Notes From Underground: The Markets’ Christmas Wish: A Nonfarm Payroll Number of +300,000

The first Friday of the month brings big news for the data dependent Fed. The market consensus is for 185,000 job gain and average hourly earnings increase of 0.2% and the work week to remain unchanged at 34.4 hours. In my opinion, a HUGE increase of 300,000 jobs with another 0.4% increase in wages (similar to last month) would bring great pressure on the FOMC to increase FED FUNDS more than the market’s expectation of 25 basis points. What I am saying is purely THEORETICAL but it would make for an interesting discussion for the DATA DEPENDENT FOMC. It’s especially interesting as the exuberance of the tax cuts, infrastructure projects, rollback of regulation, the equity markets should prompt the asymmetrical nature out of the FOMC decision-making process.

Ever since the Volcker FED slayed the inflation demon, FED policy has been directed by slow rate increases but rapid rate cuts to stem the any disinflation or recession threat. Remember when the FED raised interest rates in 25 basis point increments for 17 straight meetings from 2004-2006? The slow and steady pace of the Greenspan rate increases aided and abetted the phenomenal housing bubble, which resulted in a burst bubble and eight years of zero interest rate policy (ZIRP).

Astute economist Bill White of the BIS, questioned the FOMC policy with the following: “DO CENTRAL BANKS LEAN OR CLEAN?” Meaning, do central banks wait for the bubble to burst or push rates higher earlier in an effort to prevent a bubble from forming? Or do they rush to lower rates quickly to clean up the mess of a financial deleveraging? FED models require that the FOMC react to the unprecedented environment of FULL EMPLOYMENT and FISCAL STIMULUS. When Chair Yellen and Governor Lael Brainard discuss running the economy HOTTER FOR LONGER. We will find out just what HOTTER means. Please Santa, bring +300,000 jobs.

Now, the above discussion was absolutely THEORETICAL. As I have discussed for three years, Janet Yellen  is cautious. Since she’s a labor economist she has a predisposition to allow wages to rise and be assured that all slack is removed from the labor market. Yellen is aware of headwinds and will certainly raise the appreciation of the DOLLAR and rising long-term yields as a reason for caution but I can dream of a FED leaning instead of cleaning. The question for all market participants: If the jobs report is very robust, is the probability of the FOMC staying at its current rate greater than the possibility of a 50 BASIS POINT increase in the FED FUNDS rate? Just thinking out loud in the realm where 2+2=5 is also a beautiful thing.

***Fifteen minutes after the JOBS REPORT, FOMC Governor Lael Brainard speaks. Pay attention to Brainard raising concerns about the strength of the DOLLAR as a headwind to U.S. growth. It has been Brainard’s dovish stance for the past year. Now that the dollar has rallied with the rapid rise in LONG YIELDS, Brainard  will provide us with insight into the thinking of Yellen. Watch for her position an uber-dove and closeness to the FED chair could provide an offset to a good JOBS number. A good jobs number meaning something similar to the 216,000 ADP number put forward on Wednesday.

Or more important data point would be if average hourly earnings are at least 0.4%. I urge patience and of course preparation for the market reaction to these potential market-moving events. And of course Sunday brings Italy, so any trade is just that, a TRADE. Holiday thinning markets and year-end account balancing will create great volatility so prepare technical and be ready to take advantage of algo-driven opportunities.

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15 Responses to “Notes From Underground: The Markets’ Christmas Wish: A Nonfarm Payroll Number of +300,000”

  1. silverbug2155 Says:

    Yra in a world of bogus,trumped up data,does the Fed really stand a chance of being relevant ? They are just soothsayers.

  2. ShockedToFindGambling Says:

    Yra- 300,000 could be a chance for Yellen to pull an O’Hare trade.

    Book her flight to Brazil and tighten 100 points.

  3. Publius Says:


    I’m a fifty-something cynical liberal arts type. I have no faith in any of these stats and subsequent remedies by unelected bureaucrats.

    Am I wrong?

    • Yra G Harris Says:

      Publius—see article ten of the federalist papers.Sorry,my humor but as this blog is named I agree with you but not as a cynic but someone who searches for value opportunities through those skeptical eyes

  4. Frank C. Says:

    ADP number Wednesday of 216,000 was a harbinger. The red hot ISM today was even better. I am not sure if we get 300K but definitely break above of expectations with some adjustments up from last two months. The economy is running strong.

    I agree with your concern of Italy and year end window dressing. But the polls show Renzie/Propositions/Reform well behind and losing so one would think the adverse result is discounted in to some degree.

    Today’s bond move although reflective of the OPEC and ISM numbers, I am always skeptical that someone had a peak of tomorrows report and bought ahead of the market.

    In the end I hope more people have good jobs and higher wages, irrespective of yields or markets. That is a good thing.

  5. Chicken Says:

    Looks like a NO vote.

  6. Frank C. Says:

    Re: Euro Exit?

    I don’t know if you caught Olivier Blanchard on Bloomberg. He candidly discusses weaker countries exiting the Euro down the road.

    • Yra G Harris Says:

      Frank–thanks for posting it but he fails to discuss the ultimate issue about who guarantees the ECB and also why Draghi keeps piling sovereign assets on its balance sheet making it virtually impossible to leave

      • Chicken Says:

        Impossible by choice perhaps but aren’t bad actors eventually asked to leave the stage (following the custumary flurry of rotten tomatoes of course)?

        Or perhaps Germany calls a truce once they finally realize what’s happening and mutual divorce ensues?

        The part that doesn’t work is __exit?

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