The first Friday in April brings a key data point: the unemployment report. Of course, what most people are concerned about are THE AVERAGE HOURLY EARNINGS. The consensus is for AHE to increase by 0.3%, which is much better than February’s tepid increase of 0.1% rise. The focus on AHE has rendered the NFP growth a distant concern, especially as the participation rate suggests unemployed are returning to the job market. This calls into question how the FED model measures genuine SLACK in the jobs market. For the U.S., the unemployment rate is expected to be 4.0% with a net gain of 190,000 workers in the nonfarm payrolls.
If AHE is above consensus look for the DOLLAR to rally as the chatter will be that the FED should be on course to raise rates another three times in 2018 for a total of four. But I would pay close attention to the 2/10 yield curve to monitor how it reacts to a stronger AHE number. If the curve flattens in anticipation of more rate hikes, the FED will be forced to confront the idea that with QT in play there’s a chance they may raising too fast. Will the flattening yield curve concern the non-academics, but financially astute Jerome Powell? With all the noise about TARIFFS and trade wars the interest rate discussion has been on the back burned, but I wonder FOR HOW LONG?
Raising the issue of the possibility for four Fed rate hikes, I refer to a speech by Governor Lael Brainard delivered on Tuesday titled, “An Update on the Federal Reserve’s Financial Stability Agenda.” Brainard discussed how the Fed looks to TAIL RISK as opposed to the forecasted outcomes of Fed models. The Fed governor breaks it down the four interdependent pillars for measuring financial stability: Systematic analysis of financial vulnerabilities; standard prudential policies that safeguard the safety and soundness of individual banking organizations; macroprudential tools that build resilience in the large, interconnected institutions at the core of the system; and countercyclical policies that increase resilience as risks build up cyclically. Brainard notes that in a period of LOW RISK PREMIUMS just the RISE OF CONCERNS about potential for increased inflation “could boost term premiums on Treasury securities, which could trigger declines in asset prices across a range of markets.”
This is the predicament the markets confront regarding average hourly wages. The rise in term premiums can send the equity markets lower without any underlying change in corporate profitability. Fundamentals can remain positive for corporate profits but the Fed’s aggressive monetary policy has forced a downward pricing for risk assets around the globe. When you factor in the ongoing QE from the BOJ and ECB, it is difficult to measure the genuine value of many different asset classes. Term premiums can be the Minsky moment response to valuations.
Back in October, People’s Bank of China Governor Zhou warned that rising debt levels could provide for such an outcome. In my opinion, though, the most interesting comment in the Brainard speech came in response to CYCLICAL CONSIDERATIONS. In noting the rise the Fed’s lack of experience in measuring pro-cyclical fiscal stimulus at a time of low unemployment the Fed will have to be cautious about measuring the imbalances that arise. Brainard said: “Of course, if cyclical pressures continue to build and financial vulnerabilities broaden, it may become appropriate to ask the largest banking organizations to build a countercyclical buffer of capital to fortify their resilience and protect against stress.”
It seems that the FOMC views the use of CAPITAL RATIOS, and maybe even reserve ratio levels, as an alternative to increasing FED FUNDS, which could actually impact the recent flattening of the yield curves. Pay attention to the change in narratives if the inflation discussion begins to gain traction. Look for the FED to increase discussions about alternatives to the mere increase of Fed funds. The FED will have to be concerned about the impact of four rate increases on the value of the dollar, especially as the TRADE DEFICIT numbers continue to rise. This is not a strong dollar administration.
***Something for consideration: During these concerning times about TARIFFS on agricultural products I will raise this idea for an equity trade. It is an old theme but needs to be reconsidered: Bunge Grain has the largest foot print in the South American grain markets. Two significant firms, Glencore Mining and Archer Daniels Midland, have recently discussed buying BUNGE, which sent the stock price soaring. If China actually moves to have an even greater trade presence in Brazil, Argentina and Uruguay, BUNGE takes on an even greater asset for larger trading firms.
It’s something to consider. I advise doing your own work to measure acceptable risk. Full disclosure: On Thursday I added to my position but the amount of my involvement is rather meaningless to market impact. Although I do note that Jon Najarian ran an analysis on the options of Kansas Southern Railroad (KSU) after there was a bulge in its options volume (two days after the last blog post). I can definitely say that had nothing to do with me but maybe one of my thousands of readers put ideas into action. PRAXIS INDEED.
Tags: average hourly earnings, Bunge Grain, cyclical, Fed, FOMC, Lael Brainard, nonfarm payrolls, tariffs, U.S. Dollar, U.S. yield curves
April 5, 2018 at 8:16 pm |
Hi Yra, Hope all is well! If the Fed decides to use capital or reserve ratios as an alternative what’s the impact on big banks and thus equity markets . Would banks find themselves in a slower growth mode or would the “hopeful” continued curve steepening be the delicate balance everyone is looking for unless of course your John Doe consumer who eventually cannot fiscally absorb net higher interest rates regardless of how they came to fruition. Hope my question makes sense. Thanks and always enjoy your commentary. Rick
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April 9, 2018 at 8:22 pm |
Rick–the question is spot on and the answer would depend on how much capital investment was taking place and whether or not there was a significant rise in productivity
April 6, 2018 at 5:18 am |
Thanks for sharing your trading ideas, Yra! The dynamics in the ag business, especially for a huge company like BG are too complex for me to analyze. But I´ll certainly keep an eye on the stock. Good luck!
