Non Farm payrolls saw a big jump. The quick math is to take the last two months and see how it blends into the recent trends. That would be a 149k two-month average which is about inline with recent jobs trend. We think with post-Brexit markets holding and a better jobs numbers, indecisive Fed officials will now swivel and lean to a rate hike back "on the table." We expect that to hit markets over the next week or so.
Here's the chart.
Wow. May was revised down from 38k to 11k. This month jumped to 287k as Verizon workers came back from a strike. We want to smooth the two months and we get a 149k two-month average. That is almost precisely equal to April's 144 (Hmmm). So now three months of exactly the same jobs numbers. That should be fine, ok, not great, not terrible, eh, good (official rating).
But Rate Hike "On The Table"
We'll see what Fed Chair Yellen and company says now that jobs JUMPED back from last month and BLEW passed expectations.
Those are strong words which we don't think are frankly so true after looking at the smoothing average, but we have to hold the Fed to it.
They took a rate hike off the table when jobs dropped in June. Now that they JUMPED back, they have to put it on the table to be perfectly fair. (My kids tell me "life's not fair" all the time, so we'll see if Fed commentary fits that official "not fair" criteria or they JUMP back to rate hike).
We showed the Fed Funds futures when they took the hike off the table. Here it is again.
The JUMP June 3rd meant a rate hike was off the table (100 minus future rates, so higher futures implies lower rates.)
This report should then be the opposite unless "not fair" takes hold and the Fed is (official kid rating) "chicken" to put it back "on the table," even though that would be "fair."
Here's the stock market after "off the table" in June.
We'd expect this next week's follow through to go opposite and down.
But Elazar, futures are ripping this morning?
You're right, we admit. If you look at the weak jobs number's initial reaction June 3rd it was a mirror. A weak number dropped markets for the initial move. Then the bulls brushed themselves off and said, "hey that probably means they'll change their mind again and again and take a rate hike off the table."
The market proceeded higher post-June 3rd.
We expect the same here except in reverse.
Bulls will now say, "Hey wait a minute, that means a rate hike might be back on the table, uh-oh."
Why is a rate hike back on the table an official uh-oh rating?
The last rate hike crashed markets in January. Does anybody remember that far back? Punch up a chart, it really happened. We know it FEELS like it never happened and it can NEVER happen again, but it did, unless you think there is an all-out chart data conspiracy.
Here's why we think Q1 crashed after a measly little 25 bp rate hike.
That measly little 25bp was a 100% jump in interest rates from the pre-historic never ever ever been seen before 25bp level.
This next rate hike will be a 50% jump. If a 100% crashed markets we think a 50% will crash markets.
That 50% jump in US rates could jump the dollar which will crash currencies overseas. Is that the makings of a global swoon, post Brexit?
The Dollar, A Fascinating Move I Must Say
This is not what we'd expect. Look at today's dollar (NYSEARCA:UUP) action.
But before you look, what would you expect the dollar to do after rip-roaring jobs numbers? Go up right?
Nope. It's dropping. The Euro is getting stronger. Elazar is totally confused once again. The dollar should be going up expecting a rate hike and a carry trade investing in US bonds.
What that does tell us is that there is incredible global risk currently. All we know is that major global corrections involve foreign currency volatility.
Here we don't know what is happening but if the dollar WEAKENS it throws everybody off, especially Japan.
The dollar is not doing what it "should" be doing (please correct us if we are wrong) and that is a troubling sign.
This could lead to a round of competitive currency devaluations if the dollar continues to fall against every country's desire.
(Weak foreign currencies leads to more exports which is why they want a lower currency. The weak dollar hurts everybody by raising foreign currencies. That's why it's a risk for a global currency war.).
Weak dollar means weak markets
Quick chart but as important as any.
The blue is the S&P 500 ETF (NYSEARCA:SPY) and the green/red is the US dollar versus the yen. When the dollar goes up SPY goes up. Down, down, until recently. There was a divergence.
We expect the SPY to follow down as the dollar weakens which can take global markets with it.
Ah, Elazar, they'll never raise rates!
We don't agree. We think they will. They've been discussing it and until last jobs numbers they were "on the table." Whether they do or not, initially we expect it to be priced in.
That said, they just did one a few months ago, and we think they WANT to do another rate hike. Why? They want to give wiggle room from a higher plain to CUT rates after they RAISE rates in the case that the economy slows again.
A raise reloads the Fed gun and gives them some "ammo" for a future rate cut if needed. Do it now, or never. At least they'll have some ammo.
The next Fed decision July 27th
We expect the Fed to let markets know how they feel ahead of that July 26-27 meeting.
We did hear from Fed Governor Daniel Tarullo this week on Brexit. He seemed to say that while post-Brexit markets are ok, we are not out of the post-Brexit woods.
That COULD tone down some Fed speak for a rate hike, but some rate hike we think will get priced in before that July 27th meeting.
We love that the market is up going into next week.
We said Sunday we were neutral for the week on markets. We thought the Brexit-up needed to work itself out and we'd get a better chance to short next week. We have not been wrong. (For us to say "neutral" was difficult because we are incredibly bearish and all we want to do is short yet we refrained this week expecting follow through on the upside.)
Next week is setting up for the "Post-Brexit up-back down."
If this week was back down it wouldn't be as clear. We needed bearishness to clear out this week. Today with a market ripping there is capitulation.
Capitulation is good. (That's the opposite of the famous "greed is good" but we're not a movie.)
VIX is now officially back on the mat
We've been waiting for this. The VIX is now back on the mat showing there is no worry for risk out there. That is a good time to sell and short.
The jobs numbers like yesterday's jobs numbers were SMOKING hot. That tells us a rate hike should be, "back on the table." The Fed decides the next move July 27th. We expect the Fed to flip back and forth, back and forth, but this time to hike again.
The dollar confuses us and confusion is bad for markets.
That hike will be a 50% jump in Fed funds rates from pre-historic levels. December's hike crashed markets and we think this one can too, especially in a more fragile post-Brexit environment.
Please be safe out there.
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