISM.

***More from Japan: The Government Pension Investment Fund (GPIF) said that its “Y22 trillion at the end of last year would be given over to nine new active managers, two of whom would be given a mandate to beat small-cap benchmarks.” The net amount of pension money is less than what the Abe Government would like, though the active nature of the money would provide fund managers the ability to impact the Nikkei and other Japanese stock indexes. PRIME MINISTER ABE would favor a plan where the GPIF sells Japanese bonds and puts more money into risk-based domestic stock assets so as to give some lift to the stagnating economy. The ability of the GPIF asset managers to actively invest in domestic stocks will provide greater volatility to the Nikkei and ultimately lead to a breakdown in correlation of Japan in the risk-on/risk-off algorithmic mix. You have been put on notice.

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11 Responses to “Notes From Underground: Why All the Noise From Friday’s Unemployment Data?”

  1. Shocked to Find Gambling Says:

    Yra- The NFP number was basically a Goldilocks number, but the money flow has been horrible into the SPOOS and QQQ for weeks.

    The market was going to break last Friday, no matter what the number was, I think (easy to say in hindsight). The stock market is seeing something in the future (a recession, a crisis). I do not believe any type of future easing or QE will now help… would look like panic from the FED.

    As for the ECB promoting Moral Hazard, this is exactly what the FED has been doing for years by bailing out most large banks in the country…..and some of these are the banks who caused the crisis.

    I believe the FED, ECB, and BOJ have created a massive bubble ..,,,, Spanish 5 Years trading through ridiculously over-priced U.S. 5 Year Treasuries is as close to proof as you get in the financial markets.

    I didn’t understand your 2/10 Note analogy. I would expect the curve to flatten, in the current scenario, as investors leaving the stock market look to lock in some yield. With panic, it would steepen, I guess, but we haven’t gotten there, yet.

    Everything I just said may be wrong.

  2. yra Says:

    Shocked—not shocked about the 2/10 as I would expect the curve to flatten in this scenario—except for the speech given by Janet Yellen last week.If the FED will err always on the side of the employment “mandate” the curve SHOULD steepen as investors use the short end to park money but will not buy the long end because of doubts about FED credibility—I believe that is what prompted Pimco’s call about the curve–stay short and the long end will be too volatile—that is why my focus is the 2/10 or maybe even the 1/10 –the 5/30 curve is presently a battleground of large traders and thus the moves in the 2/10 I believe is more reflective of investors and not traders—Fed credibility is front and center on display and as you aptly note,it is a potential battle of the Fed’s credibility versus short term investor fear—which shall prevail?

  3. gerard thoel Says:

    I heed your warning regarding on/ off scenarios.should be an interesting dynamic going interest in JYM has spiked almost 50 k in the last week Yra, suggesting major buying €\¥.can you talk more about the carry trade and that ¥ 22 trillion that is seeking a nice comfy return. How much if any is required to be invested domestically versus seeking returns elsewhere?? Is ¥22 trillion big enough to have that big of an impact??
    Kindest regards,GRT

  4. yra Says:

    GRT—-much here so let me think about how best to answer—-the 22 trillion is not a huge amount,for the Abe government would love more but put into use as a trading vehicle will give its velocity a greater impact

  5. Shocked to Find Gambling Says:

    YRA- You said……..If the FED will err always on the side of the employment “mandate” the curve SHOULD steepen as investors use the short end to park money but will not buy the long end because of doubts about FED credibility

    That’s not how I see it. Fed funds are at almost Zero, so unless the FED is going for negative rates, the yield curve should flatten if investors see a recession coming, regardless of the FED employment “mandate”. The recession would probably mean lower inflation and huge flows into 10 year notes. Of course if we go into a panic, or the longer horizon credit of U.S. Treasuries is seriously questioned, or a Weimar situation develops, the yield curve could steepen.

    What I am trying to say, is that with Fed Funds at almost Zero, the FED is pretty much out of bullets, and the market will govern rates and yield curve.

  6. Arthur Says:

    “Central banks will be financing governments on a permanent basis… Perhaps in ten or 20 years time, recent events will be seen as the moment the world crossed a line,” by The Economist

  7. yra Says:

    Shocked–I understand your thinking and will agree if the 2/10 goes below 220 and then I will reassess

  8. yra Says:

    shocked–2/10 presently trading 229

  9. Chicken Says:

    John Connally: “The dollar is our currency but your problem.” Congress told us years ago they were outsourcing our dirty jobs and Americans didn’t need this type of employment, we should all pursue higher education instead. As a result we have full prisons, 2,000 programmers for every user, and 2,000 bloggers for every reader. :O

    Thankfully, 10% of the population pays 100% of taxes.

  10. yra Says:

    chicken–you are killing me—i think I have 2000 readers

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