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.
Tags: British pound, EUR/GBP, Fed, FOMC, Janet Yellen, Mario Draghi, Mark Carney, nonfarm payrolls, Stanley Fischer, U.S. Dollar
November 5, 2015 at 10:54 pm |
Whatever the guidance, we can be sure the automated algos will interpret the Fed’s Rubik’s Cube, elbowing aside any notions that market prices will be based on Benjamin Graham’s fundamentals. Amazon to trade at 1001 times earnings? (GAAP or Non-GAAP, analysts’ choice.)
Once the NFP distraction subsides, attention should turn to Europe’s refugee “situation,” especially that which is unfolding in Germany. I think it’s an issue the sovereign governments will not be able to punt to the central bank, hoping that a monetary policy tweak will mitigate.
November 6, 2015 at 3:19 am |
People need to stop quoting AMZN’s 1000 P/E to promote a bear case or frustration with the valuation. AMZN actually has a booming cloud business (besides the whole retail). Please note that I am a value investor and am not trying to support Amazon, but want to point out that there are plenty of companies trading at crazy valuations who are not market leaders, who have no product worth mentioning, who are constantly raising capital and will be gone in the next few years. But every time Amazon reports, out comes the P/E calculator. People need to talk more about the biotechs, leveraged energy & REITs, MLPs, cypersecurity, no model tech, etc.
November 6, 2015 at 6:04 am |
sophocles—-absolutely right as Stan Druckenmiller so eloquently stated about amazon in his interview this week—-did you read that interview from one of the true greats of the globall macro world
November 5, 2015 at 11:56 pm |
With the exception of the Spanish Services PMI, reports out of the EU countries lately (including Britain) were anything but bullish news. The big miss on German factory orders (again) VW’s additional exposure to liability (and eventual job cuts to a company town known as Woflsburg) don’t show much promise of reversing soon. The way the BOE backed down any idea of them raising rates anytime soon, was light speed speak at its finest. SO…..
What is Janet going to find in her 19 variable index that will warrant a December hike? NOTHING. The index she follows and the way we “measure” inflation will allow my property taxes to double again in the coming year before any Fed raise, even the lousy meaningless 25bps being debated.
On the jobs report, look for another increase in bartenders and waitresses if there is anything near the 192,000 expected increase.
Go Algos!
November 6, 2015 at 5:11 am |
Bullseye Yra on all your observations. The meaningless quarter point increase might take place only to give some gravitas to the denizens of the Eccles mansion with couched words really meaning ” sorry we’ll never do it again. “
November 6, 2015 at 8:21 am |
The so-called “battle” between Yellen and Fischer (or any other Governor) is nothing more than a distraction that the dependent pundits propagate to the masses. The Fed (and all Govt’s) always do what is in their self-interest. The Constitution, rule of law, and certainly data are not going to dictate what any of these fraudsters do. Besides, if they don’t like the data, they simply change the calculations anyway. Why does everyone keep debating the meaning of the data when it means nothing today?
So, what does the Fed want, or don’t want? All the Fed (and govt) has is the confidence of the people, which is directly tied to their reputation. If stocks continue to rise in an obvious bubble, the Fed will be blamed, due to their easy money policies. The Fed was never going to raise rates based on the data. If they were, they missed their chance, as the data is only going to get worse.
They will raise rates when their reputation is at stake for being a serial blower of bubbles, which everyone that does not have their head in the sand already knows. The majority does not understand this, yet. What’s sadly ironic is that raising rates will only highlight the primary reason for higher stock prices, and blow the bubble bigger – capital flight into the US Dollar from the horses at the front of the line into the glue factory. The Fed, like govt, doesn’t care, as long as they think their actions are good for them; and they don’t have to have a clue, because the public and analyst are more clueless or complicit.
Unfortunately, when the rising dollar blows up dollar-based debts around the world, which will only blow the stock bubble bigger; then govt and the Fed will realize they are not God and cannot manipulate the business cycle. The masses will then have a real reason to bury their head in sand, or at least fill sandbags, to hide or protect themselves from the debt tsunami (caused by the dislocation of the two biggest tectonic plates in govt – hubris and stupidity).
Wake up – the Feds gibberish means nothing, as the biggest bubble has been in govt’s, which has now been pricked. The sovereign debt crisis will ripple across the globe before it finally crashes on to the shores of the USA … and raising rates will accelerate the process.
Anyone that has allowed themselves to become dependent on govt will be swamped. Our biggest enemy to our freedoms, prosperity, and way of life is govt, not ISIS or al-Qaeda. Instead of people celebrating our modern-day troops that fight bogus political wars, why don’t they turn their focus on the real enemy?
November 6, 2015 at 9:07 am |
“Our biggest enemy to our freedoms, prosperity, and way of life is govt, not ISIS or al-Qaeda.”
It’s big business though! Absolutely Huge. These are a product of government by virtue of necessity, not so different from your primary threat. US wastes half a trillion on this teet annually.
November 6, 2015 at 9:00 am |
Wonder what happened to that $US crash?
November 6, 2015 at 10:30 am |
chicken –yes who did you cite was calling for a dollar crash
November 6, 2015 at 11:54 am |
As we approach Thanksgiving, I’m looking forward to eating more crow on November 26. Good thing I started on November 5.
“On the jobs report, look for another increase in bartenders and waitresses if there is anything near the 192,000 expected increase.”
November 6, 2015 at 1:38 pm |
It could have been any number of talking heads or gold bugs who are linear thinkers that live in a US-centric world.
November 6, 2015 at 10:04 pm |
The subject of a dollar crash has been parroted incessantly, my guess is must be from the PM sell side?
November 11, 2015 at 5:14 pm |
I notice you posted this on Nov 5th a day one of my old school chums tried to correct that which he considered to be wrong with England. So perhaps we could start our own little plot, without the gunpowder, and listen to the latter day Fawkes, Mr Santelli, and be guided by his advice. For as the movie version of Mr Fawkes wisely said “If we want to see who is responsible for this mess, we need only look in the mirror…”