Is it the first Friday of a new month already? If so, then it must be time for the release of the U.S. employment data and preparing for a day of market volatility driven by the machines of madness and their algorithmic masters. In preparation for the trading madness, it seems that the consensus is for a nonfarm payrolls increase of 192,000 jobs, a work week of 34.5 hours, and, most important for Chairman Yellen, an increase in average hourly earnings of 0.2%. It appears that a strong number will result in a higher probability of the FED raising rates at the December 15-16 FOMC meeting. It is the problem of dissecting what a STRONG EMPLOYMENT is that makes trading and investing so difficult for the next six weeks. Is it the number of jobs created and the impact on the unemployment rate that renders the most powerful argument for the Fed hawks? Or is it the level of wages relative to GDP and corporate profits that is the most significant indicator of job strength and possible inflation?
It has been my HYPOTHESIS that Janet Yellen is a labor economist and will err on the side of allowing WAGES TO CATCH UP to profits in an effort to benefit Main Street at the expense of Wall Street. (As a moral position I agree with Yellen but it is not the position I a central bank chair ought to espouse). Chair Yellen has stated from her time on the FOMC that she utilizes a Labor Market Conditions Index, which contains 19 variables to measure the health of the labor market. This gives Yellen plenty of latitude in her position of the Fed’s responsibility to fulfilling its beloved dual mandate. The recent statements from Chair Yellen on December ‘s FOMC meeting being in play to raise rates is an effort to keep the “inflation worriers” comfortable.
Yellen appears to have a problem in that the Fed Vice Chair Stanley Fischer is from the more hawkish side of the inflation mandate. He’s worried that asset price inflation is a possible force for financial instability and therefore the Fed needs to be pre-emptive to subdue some future fear of the negative impact from the collapse of mis-priced assets.
I BELIEVE THAT IT IS THE ONGOING BATTLE BETWEEN YELLEN AND FISCHER THAT IS CAUSING THE CONSTANT DISSONANCE BETWEEN FOMC MEMBERS. STANLEY FISCHER IS A MAJOR FORCE IN THE FIELD OF MACRO-ECONOMICS AND YELLEN IS UNABLE TO DISREGARD HIS OPINIONS. IT WAS A MISTAKE TO MAKE FISCHER THE VICE CHAIR FOR IT TENDS TO UNDERMINE JANET YELLEN’S AUTHORITY. BUT IT SEEMS THAT AFTER SENATOR ELIZABETH WARREN QUASHED LARRY SUMMERS ON THE FED CHAIRMANSHIP, SOMEBODY BELIEVED A HIGHLY REGARDED ECONOMIC ACADEMIC WAS NEEDED TO HELP SET POLICY.
This is what has caused so much back and forth on the decision to raise rates a MERE 25 basis points. The market will react to a STRONG jobs number by BUYING DOLLARS (selling currencies), selling the near-end of the interest rates and buying stocks in the sense that good news is good news. The problem for the SPOOS is that the rally off the August 24 lows has brought the market back to within 2 percent of all-time highs and it may be too far extended to continue its recent dynamic rally.
Maybe, the most important outcome from a strong jobs report will be the reaction of the yield curves: After October’s WEAK REPORT the 5/30 curve went from steepening to 156 basis points to flattening during the last two weeks down to 135 basis points today. This is because the market has built in a higher probability of the FED raising rates in December and thus selling the front-end of the curve. Today’s low on the 5/30 curve approached its 200-day m.a. of 133.96. A strong number will test to see if the key moving average provides support to the curve. Be patient and let the algos provide the levels of lowest risk to trade. IT IS NOT THE FIRST SIXTY MINUTES AFTER THE RELEASE BUT WHETHER PRESENT MOMENTUM TRADES CONTINUE BY THE END OF THE DAY.
***Today the Bank of England announced no change to its interest rate. The shocking result was that the British pound dropped more than ONE PERCENT on the no change. There was no way that BOE Governor Carney was going to be hawkish on the future direction of BOE policy with the POUND near eight-year highs against the EURO. The EU is the Brits’ largest trading partner and with Mario Draghi jawboning the EURO lower every press conference, Governor Carney does not wish to adversely affect the British export sector.
Today’s low on the EUR/GBP cross, 0.7041, will be a key support level and Mark Carney will be vigilante in preventing an appreciation of the British pound versus its major trading partners. The battle is on to defer currency strength and Janet Yellen and her cadre will use the strength of the U.S. dollar as a headwind to economic growth as we near the December FOMC meeting. After all, Mark Carney showed them the way.