Fridays Labor Report showed strong growth in the job market, enough so that President Obama was able to take a victory lap. Yet if one peers behind the headline number curtain, we see that the type of jobs and demographic are not as robust as the headlines would suggest. Over the years we have seen a rather massive shift from full-time to part-time jobs, weaker employment in the younger demographic, and more people over 55 are going back to work for lack of retirement savings. There may be no argument that more jobs have recently been created, but the quality, type, and demographic are sure in question.
As expected from my Thursday report, a stunning jobs report (better than expected), can initially knee jerk the markets up to their resistance levels. Unfortunately good news in the job markets could also be bad news for the financial markets as expectations about a potential Fed rate hike again rears its head. Markets will pause at resistance levels and it should not be surprising to see selling pressure resume, as we may see some take risk off the table.
Yet I can’t help but wonder if the market is truly buying into the strong Labor Report and boost in jobs. It is certainly conflictive with other economic data that is pointing to a slowdown in the economy. A couple of other data points that are raining on the Job’s Victory Parade are:
- China’s massive slowdown in exports and imports (biggest decline since 2009). Exports fell a whopping 25.4% and imports fell 13.8% on-year for February, significantly below analyst expectations.
- National Federation of Independent Businesses (NFIB) report for small business fell for a second straight month in a row. Six of the ten index components declined and the rest were unchanged.
- ECB is taking a more dovish approach ramping up stimulus and now considering negative interest rates.
- Fed Vice-Chair Fischer and Fed Governor Brainard (both FOMC voting members); stated they are concerned about “global crosscurrents” that could slow down economic activity. Brainard argued for patience in rate increases.
Courtesy of the NFIB
Courtesy of the NFIB
FOMC rally coming?
If we look at the 10-year treasuries, they are rallying as yields fall. As of this morning they are at 1.84%. Interesting as the bond market is not pricing a rate hike, we also see equity markets pausing and coming off in the pre-market.
The FOMC meeting is coming up on March 15-16th and I do not believe, even with the strong job headline numbers, that the Fed will raise rates. Other economic indicators are reflecting a slow and weakening global economic environment and the ECB is looking to pour more stimulus in and take rates into negative territory to spur lending.
The market is poised to rally on more stimulus and the bonds are not pricing in a rate hike. We are at a pivot point and could see some selling pressure and volatility until the Fed makes a decision at their next FOMC meeting. For now the Labor Report is more window dressing and certainly plays well into the political election circus and Obama’s legacy, however as to real Fed monetary policy and actual economic measures it’s true significance is muted.
Support & Resistance
We are now pushing into what was once a Support level in December, now a Resistance level in March. The market wants to rally, especially if the Fed doesn’t hike rates. We are seeing the risk-off trade in this arena, as those that weathered the wild ride from December through the first quarter are wanting to take some risk off the table. 17,000 is a straddle strike and I suspect a big move in the coming – up or down. FOMC will be a factor at play.
I am more disappointed with the tech heavy index, as I thought a visit to 4400 was in the cards before we say any significant resistance. Struggling to get there means we could be loading up on hidden volatility, like a compressed spring – ready to expand with a gap up or gap down move.
All eyes are watching the S&P 500 and the big 2,000 area. Is this resistance in which we see a retreat back down into the 1940 area or are we ready for a break-out rally that could be fueled by short-covering up to 2060? The FOMC meeting is still days away, so in the meantime we could see some knee jerking volatile action in here.
The strongest sign of a bottom and rebound in this recent move has been the Russell. Unlike the other indices it has moved strongly higher, new highs every day. The 1100 to 1120 range was previous support and now potential resistance. So far the Russell shows a rather strong bullish rebound. We still have a ways to go before we get to the January highs and a strong close above 1100 would be a good sign. I believe the 1100 to 1120 area is key to watch as we head into the FOMC meeting next week.
Unfortunately nothing has really changed and the 1st quarter sell-off in the equity markets was driven by the Fed’s shift in monetary policy taking a more hawkish tone. Global economic data consistently shows a slowdown and weakness. China’s export-import data was rather concerning and other domestic economic data (minus the government Labor Report) are showing tepid growth at best.
No doubt this market can again get back into rally mode if the Fed changes tune back to a more Dovish and accommodative stance. Both Fischer and Brainard sounded like Keynesian Doves arguing for patience in raising rates and the talk of Negative Interest Rate Policy (NIRP) has been circling. Europe is heading down that path and Yellen’s Congressional testimony was peppered with NIRP discussions (and to whether it is legal or not).
My concern lies in hidden inflation that is building and the Fed’s continual accommodative nature, which is a recipe for disaster if not thwarted and controlled. I am just not sure if the Fed is willing to take the pain today to avoid the bigger problems in the future. It is also an election year and the Fed are not only Keynesians (siding with liberal socialism), they have also ALL been appointed by President Obama and I believe there is allegiance toward the Democrats. So I doubt the Fed will take any significant hawkish action, which is not in their nature and certainly will curtail economic growth.