Good News is Bad News?
It is that time again, the Labor Report and the health of the job market. Last month the dismal numbers were the nail in the coffin for any hope the Fed would raise rates in October. This morning was the polar opposite, with a huge upside jobs report for October and that is fueling concerns of a rate hike.
Good News is Bad News?
As I type this the Bureau of Labor Statistics releases the October Labor Report, with a significant upside surprise. Expectations were for 180,000 jobs created in October and the number came in above the highest estimate at 271,000. This was a huge upside surprise, especially after a weak September 142,000 jobs number.
We immediately saw the financial futures sell off and bonds sell off (yields rise) as expectations rocketed that the Fed will now raise rates in December.
The rest of the data was also somewhat better; wages rose slightly, participation rate did not decline anymore, and the U3 rate fell another tick.
Rate Hike Cheer-leading
Frankly I am surprised by the rather huge upside numbers this morning and it has certainly given fodder to the “rate hike” cheerleaders – who now are positive that Fed will raise rates in December.
But this is just one Labor Report amongst a sea of weak economic data we have been drowning in. There is also a river of economic data to come before December FOMC meeting – including ANOTHER Labor Report.
Good News is Bad News
Ironically a weak (bad) Labor Report would have sent the market higher as it would lower the expectations of a rate hike. So having a good Labor Report has sent the market lower as it raises the expectations of a rate hike.
One only has to look at the 10-year bond, which dropped hard and sent yields spiking over 60 bps to 2.3%. Clearly pricing in a 25bps raise in December. I think we could see 2.45% before the end of November.
The financial futures this morning are coming under pressure and it will be interesting to see if the market can rally into the close after absorbing the news.
The Dollar index rocketed and pushed up above 99 and we could see 100. That will certainly hurt top-line revenue for the multi-nationals and forward earnings.
Courtesy of FRED
Will the Fed Raise Rates?
It seems like the pressure is on that the Fed has to. Donald Trump went as far as to say that Yellen (appointed by Obama) will not raise rates because it will hurt President Obama’s economy – suggesting it is a political decision. Certainly his accusation is based on conjecture, but there is some truth – a raise in rates will certainly curb growth and depress borrowing and spending.
I am still in the minority camp – why, because one very good – GREAT – Labor Report is not the deciding factor. It certainly has convinced the markets and talking heads that the Fed will raise rates – but we need to back-up and look at the big picture.
Courtesy of FRED
Disinflation and Deflation are a huge factor for the Fed, was anyone paying attention to the dollar this morning after the Labor Report? Because if you are very concerned about Deflation and trying to target 2% Inflation – it’s not going to happen if the dollar continues to rocket higher. Dollar index could breach 100 and that is something we haven’t seen in a decade.
Courtesy of wikipedia
Perhaps this massive upside surprise Labor Report is to buy time, give the people/market some confidence the economy is doing well, get pressure off the Fed not raising rates, and test the market’s reaction to a highly probable rate hike?
There is time – we can let this play out, if this one highly watched and touted data point is just a charade and then either November’s Labor Report (released December 4th) along with inflation data becomes the last minute bad news that keeps the Fed from raising rates at the last minute. The Fed can even say they WANTED to and PLANNED to, but alas the recent data was bad and we couldn’t. It would be an excellent game of selling hope and at the last minute passing the buck.
I can’t get excited about today’s data as it pertains to potential rate hikes – there is just too much time and other economic data points to consider. I made a list the other day as to WHY they won’t raise rates and that list still holds true even with this one data point.
Of course I could be wrong and they could raise 25 bps – quiet the likes of me (for a while). But it would be nothing more than window dressing and potentially short-term. Any raise in rates would NOT be because of strong or even better economic data, it would be to quiet the cynics of the Fed policy and get the Fed off the financial market radar for a time.
Support & Resistance
The good labor report has jolted the market. I would look at 17,800 as to if we can close above that level heading into the weekend. If weakness visits the market, we could see 17,600 as support. Resistance will come in at 18,000 if we open flat.
The tech heavy index despite its climb has seen some huge volatility among some of the individual stocks in the basket. Look at 4600 as low support – but I really don’t like the gap below.
We could see 2080 today if the market doesn’t like the rate hike expectations. A close at 2100 could bring some comfort at the close.
RUT 1180 – 1200
For me it is all about the order flow in the Russell. The index hasn’t shown great confidence in the equity markets since June and while we have come off the lows in October, we are still shy of seeing a break-out rally above 1200. The Russell continues to lag the narrower based indices, failing to confirm the rally.
Today’s a trader’s day – there is some action and opportunity. Stocks and indices should jerk around, creating some volatile action.
As for long-term trends, even though the market is reacting to a potential rate hike – today is just one data point and there is still a long time between now and Decembers FOMC meeting and a boat load of more economic data to consider.
Implied volatility is low and it is perhaps a good time to over-hedge positions.