Jobless claims came in very strong once again. That means we have three weeks of very strong data in a row. We showed that the Fed may have leaked to the Wall Street Journal ("WSJ") that the Fed would give new hike commentary next week. We pointed out that the Fed leaked the word "urgency" to describe the need to react to strong numbers. This jobless claims number qualifies as one that could require "urgency."
This is a risk to the stock market (NYSEARCA:SPY).
First let's review today's jobless claims report. Here it is.
A down number means less jobless claims which implies more people are working.
Since May it's been getting stronger (down means less jobLESS claims meaning less people saying they Don't have a job. LESS X Don't = Do).
Here's a longer term view.
This thing is down. Any lower and it's pre-historic-never-been-here before-perfect-universe-nobody-is-claiming-to-be-unemployed-the world-is-perfect-rating. PERFECT, couldn't be better.
Fed Will Make Sure We Know Rate Hike Coming
That's why next week the Fed, as promised will most likely talk about a RATE HIKE surrounding their FOMC meeting. They will likely say it VERY publicly.
"But the message in their post meeting policy statement could be that the economy is on a more solid footing than appeared to be the case when they last gathered in June, setting the stage for raising rates if the data hold up in the months ahead. Such a message would get the attention of traders in futures markets, who see low chances for the Fed moving as early as September."
Combining that WSJ/Fed statement with this very strong number means to us a HIKE (despite all you never ever again in the history of mankind believers, sorry, it COULD, I say COULD be. Out on a limb rating with "could")
Buuut, combining that very very strong jobless claims with this statement, it's a new rating DEFINITIELY COULD BE.
And did you read the part that they want to make sure traders pay "attention." They will make sure we know.
We pointed out that the WSJ pre-FOMC leak said this, "But new rounds of strong economic data-particularly on hiring or an uptick in inflation-could increase their sense of urgency in the months after their meeting next week."
What did that say? Strong hiring data? We admit this is not non-farm payrolls but they are very similar. This is a strong piece of "hiring" data that they need to move to a sense of "urgency."
This is a change.
Quick question, does that jobless claims chart above have any resemblance to this non-farm payrolls chart (The Fed's key jobs indicator)?
It's pretty much a mirror, right? Low jobLESS claims means High jobS claims, right? This is not rocket science.
Well this jobLESS claims number is the only real key indicator that the Fed will have in hand post their "urgency" statement and ahead of their FOMC statement.
It may not cause a hike next week but it will definitely bias their public comments.
We think that means talk confirmed that there will be a rate hike.
Market Impact Of A Fed Rate Hike When GDP Is Slowing??
Here's GDP, which way is it going?
GDP is slowing right? What would a rate HIKE do to that number? It will slow it further. That is not good.
Just like January we think another rate hike will hit markets negatively
We are in pre-historic rating land with our Fed Funds Rate. The rate hike in December was of the 100% variety (25 to 50bp) and crashed markets and this one that is coming (sorry non-believers) ahead of the elections will be a 50% jump in rates. (50 to 75bp)
Here is the chart dating back to the invention of the wheel. Fed rates have never jumped from this level.
All the valuation formulas that have rates in their denominators that are oh so popular with low bond yields will go DOWN in value.
A higher denominator means a lower overall number. Higher yield denominators will hit overall valuations.
You can see we're excited about the turn of events we have going into the FOMC decision next Wednesday. The Fed prepped us this week to watch out for hot pieces of economic news. We got one. It's not the granddaddy of economic numbers but it feeds into their core non-farm payrolls. It's definitely not a nothing official rating.
A rate hike is clearly "on the table." For us, that is a big risk to markets in an already slowing economy.
Please stay safe. We remain bearish.
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(Aggressive Ignores our Medium Term Fundamental Call and just focuses on the week)
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