Before we review Friday’s action, I would like to present a quote from Tolstoy sent from a long-time reader and is representative of the 2+2=5 basis of Notes From Underground. While I have respect for the theoretical basis in the continued search for knowledge, I try to write NOTES with a deeper understanding of the fundamentals that drive markets on a short- and long-term time scale.
Last week, global macro blogger Macro Man noted that the Yellen speech that focused on inflation dynamics, “… Yellen used the word ‘model’ thirteen times; she used the words ‘globalization,’ China, trade, outsourcing and non-tradeables a grand total of zero times.” It is with this in mind I cite Tolstoy (a h/t to MKB for sharing this grand piece of philosophy):
“The Germans self-assurance is worst of all, stronger and more repulsive than any other, because he imagines he knows the truth-science-which he himself has invented but which is for him the absolute truth. Pfuel was one of those theoreticians who so love their theory that they lose sight of the theory’s object–its practical application. His love of theory made him hate everything practical, and he would not listen to it. He was even pleased by failures, for failures resulting from deviations in practice from the theory only proved to him the accuracy of his theory.”
It is this spirit in which the markets are to be analyzed. When models provide useful tools for aggregating data and understanding statistical probabilities for market outcomes, they’re FINE. But I will always strive to find the deeper relationships not readily discernible solely through number crunching. When theory and practice converge (PRAXIS) we will have powerful market dynamics.
***Now, when looking at the September jobs data, it certainly showed a weakening economy. Nonfarm payrolls were not weak because of the 142,000 headline number itself. From my perspective it was the downward revision of July and August that provided some fear. As Dennis Gartman has opined for 20 years, strong reports are revised upward and weak reports downward. Also, the ZERO gain in average hourly earnings means that while the unemployment rate is relatively low there is little upward pressure on wages. Some good analysts were of the mind that while the headline number was weak some of the underlying numbers were positive, especially since the part time for economic reasons (PTER) showed a decline. This means that part-time workers were able to get more hours, which should result in higher wages going forward. It’s possible, but it is too early to tell and for the FED it will mean that any October rate hike is off the table. However, it’s something to watch in the October jobs data.
The market reactions to the jobs data seemed very predictable for the first part of the trading day but around noon the SPOOS began a sizable rally and moved into positive territory. The equity markets were weak for the first four hours–as would be expected–for the FED‘s threat to raise rates is not the driving fundamental for the equities. The stock market would like good news because good news will drive corporate profits higher and relieve any pressure from similar stories like Glencore. Strong profits will relieve any immediate threat of negative credit events.
Many traders were perplexed by the late day surge in STOCK PRICES with such weak jobs numbers. I don’t have an answer except to note that the European markets, especially the DAX, had started to rally prior to the SPOOS. Also, since it was the second trading day of the last QUARTER many institutional investors had money to put to work. As always, look for areas of technical resistance based on the price action from August 21 and 24 to verify any type of sustainable equity rally.
The yield curves performed as projected as after an initial flattening following a surge in the long end. By the close the 2/10 and 5/30 curves both steepened as the pressure came off the shorter duration Treasuries. The 2/10 almost reached it recent low of 135.2 on August 24 and rebounded to close over 140 basis points. The curves will be a significant indicator for market sentiment about the FED.
In the spirit of the poor unemployment report trapping the FED at the zero bound, GOLD and SILVER both staged strong rallies. MORE IMPORTANT, THE METALS HELD THEIR RALLIES EVEN AS THE EQUITIES CLOSED ON THEIR HIGHS. The RECENT CORRELATION for the algos has been to sell the precious metals when the SPOOS and NASDAQ rally so Friday’s counter-action is to be noted. But of course one day a trend does not make. The TECHNICAL picture for GOLD is still weak but the 200-day moving average comes in near $1177 so pay attention to overhead resistance.
If the market believes that economic growth is beginning to slow with interest rates at ZERO, fear will develop about possible FED actions to stem the onset of a new round of deflation. The DOLLAR was mixed by the close as early weakness was reversed in response to the EQUITY rally. While the DOLLAR still closed weaker on the day it did not mirror the sustained rally in GOLD. The market sent us a notice of DIVERGENCE from previous algo correlations. Let’s see if there is a new dynamic beginning to unfold.