Notes From Underground

It has been an interesting first month of trading as markets have gone from searching for inflation fueled by a rise in commodity prices and a weakening dollar, especially in regards to emerging market currencies. The commodity rally coupled with an upward thrust in emerging markets ran into the headwind of the spread of the Coronavirus from Wuhan, China to several other nations. The whiff of inflation was subsumed by the onset of fears of global deflation as investors continue to be concerned about China economic activity grinding to a halt as quarantines are the prescribed remedy for preventing a genuine pandemic.

The oil price collapse suggests investors are convinced that auto, rail and air transportation will slow prompting conjectures about three million barrels a day being removed from global demand. There has been a bounce in copper and oil for the last two days as the strong rally in global equity prices is suggesting that the fears of a serious global slowdown appear to be overblown. The markets are “alive” with the contagion of all sorts of headlines providing fodder for both the “its not not bad” to of course a coming slowdown resulting in what central banks fear most, a DEMAND SHOCK. This present situation keeps the UNEMPLOYMENT DATA from having the significance for the FOMC that markets would generally predict.

Wednesday’s ADP release was much larger than anticipated as private sector job growth was 291,000 versus the the 160,000 predicted. Economist Mark Zandi suggested that the large number was due to the seasonal factor of much better weather. My sense is the BLS will not be as generous in its seasonal impact and the consensus of 180,000 will hold. Most importantly, I will be the average hourly earnings (AHE), which is expected to be 0.3% but with the previous release being a very tepid 0.1% the consensus number will not be a big deal. The hours worked has been softening of late so pay attention. The consensus is for no change but if the number is lower then 34.3 hours worked per week it will raise the concern of some analysts that the labor market is not as robust as the low unemployment rate suggests.

The jobs report has impact because it lends credence to the idea of the U.S. consumer being able to carry the economy upward even as capital expenditure remains tepid. I’m skeptical about the consumer because the growing debt load reflects consumption being based on “borrowed” time. Credit card debt is EXPENSIVE as rates remain high (17%+) so I question the ability of consumers to absorb more debt. If the employment data is stronger than expected watch the yield curves and precious metals for a key to what the market genuinely feels about the economic impact from the corona virus.

ECB President Christine Lagarde spoke today and warned that central banks are running out of room to impact markets. “Every time you get a shock in the system you get high expectations of a reaction of the central bank that’s quickly incorporated in market expectations.But there is only so much a central bank can do.” This is not the thoughts of a dove or hawk but as she has advised the financial world, an OWL. At her last press conference Lagarde was sporting a GOLD OWL PIN on her jacket. Will her policies be as transparent as the OWL BROOCH?

Be patient and let the market have some time to signal its real concerns or desires. For currency traders, one more issue to be concerned with are the comments from the Commerce Secretary Wilbur Ross. A Wall Street Journal article the early in the week said the Trump administration will allow companies to pursue tariffs against foreign competitors if they can show those rivals have benefited from currency manipulation in their countries.

Tags: Christine Lagarde, consumer, Coronavirus, nonfarm payrolls, tariffs, Wilbur Ross

This entry was posted on February 6, 2020 at 7:39 pm and is filed under trade, unemployment, United States. 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.