It is the end of the first quarter and it was an amazing time to be a volatility fabricator in the land of algo-driven headline readers. This quarter has seen a great deal of ebbing and flowing for the global equity markets as China, the Fed, the ECB and BOJ have created fear and greed in copious amounts. But as the SPOOS have ended 0.8% higher (after being up 11% in February), the world is well for U.S. domestic investors. The remainder of the developed world equity markets have not fared as well even as its central banks have been very involved in creating new rounds of liquidity and driving their lending rates into negative territory. The DAX and Japanese equity markets seem to be trapped by anemic growth, as well as appreciating currencies. The recent noise from the FED seems to have caused a REVERSAL IN LONG DOLLAR POSITIONS as the short dollar trade was every major investment bank’s favorite trade for 2016. So it goes.
It seems that tomorrow’s unemployment data has this for consensus: unemployment rate steady at 4.9%; nonfarm payrolls at 201,000; and average hourly earnings UP 0.2%. Last month, AHE FELL by 0.1% following a surge of 0.5% in January (seemingly on the back of hikes in minimum wages around the country). It will be important for AHE to rise above 0.3% for the market to get any tinge of rate hike glee because of Tuesday’s über-dovish speech by Chair Yellen. This is Janet’s FED and it would probably take a number above that to catch her attention. I think the NONFARM PAYROLL number will only get attention from the HAWKS if it is more than 300,000.
As always, I caution against racing the algos as the headlines on the jobs number are digested by computers searching key data points. As they taught us in kindergarten, THINK AND DO and not vice-versa. It will be important to watch the yield curves tomorrow and the way they react to STRONG data. If the employment report is strong and the curves begin to steepen after the first hour then the market will be revealing that it believes what Chair Yellen has said and the rest of the FOMC voters be damned … at least until we see the vote at the next meeting.
The YIELD CURVES closed out very interesting for the first quarter. First, the 5/30 closed 15 basis points steeper and the 2/10 closed 15 basis points flatter. The steepening in the 5/30 for the quarter all took place this week following the Yellen speech. I always refer to the 5/30 as the speculators’ curve and the 2/10 as the investor curve. Thus it seems as if the specs are now betting that the FED will let “inflation” run hotter for longer before raising rates while the 2/10 is confused and trapped by the huge impact on the 10-year sovereign debt market from the massive amounts of ECB and BOJ buying. However, if the market is convinced the FED means what Yellen says then any strong economic data OUGHT to result in curve steepening.
If this theory is correct on a strong number, the DOLLAR should trade lower by the end of day and the GOLD higher with SPOOS finding some support. This is all dependent on the action in the yield curve. Trade with the lowest risk points from your technical work and be patient and let the algos find quality trades at low-risk points.
***The Irish government auctioned off 100-year bonds yesterday at 2.35 % … no joke. It boggles the mind but then again finding value in the time of central bank control of the market is very difficult. May the wind always be at your back and may the road rise up to meet you. It’s good to be issuers of sovereign debt.
***NOTE: I will be on Wall Street Week with Gary Kaminsky and Anthony Scaramucci tomorrow at 8pm EST on Fox Business. It will also air on the network on Saturday and Sunday. Check your local listings.
Tags: average hourly earnings, Fed, FOMC, nonfarm payrolls, Yellen, yield curves
March 31, 2016 at 9:47 pm |
I don’t see how strong US data in the am would push the dollar lower when stronger than expected Chinese data this evening – which is of greater import to the Fed, is causing gold and spooz to sell-off and bidding up USD. Since March’s FOMC meeting, I’ve been calling for a “reflexive” long-dollar catch-up trade. Gold’s inability to breakout, let alone sustain strength following spikes higher post FOMC’s balk and Yellen’s Tuesday speech isn’t supportive of a short-dollar thesis.
April 1, 2016 at 8:16 am |
Again–it was and will be dtermined how the yield curves react and are reacting—the present flattening action is what makes the theoretical approach right for now as the dollar has rallied and the gold broken as the curves have flattened in response to stronger data but the day is young and I am thinking at this point—to where the curves go
April 1, 2016 at 7:39 am |
I’m no sure either, how strong employment (is it fake?) data would push the $US further down, either. It would bring the hawks back out though, especially considering positive Chinese (is it fake?) data.
Earnings seem to have rolled over, that’s weighing on equities. I just don’t understand all the hiring in the face of weak earnings.
April 1, 2016 at 9:19 am |
Chicken–my thinking if that markets are convinced of lower for longer as Yellen speeled out then strong data should push the dollar lower and other assets higher—-but again the proof will be in the curves as I stated—we will see how the market deals with this especially the manufacturing prices jump
April 1, 2016 at 11:03 pm
Well, certainly the dollar didn’t close with a gain so Yra that’s a pretty good call I have to ponder this weekend. 🙂
April 3, 2016 at 9:09 pm |
Yra-Could a weakening dollar reverse some international capital flows away from the US? Emerging markets are showing signs of stabilizing and if that continues could this hurt SPOO’s rather than help as money flows back to some much cheaper equity markets as the US equity carry trade unwinds? Just a thought I’ve been having.
April 4, 2016 at 5:21 pm |
Dustin–i have been pondering this but then it makes the recent rally even more difficult to comprehend—-presently it is domestic investors pushing equity prices higher and higher—sly and the family must be stoned
April 4, 2016 at 6:45 pm |
LOL! “It’s a Family Affair”