Today’s release of the ADP report caused the market to react in highly predictable fashion. ADP data predicts a nonfarm payroll in the high 200,000 and as to be expected the BOND FUTURES were sold on the positive outlook, resulting in a STEEPENING in the 2/10 yield curve, a rally in the U.S. DOLLAR and leaving yesterday’s SPOOS rally intact. The only non-correlative trade was the precious metals and copper as both sets of ELEMENTS rallied, defying the implications of potential higher interest rates. Tomorrow will be important in seeing how the market reacts to the jobs data. BE PATIENT. Here’s why:
A. If the jobs data is above the ADP 281,000 number reported today wait to see if the DOLLAR, BONDS and SPOOS measure it as a news-already event. Also, a high NFP number may be softened by low wage growth and what the unemployment rate shows. If the RATE goes higher because more people are returning to the labor force it will take time for the market to digest that information. A strong overall number should be positive stocks and the dollar and OUGHT to put pressure on the recent rally in the GOLD and SILVER. Remember, I say OUGHT so I will wait for the test.
B. If the data is relatively weak–maybe 150,000–and low wage growth look for the DOLLAR to soften and the BONDS to rally after the previous two-day selloff of BOND FUTURES. The key will be how the BONDS react on any weakness in the data, especially in the YIELD CURVE. If the 2/10 does not FLATTEN on WEAK data if will be a signal that the curve will renew steepening in concern for FED CREDIBILITY. In my humble opinion it is THE QUESTION OF GLOBAL CENTRAL BANK CREDIBILITY THAT HAS BEEN THE SOURCE OF THE RECENT RALLY IN THE PRECIOUS METALS. The initial leg of the GOLD and SILVER began June 19, the day after the YELLEN press conference. The dollar has been moderately weak in the same period but the BONDS and NOTES have weakened on the YIELD CURVE.BUT AGAIN, BE PATIENT FOR ON MAJOR DATA RELEASES IN A FED DOMINATED MARKET THERE IS NO FIRST MOVER ADVANTAGE.
The yield curves and precious metals may provide the important directional knowledge. Complicating the picture is a DRAGHI PRESS CONFERENCE beginning at 7:30 a.m CST, exactly when the unemployment data is released. The ECB will announce its rate decision at 6:45 a.m. and no change is expected as Draghi will not announce any new QE programs or further cuts in interest rates. But if the U.S. unemployment report is ROBUST then President Draghi may try to incite the market through his RHETORIC. If the DOLLAR rallies on strong data watch for Draghi to push it higher.
***This review of Yellen’s speech at the IMF is written in the spirit of Abraham Lincoln (“with malice toward none,with charity for all…”). I tried to find something redeeming in Chair Yellen’s speech on monetary policy and financial stability. It was very difficult as the Fed’s dominant voice let it be known that monetary policy will not be used to foster financial stability. Rates will remain low as long as economic growth remains tepid and inflation is well contained. Here are several quotes:
“As a result ,I believe a macroprudential approach to supervision and regulation needs to play a primary role.”“A tighter monetary policy would not have closed gaps in the regulatory structure that allowed some SIFIs and markets to escape comprehensive supervision”YRA SAYS: No but it may have thwarted the size of the credit bubble, Chair Yellen.“… it is also clear that a tighter monetary policy would have been a very blunt tool: Substantially mitigating the emerging vulnerabilities through higher interest rates would have had sizable adverse effects in terms of higher unemployment.”YRA SAYS: Madam Chair, the higher unemployment resulted anyway and has taken six years and more to correct while causing havoc with the global financial system and resulted in continued slow growth.“In my assessment, macroprudential policies, such as regulatory limits on leverage and short-term funding, as well as the stronger underwriting standards, represent far more direct and likely more effective methods to address these vulnerabilities.” YRA SAYS: Even Janet Yellen admits that these tools have not be battle tested enough to provide assurances of outcome and most probably be applied to “the largest, most complex organizations.” The problem from my perspective is that macroprudential tools in a slow growth low interest economy will actually act to subvert the needed credit growth. Capital rules are needed but can only be applied to a healthy economy and it is experimental to use these tools to deflate a “bubble in a slow growth period.”
“In recent years, accommodative monetary policy has contributed to low interest rates, a flat yield curve, improved financial conditions more broadly, and a stronger labor market.”YRA SAYS: Yes, it is true that conditions have improved from the trough of the crisis but Chair Yellen to say that the CURVE is flatter is just plain wrong. I am inserting a chart of the 2/10 curve for the last 10 years (courtesy of Bloomberg). If my opinions are correct, the lowered faith in the Fed’s credibility will cause more steepening in the curves and continued strength in the precious metals. The question for equity traders is: WILL A STEEPENING YIELD CURVE SUPPORT CONTINUED STRENGTH IN EQUITY MARKETS?