Notes From Underground: After the Flood … Of Data

It’s that time of the month: first Friday and the jobs data is front and center. Consensus is for 152,000 nonfarm payrolls. In my humble opinion it will take a number above 200,000 to put pressure on the FOMC to actually raise rates at its June meeting, or, more importantly, a headline jobless rate of 4.8%. As always, I am highlighting the AVERAGE HOURLY EARNINGS (AHE) as the most important number because it plays to Chair Yellen’s concern about 20 years of stagnant wages. The market is anticipating a tepid rate of 0.2% following April’s gain of 0.3%. A flat wage number would keep the FOMC on hold.

But in light of this, Governor’s Tarullo’s speech today revealed an insight that I have raised frequently and again last Friday with Rick Santelli: “The second approach, which I’ve been a little bit more inclined toward, is to say, ‘Gee, you know, it’s NOT CLEAR WHAT FULL EMPLOYMENT  IS , WE’RE IN A GLOBAL ENVIRONMENT WHICH IS NOT INFLATIONARY, AND WE CAN PERHAPS GET SOME MORE EMPLOYMENT AND SOME HIGHER WAGES.” This is the issue of NEHRU VERSUS NAIRU and you must pay attention to the idea that this is someone from Yellen’s inner circle voicing this concept. Globalized headwinds on U.S. wages is an important consideration for Chair Yellen as it blows apart the FED‘s models and calls into question the significance of output gaps in a globalized economy.

Combine this discussion with the fears about Brexit and IT IS DOUBTFUL that the FED will raise at the JUNE meeting. Today, Rick Santelli and Jim Bianco covered the BREXIT discussion very well. The negative FALLOUT from a VOTE TO LEAVE will be far more detrimental for the EU than for the British. This is the referendum contagion this blog has been discussing for three years. The European elites are fully aware of the ramifications for the EU if Brexit wins. Credit markets will feel the full force as the ECB will battle speculators over the valuation of much of European the sovereign debt. The BRITS will control their printing press regardless while Italy, Spain and others will be called in to question. The FOMC will be reticent to raise rates ahead of the vote.

Yes, there are always concern about some global event but certainly not all events are created equal. Today, the ECB was unchanged across the board except that we now know that the ECB will begin buying corporate bonds on June 8. The most interesting aspect of the Draghi press conference was the amount of times that Draghi raised concerns about headwinds from the emerging markets and the global deleveraging still plaguing the European economy. Draghi made it known he is very concerned that risks are “tilted” to the DOWNSIDE as Brexit and other global political risks are raising the level of financial uncertainty.

***A more important issue for the FOMC  is the Chinese YUAN. Have the Chinese been pushing the YUAN a little bit lower everyday in an effort to send a message that they are concerned about the FOMC raising rates and sending the U.S. DOLLAR HIGHER? (This would put upward pressure on the YUAN and cause contraction pains for many emerging market nations who have large DOLLAR-based debt.) Remember, two weeks ago the Chinese had the audacity to request a heads up before a move by the FOMC before the actual meeting. Allegedly, Secretary Lew informed them that was not possible.

Next week is the Strategic and Economic Discussion (SED) in Beijing. The Chinese will certainly press for the U.S. to keep rates steady until some of the global uncertainty lifts: dual mandate with an extraterritorial reach. The rally in the BONDS is causing angst among investors believing a FOMC raise as being imminent. Now the curve is flattening so readers of NOTES are not surprised as to the action but as can be seen for the long end is signalling that Chinese fears may be justified. If the FOMC raises and the Chinese push the YUAN substantially lower, a new round of deflationary forces will be unleashed upon global markets, as the WEIGHT increases on the U.S. policy makers.


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9 Responses to “Notes From Underground: After the Flood … Of Data”

  1. Rob Syp Says:

    Yra – You’re like watching last weekend’s Indy 500 at the end. You bring up so many different perspectives and strategy’s.

    And for that I am thankful.

  2. Asherz Says:

    Yra-It is amazing to me that the much anticipated/hold your breath monthly employment number continues to hold so much sway and analysts and financial journalists ink. The birth/death number has a preponderant affect on the headline number, and to any careful analyst that number is fictitious. Since the beginning of this “recovery”, two/thirds of new job creation has been manufactured from this source. But more businesses have been closing than opening!
    Many decades ago a monthly money supply announcement had the same effect as today’s BLS announcement. That one went the way of the Dodo bird. So will this one as well, as the FED keeps putting employment goals out there, only to change them when reached (the goal posts are now in the stands).
    The total increases are probably going to total not much more than .50, half of which was delivered in the badly timed December .25 increase, and these only for attempting to retain some credibility, whatever is left of it. The rest is noise, but keeps traders interested and hopping.

    • yra Says:

      Asherz–totally agree and if the SEC and others were concerned about MARKETS and the function of such in capitalism all data releases would be on the weekend so there was time to digest the data in a thoughtful taking out some of the hysteria promoted by the media—weekend meetings and data releases

      • asherz Says:

        FE-See my last paragraph.
        Bullards broken clock is right sometimes.

        June 17 – Financial Times (Sam Fleming): “Close watchers of the Federal Reserve were bemused this week after an unidentified policymaker forecast just a single increase in official interest rates over the coming years. On Friday James Bullard, the president of the St Louis Federal Reserve, revealed that he was the rate-setter behind that unexpectedly low dot on the Fed’s ‘dot plot’ of rate forecasts, as he executes a big shift in his views of the economy that puts him at odds with other rate-setters who see a gradual series of increases. The former hawk said in a statement that he expects rates will remain unchanged in 2017 and 2018 following a single rate rise, in a leap towards an ultra-dovish outlook.”

  3. tom owens Says:

    I’ve been skeptical of all data and it’s impact on markets; not that it wasn’t a great opportunity for trading. “Michigan Sentiment” ??? Is it 500 people who don’t hang up on a telemarketer graduate student and espouse their feelings? —Friday release at nine moved bonds, equities, interest rates and currencies to the tune of trillions.

  4. Dustin L. Says:

    Asherz-The market seems to agree with your last point as evidenced by the curve; maybe a slight tightening in the intermediate term but no major shift upwards over the next decade. This is my interpretation anyways. So the flattening goes…

    Yra-I know you have been talking about the distortions in the U.S. curve (and hence all risk pricing) lately, but my question is this; with a persistently steep 10-2 curve since 2008 what is the new zero? Cleary the direction we are heading matters as well, but it has been a question on my mind of late? Has global monetary intervention mad the new zero 70-80 basis points on the 10-2? Or does inversion still hold the keys to major monetary policy error? Japan is an interesting case study I think.

    • yra Says:

      Dustin–the penultimate question—–that 75 basis points is the key level i see on the longer term charts and have discussed–the real answer is we don’t know because of how badly broken the bond markets are due to the world’s central banks—but if that 75 level goes the FED is going to have to be very,very nervous—but because DRAGHI has brought market corruption based on the potemkin village of counterfactual construction we JUST DON’T KNOW.This question was raised by KARL at VST and said why should we hang so much on it—because the market does and that is the tools we have—otherwise just turn off the lights and go to school and become a philosopher

  5. Joe Says:

    Yra – You could not be more adept at describing what is inside Madam Yellen’s head. The realization that the dollar’s reserve status makes both official FOMC mandates increasingly less significant to those who believe or pretend that they can manage economies, shows that monetary authorities have lost credibility and control.

  6. ShockedToFindGambling Says:

    Yra-The employment numbers looked like a clear change in trend to me, especially considering the downward dog revisions.

    Still, the stock market isn’t doing much…….FED buying All SPOOS?

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