Here´s Bloomberg:
“Here’s an unexpected twist to the China-U.S. trade drama: proposed tariffs on U.S. soybeans are boosting profits for oilseed processors.
While China’s plans to impose 25 percent tariffs on U.S. soybeans are dragging futures lower, crusher margins jumped as much as 19 percent on Wednesday to the highest since November 2014. One reason for the move: soybean meal was left off Beijing’s $50 billion hit list of targeted American goods. The protein is made by crushing the oilseed.
China’s livestock-feed producers could start importing soy meal, instead of the usual beans, to satisfy the country’s hogs — a boon to processors like Bunge Ltd. and Archer-Daniels-Midland Co.”
April 6, 2018 at 7:54 am |
Yra,
Fully understand you point on ADM or Glencore potentially buying BG.
Why wouldn’t some Chinese firm (probably 50% owned by Chinese Govt) just come in and buy BG to have maximum pressure to put on Trump via the Ag Sector??
April 6, 2018 at 9:50 am |
The US government would certainly block such a transaction. CFIUS also has a say in agriculture (Food Security is National Security Act of 2017).
April 6, 2018 at 11:17 am
Dont forget who owns SFD Smithfield Foods now (old ticker SFD)
April 6, 2018 at 11:44 am |
Trader1 – yes I know (the Chinese). But that was back in “friendly” times. The above mentioned Act was introduced on a bipartisan effort in 2017. Given the current climate I doubt that any chinese takeover (no matter which industry) will get approval. Last month CFIUS even blocked the auqisition of Cogint – a 300m market cap advertising/performance marketing company.
I seems these days any company is a matter of America´s “national security”.
April 8, 2018 at 9:56 am |
Green and Trader—the concept of extra territoriality allows the U.S. Government to reach into the affairs of other countries.But the fact that Glencore and ADM have pursued Bunge prior to the tariff outburst to me makes Bunge an even more desirable target for the merchants of grain.Yes ,the Chinese would probably be smart to purchase the second largest S.A. grain operator–Cargill being the first and they are privately held–stay tuned as this gets to play out
April 6, 2018 at 1:00 pm |
Goldman, which has a presence in China, is out with a client note today stating that China’s next response to any substantial Trump trade action will be a surprise devaluation of the Yuan.
That would no doubt infuriate the Trump Admin and more importantly send deflationary shock waves around the world, likely crashing equity markets in the US and Europe. Recall that the last time China “devalued” in 2015 by mere 3% rather than this would-be 10%, equity markets had their worst collapse in these past nine years, culminating in the waterfall equity event of early 2016 until the so-called Shanghai Accord. Because the Yuan has strengthened 10% against the dollar since 2016, a sudden 10% devaluation would seem a reasonable and defensible counter-measure to anymore Trump Admin tariffs and its “deliberate currency devaluation” in the words of no less than Mario Draghi.
Nevertheless I’m skeptical because I believe China has adopted a “strong Yuan policy” in order to realize their greater objective of becoming the leading reserve currency over time. And the Chinese tend to be long-term strategists rather than focused on the short-term like the Americans. So we’ll see.
April 6, 2018 at 1:47 pm |
Of course I am paraphrasing Draghi in the above. In addition, the ECB’s #2 man Coeure is now hinting the ECB could balk at any tapering because “protectionist sentiment has already contributed to tighter financial conditions” and “A trade war scenario adds to global uncertainty at a time when some central banks have only just begun the process of unwinding the unconventional policy measures”. This per Bloomberg and not paraphrasing.
April 8, 2018 at 9:44 am |
David—you are writing my blogs 48 hours ahead of me.My thoughts mirror yours as the Trump team has been vocal on its key concerns but it has no political acumen.The more Donald tweets about the stock market the more captive is his administration to Chinese responses.The Ross/Navarro team played this game way too early and as I wrote several weeks ago would be held captive to the coming election.The South American harvest is completing and the bins are full of Brazilian beans giving the Chinese an immediate alternative to threaten the Great Midwest farmers with so putting the White House political team on the defensive.As I have tried to make my readers aware with the notations of Chinese actions to counteract NAFTA–the Chinese and Russians are far more astute players in global macro geopolitical concerns—-when you are not setting the world’s agenda you have to be -no time for the arrogance of the unipolar world and the end of history.As to Coeure ,he has gotten very vocal as he tries to gain stature in his desire to replace Draghi—I find Couere a self-indulgent bureaucrat trying to ride the Macron wave—he will not be the next ECB President.I also think your summation that the Chinese have moved to a more domestic based and therefore a stronger YUAN enriches the middle-class—I think Michael Pettis holds great sway with Chinese policymakers–but the idea that they could announce a 10% devaluation and rattle world markets is not beyond the realm of possibilities—and refer back to August 2015 for the effects of Chinese actions.
April 6, 2018 at 2:56 pm |
Janet Yellen: What the Fed Has Learned Since the Financial Crisis
http://knowledge.wharton.upenn.edu/article/janet-yellen-fed-learned-since-financial-crisis/
April 8, 2018 at 2:49 am |
This week starts earnings. I woke up this morning and my first thought was forward guidance. The tariff situation will be a statement in future earnings.
April 19, 2018 at 6:52 pm |
[…] a previous post I noted how this language had appeared in another Brainard speech. Governor Brainard noted that the […]