After the strong jobs reports, if the Fed wanted to raise rates, they would have warned markets (NYSEARCA:SPY). Their comments since jobs however seem to say just the opposite. They are dovish. If they were to raise in a slowing global backdrop, they would destroy global growth as all money swims to the US. The Fed on hold removes rate hike risk to markets in the very near term. The Fed on hold is good for gold and silver as inflation seeps out.
Since the jobs number, we saw two key comments from the Fed. We're looking for some guidance of where they stand.
Here's the two comments since the jobs report.
1) The Financial Times quoted Fed board member Jerome Powell talking about LOWER rates.
"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. [Economic forecasts] just have to be lower than I thought. [The long term Fed Funds rate] could be lower than [3%]. It could be lower than that, in my view."
Above you saw a major Fed governor say rates need to be LOWER than his long-term view.
Despite the strong jobs numbers, Fed officials are talking about lower rates?
2) The Wall Street Journal ("WSJ") just reported something very similar from another Fed governor. The WSJ quoted William Dudley as saying, "If the economic outlook abroad deteriorates and this causes foreign countries to pursue a more accommodative set of monetary policies, then the dollar would likely appreciate―other things equal― reflecting expectations of lower interest rates abroad relative to U.S. interest rates. In this case, the U.S. may need to adjust its own monetary policy path. If the (Fed) did not make this adjustment, the stronger dollar could result in an undesired tightening of U.S. financial conditions."
Quick question, okay?
If the dollar goes up and tightens, which way do you need to "adjust" to offset a tightening? You'd need to ease, right? Here you have another Fed governor talking about the need for EASY monetary policy.
That is so strange. You have a blowout jobs number on Friday. Really, you had two months in a row of blowout jobs numbers and the only commentary from the Fed in the last week was dovish.
Mr. Powell says we need low rates for a long time.
Mr. Dudley hints for a rate CUT? Did I hear that right?
Let's look a little deeper into what he said.
He said if foreign countries continue to ease the dollar should rise. That would act as a rate hike and slow the US. If that were to happen, his words now, "the US may need to adjust its own monetary policy path" and ease to offset that strong dollar. That's what he said. What other adjustment do you need to offset a strong tightening dollar? None. He said in Fed-ese, "rate cut" not hike.
Are we talking about the same country. Two Fed officials are talking about easing after that jobs report that blew out expectations. Does that make sense to anybody?
If the Fed were to raise, they would crush global growth.
The Fed realizes that a hike would kill global growth.
1) Global historic easing has not led to a pickup.
2) Global easing is peaking and at max levels.
3) If the Fed offers higher rates, all that global liquidity will come to the US.
4) That would mean all the global central bank ("CB") ease would not go to growth. It would crush their own economies.
Therefore, the Fed realizes there is no way they can raise rates. They would crush global economies and that would hurt the US economy.
Even if US growth and inflation picks up, the Fed is on hold.
Good For Gold And Silver
The more the Fed remains on hold during signs of US growth the more inflation risk seeps out.
Stock Market Implications
We think a rate hike is a risk to markets. As long as a rate hike is on hold, it is one important risk removed from the stock market.
We have stronger and stronger evidence that the Fed is on hold until the elections at the earliest. The way they have spoken following strong jobs numbers though, they may be on hold indefinitely.
Defending Why Jobs May Not Be So Strong: Stagflation
There is a reason why we don't have to necessarily take the upside surprise jobs numbers as a strong economic signal. The reason is productivity.
Productivity is GDP growth minus hours worked growth. The recent productivity number was -.5%. It has taken more workers to produce less GDP. That is not good. Productivity has been slow and now negative for an extended period of time.
That has two implications.
1) A strong jobs market may not translate into strong growth. That's what we've seen. We saw strong jobs and weak GDP.
2) Inflationary: The more it costs to produce less is called inflation. That is good for gold and silver. That is ultimately bad for stocks and bonds.
Inflation: The Bubble Popper
Maybe not for the very short term (next couple of weeks) but medium term, we think inflation will be the bubble popper.
Higher inflation as it seeps out with a Fed-on-hold and low and negative productivity, is ultimately a stock market risk. As inflation goes up, it makes future bond coupon payments worth less. Inflation reduces the "real" interest rate on a bond (nominal interest minus inflation = real rate).
As "real" rates go down as inflation goes up, bond prices likely go down. The stock market, thus far, has depended on high bond prices and low yields. If that were to reverse we see that as a risk to stocks medium term.
August 26th: Fed Chair Yellen Speaks
We expect August 26th to also be a dovish affair. The WSJ slipped into their article that Mr. Dudley is a close advisor to Fed Chair Yellen. That implies for us that Mr. Dudley and Mr. Powell will be on the mind of Fed Chair Yellen on August 26th when she gives a speech.
We also expect that meeting to conclude dovish.
Economic Calendar Ahead Of August 26th
August 16th: CPI
August 26th: GDP, 8:30 AM
August 26th: Fed Chair Yellen speaks, 11 AM
Before the Fed Chair speaks, she will have seen CPI and GDP. We don't think that would sway her hawkish. If these jobs numbers have not made the Fed hawkish, we don't think anything will.
We are shocked by the Fed commentary after two strong jobs numbers. It means to us the Fed is on hold. We think that means less short-term stock market risk of a rate hike. Medium term though we think it increases the risk to inflation dropping bond prices.
We do think that gold and silver could benefit as an inflation hedge. As long as the Fed is on hold, good economic or inflation news in the US causes a risk of inflation seeping out.
Letting The Market Dictate
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