We wanted to get some hint what the Fed thought after the jobs number. One thing we (think we) know is that the Fed was shocked by the number. But now they're playing it down. Our conclusion is even if CPI prints 10% inflation we think the Fed is on hold.
Near term it sounds like there is less hike risk to markets (NYSEARCA:SPY) but more global risk medium term. We would take that to mean stocks can hold up for the next couple of weeks. That said, what we are about to show is the Fed is more worried about the global slowdown. We think that increases market risk further out.
Let's watch another regular strange (regular and strange go together now) event in the "2016 hikes on hold saga."
First let's see what the Fed said about the jobs number ahead of the jobs report.
"The magic number in Friday's jobs report is 200,000. If the Labor Department reports that employers expanded payrolls by 200,000 or more in July then that will likely keep alive the possibility of a Federal Reserve interest rate increase at its September policy meeting. Something much below that threshold will likely keep the Fed on a wait-and-see path, inclined to raise rates this year but in no hurry to signal an imminent move barring some other positive economic surprises."
We see a couple of between the lines scenarios here.
1) 200k+ Fed hike on the table for September
2) 185k or less no Fed hike on the table.
Reading into these two scenarios what would you say the Fed would say to...
3) 255k? Based on the above commentary, we'd guess the Fed ahead of the number were saying to each other, "yeah right, no way no how, let's throw the WSJ a bone and under-over it at 200k because there is no way in Kentucky that the number prints anywhere near that. This way we can be on hold until the day after elections like Elazar wrote about us."
How do we know that? Because the number printed way way over that 200k. Even with that a Fed board member came out to say they're on hold anyway.
It was FT reporting on Fed Board Member Jerome Powell saying, "I am more worried about it than I was. The probability of an era of weaker growth, lower potential growth, for a longer period of time-that worries me more than it used to. (Rates will) just have to be lower than i thought."
The FT report came out Sunday. They said the interview was before the jobs number. That said this was the only report from a ranking member since the jobs report.
Did he take Friday off? Are you joking? C'mon that's just not fair.
Do you remember that WSJ preview? Anything around 200k and a rate hike is on the table, right? That's what they said.
Then right after that 200k give-or-take "yeah right" to the WSJ the number comes way above at 255k. And what does the Fed say, "Oh, my goodness you have no idea how SLOW things are. Better leave rates low forever. I thought the number would be at least uh, 255? Slow, I know, right?"
Am I the only one losing my mind here? Where am I? What slower growth is Fed Governor Powell looking at with that quote right there? We're guessing he had some idea. Maybe they handed him Venezuela's numbers because there is no way he was looking at the numbers we saw out of the US Friday.
To Make Matters Worse
*The July jobs number was above the second quarter average by 100k.
*The Atlanta Fed just upped their GDP numbers August 5th, the same day as jobs.
Stock Market Implications
With the Fed on hold we think the markets can glide higher for the next couple of weeks. We now have practically guaranteed low Fed rates. We have low inflation numbers unless next week's CPI surprises. We thought the jobs number was good until the Fed told us, "Oh no you didn't look at the really SLOW part in that number. Oh that number is very slow. You don't know how slow that number was. SLOW."
That tells us the Fed is on hold no matter what.
Further out, however, the fear the Fed has on the rest of the world appears to be a bigger risk. If the Fed can ignore a great jobs number it tells us there is something bigger at risk to economies and markets. Fed Governor Powell said, "the risk of the global economy is to the downside."
Next Scheduled Events
Tuesday, August 16th: CPI
Friday, August 26th: Fed Chair Yellen is going to tell us how SLOW things are August 26th in Jackson Hole. We're going to sneak in a question if she means Jackson Hole is slow or the United States Of America (We'll say it slowly so we're sure we're talking about the same planet). (Oh, let everybody know the Hamptons party is called off that weekend with key members out of town, sorry.)
The Fed is on hold. They are waiting for inflation to get to 2%. Or maybe when we get to 2% we'll wait for 3%. (We can just picture it when inflation prints 2%, "Did you see how SLOW inflation is?") When it gets to 2% we expect it to skip straight up to 3% given the amount of global easing.
The world is awash in money. Global money supply is way up and global money demand is down. That equation makes us think global money value will go down. We think you see that show up suddenly at some point in inflation numbers.
Really The Fed Knows If They Raise They Crush Global Growth
Realistically if the Fed raises rates all the foreign easing money is going to row-boat over to the US for the 1% higher rates here.
The Fed likely had a few foreign central banks all-out begging ("we'll do anything" type calls) them not to raise rates while they are all easing.
If the US raises rates they will slow the entire world. Why? Because all that easing money globally will not go to easing. It will go to get the rip-roaring 1% US yields. And all that easing will be good for as much as it's been so far, supporting markets and not economies.
It Could Be The Fed Wants To Continue To Lower QE
We recently showed that the Fed had its biggest reduction in QE Federal reserve balances in several years.
It could be that the Fed is distracting the world with their low rates but at the same time pulling the really important money from banks in those Fed reserves.
That also will sop up liquidity from the world and push up market rates as there is less free money being lent to banks to lend to delinquent student/auto loan credit card carriers.
We think the Fed gave the WSJ way too much information ahead of the jobs number. No matter HOW strong a number is the Fed is going to tell you how SLOW that number really is. You probably didn't go to the same Fed post-grad academy which is why you misread jobs thinking it was really strong.
On the one hand it tells us a rate hike is not a risk for markets in the near term. That can hold up markets over the next couple of weeks. On the other hand it tells us how much risk there is in the world in the face of the Fed secretly pulling liquidity from their QE balances.
The risk to the world and markets is to the downside further out.
Letting The Market Dictate
To enter a trade we have to let the market dictate. Whatever we think in the above report we need a game plan to enter when the market is in our favor. To line up timing on a shorter term basis with risk management spelled out try Your Trading Team an Elazar Advisors, LLC service on Seeking Alpha.
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