Notes From Underground

The first Friday of August brings the BLS jobs report. Does it matter for the markets?In my opinion, not unless this number is above 300,000 or the rate falls below 4.1%. Average hourly earnings (AHE) is the critical variable of the economic story. The FOMC and others have been adamant that it is the fear of wage inflation that drives the discussion about either an interest rate increase or a “relatively soon” beginning of quantitative tightening. For our preparation, the market estimate is for a nonfarm payroll number of 170,000, an unemployment rate of 4.4% and, more importantly, a 0.3% increase in AHE. As an aside, a number that Art Cashin likes is the hours worked per week, which is expected to remain at 34.5. The hours worked are examined because even if new jobs aren’t created a strong economy will get employers to seek longer hours for current workers.

As usual, I warn dear readers so as to be aware of the algo headlines, which may give a “false” read as to the context of the jobs report. Be patient and know your risk parameters to see if there’s  an opportunity at a low-risk entry point for your asset of choice. The U.S. treasury market has been strong all week riding the wave of the ECB asset purchases. If the headline data reads STRONG (high wage number), be leery of the ECB buying as it is the beginning of the month and they have a fully loaded mechanism. The DOLLAR is at elevated levels so STRONG data will provide an opportunity to test the sentiment that keeps downward pressure on the greenback. Patience for your low risk entry levels (that is critical). Don’t race the HFT algo traders for as Joe Friday would say, speed kills.

***The Bank of England stayed the course and kept rates steady at 0.25% and the asset purchase facility steady at 435 billion pounds. The actual vote changed to 6-2 from 5-3 at the previous meeting. The two dissenters were the same but the changed vote was due to Kristin Forbes having left the Monetary Policy Committee and her replacement Silvana Tenreyro casting her vote with the majority. The British pound sold off against all the major currencies and with the EURO/GBP cross making a 10-month high, closing above the 0.90 level.

As I opined yesterday, BOE Governor Carney OUGHT to raise rates in response to the very weak British pound and higher than expected inflation.Instead the coward of Threadneedle used the weakness of the POUND as the rationale for not raising rates:

1. “Net trade is bolstered by strong global growth and the past depreciation of sterling”;
2. “This overshoot reflects entirely the effects of the referendum-related falls in sterling”;
3. “Attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment,in all likelihood,even weaker income growth. FOR THIS REASON, THE MPC’S REMIT SPECIFIES THAT, IN EXCEPTIONAL CIRCUMSTANCES, THE COMMITTEE MUST BALANCE ANY TRADE-OFF BETWEEN THE SPEED AT WHICH IT INTENDS TO RETURN INFLATION SUSTAINABLY TO THE TARGET AND THE SUPPORT THAT MONETARY POLICY PROVIDES TO JOBS AND ACTIVITY.”

The bottom line is that central banks can do whatever they wish and they can define EXCEPTIONAL CIRCUMSTANCES to fit any policy stance. It is Governor Carney’s panicked response to the BREXIT vote that created this situation. The BOE was WRONG on its forecasts for a BREXIT vote. The economy remained strong although Carney would say it was because of the BOE‘s actions. If you accept Governor Carney ‘s counterfactual then Carney should be following the FED and removing the extra stimulus that prevented a meltdown. No wonder the sterling suffered a bout of weakness today.

Tags: BOE, Brexit, British pound, nonfarm payrolls

This entry was posted on August 3, 2017 at 7:12 pm and is filed under BOE. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.