Notes From Underground

MAYBE. It’s the release of the most important economic data for market watchers, the unemployment report. The JOBS NUMBERS have taken on added importance as the FED has made its data dependent interest rate decision overly reliant on job growth and more importantly, AVERAGE HOURLY EARNINGS. Last month’s nonfarm payrolls were well below expectations and the market reacted in a HOLIDAY-SHORTENED trading session (Good Friday) with a rally in all ends of the interest rate market and the U.S. dollar being sold in response to a FEDERAL RESERVE remaining at the zero interest rate level for longer than previously anticipated.

Last months disappointing NFP was 126,000. This month the consensus calls for 225,000 NFP, an unemployment rate of 5.4% and a small increase in AHE of 0.2%. Watch for upward revisions to last month’s weak number for if the weak jobs date is revised upwards and the consensus level of 225,000 jobs created is realized, the market will initially BUY the DOLLAR and SELL the short-term and long bond markets in a thought that the FED may actually move to raise rates in JUNE. I would prefer to see a NFP above 275,000 to get a genuine test of the raise in June theory. A higher number is better for a test of the market’s leanings because the DOLLAR has been in retreat for two weeks and the BONDS have already been sold hard. A strong jobs number would allow the market to retest the recent action and if the raise in June scenario gains traction I THINK THE YIELD CURVES WILL ACTUALLY FLATTEN A BIT BY THE CLOSE TOMORROW AS THE SHORT END OF THE YIELD CURVE WILL BE THE TARGET OF THOSE SEEKING A JUNE RATE RISE.

Also, a test of the DOLLAR on any strong data will be important as the DOLLAR should rally in anticipation of an earlier FED move. If a strong jobs number doesn’t result in a sizable dollar rally then the market would be hinting that market sentiment about an uber-strong DOLLAR was shifting. A strong NFP will cause an initial selloff in the SPOOS  but I would be a buyer of an early selloff at key technical levels. As I theorized yesterday, I believe the FED is searching for a reason to raise rates sooner rather than later in order to test the mechanism of excess reserve control. Get off the ZERO floor to put a full-blown O/N RPP/IOER operation into practice so as to test its success. A rather tepid jobs number of 175,000 or less with a weak wage gain report will result in more of the same madness we have experienced the last few weeks. Strong data will provide the FOMC with the strength to raise rates soon.

As usual, be patient and let the market sift through the initial noise and be prepared with low risk levels in which to enter your desired trade. To those trading the EUROPEAN DEBT market: If the JOBS DATA is strong watch the dramatic drop in the BUND, OAT and BTP futures as the ECB will be waiting to purchase any significant drop in the prices of the European bonds. Draghi will attempt to prevent any rise in European sovereign yields resulting from a large move in the U.S. Treasury market.

***A must-see from today was the Santelli interview with Professor Robert Shiller. Santelli asked the Professor probing questions:1. Did he agree with Janet Yellen’s assessment of the equity markets? Yes. He said markets are overpriced and she did the right thing by disturbing the tranquility of the markets, which Shiller said was part of Yellen’s job. In response to Rick suggesting that the FED should raise margin requirements to “lean against the wind” of an overvalued market, Professor Shiller said raising margins would have too many other ramifications then just nudging the stock market lower. This sounded to my ears as one academic defending another or as Larry Summers purportedly said to Senator Liz Warren: ONCE YOU ARE IN THE CLUB YOU DON’T TURN AGAINST THE OTHERS. What really brought me to the edge of my seat was Shiller’s comment about the FED‘s use of QUANTITATIVE EASING. He opined that they had to do it to prevent a slide into a depression and we have to remember that QE is a NEW EXPERIMENT.

I agree that QE1 was necessary but what followed with QE2 and QE3 I have been against, but regardless, even Shiller admits it is an experiment. The problem is that there is a great deal riding on an experiment and the experiment has been compounded by its acceptance by Mario Draghi and the ECB, and certainly as a main tool of Abenomics. Again, the FED‘s QE PROGRAM, no matter how adulation falls on the Bernanke/Yellen Fed, is a gigantic experiment and no matter how much advanced math is applied to support the theory of QE. It is not rocket science. THE MONEY CRAFT MAY HAVE GOTTEN TO THE MOON BUT WILL THE WORLD’S CENTRAL BANKERS BE ABLE TO LAND IT TO A SPOT WHERE IT IS RECOVERABLE. Even Robert Shiller doesn’t know. Back to the bond and money markets. Will the FED need to rely on Simon Potter or Harry Potter?

***Alchemy 101: In an effort to weaken the Swiss Franc before January 15, 2015, the Swiss National Bank printed massive amounts of its currency to sustain the Euro/Chf rate at 1.20. As I blogged about several months ago, the SNB bought many euros, foreign currencies and also many international equities. Today, the SNB revealed it owns more than $1 billion of Apple stock, the perfect bit of ALCHEMY. Create a shitload of fiat currency; sell it to willing buyers in an effort to undermine its value; and turn around and purchase REAL QUALITY ASSETS with the proceeds from the sale of the Swiss francs. It’s a perpetual wealth creating machine. What a wonderful world of illusionary finance.

Tags: Fed, Janet Yellen, nonfarm payrolls, QE1, QE2, QE3, real quality assets, Robert Shiller, SNB, U.S. Dollar

This entry was posted on May 7, 2015 at 9:00 pm and is filed under Fed, 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.