Soon, I will need to ponder the possibility of a first rate hike from the Fed in March, 2016.
The U.S. jobs report delivered decent headline numbers for June: 223,000 net new jobs and an unemployment rate that declined to 5.3% from 5.5% in May. While the unemployment rate beat "expectations" of 5.4%, the consensus market forecast was for 233,000 jobs (according to DailyFX.com). The participation rate fell to 62.6% from 62.9%. The size of the civilian labor workforce reversed all its gains from May. The number of marginally attached and the subset of discouraged workers remained roughly the same with June, 2014 levels. The number of workers in part-time positions for economic reasons remained roughly flat with the prior month.
The immediate reaction in the 30-Day Fed Funds futures prices was dramatic. The odds of the Fed making its first rate hike fell from December, 2015 at 49% to January, 2016 at 66.1%. The futures confirmed the shift on Friday, July 3rd with the odds shifting even more in favor of January. The charts below are snapshots from the CME Group Fedwatchshortly around 9am Eastern on July 2nd and July 3rd. The jobs report was released at 8:30am on Thursday due to the U.S. holiday on Friday for Independence Day. (Note that "previous day" means the close of regular trading on the previous day).
The U.S. jobs report pushed the odds of a December rate hike below 50%
Holiday trading in Fed Funds Futures further confirmed the shift in odds to a January, 2016 rate hike
Source: CME Group Fedwatch
Note how the odds for a first rate hike in January are now slipping along with December. At the current pace, December will be a forgotten memory and the serious competition will become January versus March (current odds at a very firm 75%). Given the number of pundits and analysts who are still clinging to a scenario for a September rate hike despite the persistently low odds in the futures market, I expected a shift to 2016 to cause a dramatic turn against the U.S. dollar (NYSEARCA:UUP). Instead, the overall dollar index barely budged.
The U.S. dollar index finished just off its highs for the holiday-shortened week
The Japanese yen (NYSE:FXY) appeared to be the biggest beneficiary of the U.S. dollar's very modest weakness. At the time of writing, the yen is gaining even more strength against all major currencies. Against the U.S. dollar, the yen is headed for another test of the rising 50-day moving average (DMA) and a major breakout point around the 122 level.
USD/JPY is testing major support levels
I am a bit conflicted from a trading perspective. I think follow-through weakness in the U.S. is yet to come, just waiting for the outcome of the Greek bail-out referendum. I think the specific outcome matters a lot less than just eliminating the uncertainty of the outcome. On the other hand, I remain firmly bearish on the Japanese yen and view the creeping strength as a fresh opportunity to short. In the end my bearishness on the yen won out for USD/JPY. In particular, I am following through on my strategy on the British pound (NYSE:FXB) against the yen. I am also net short the U.S. dollar for now. If the tides turn, I will be looking to short the euro (NYSEARCA:FXE) against the U.S. dollar.
Be careful out there!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: In forex, I am net short the U.S. dollar and the Japanese yen