This morning’s July non-farm payrolls report came in better than expected for the second consecutive month. That brings the average monthly gains to 186,000 for 2016. The unemployment rate stayed put at 4.9%. The July report had a little something for both bulls and bears on the U.S. economy, bulls will see us recovering from a soft patch in Q1 that was caused by unusual factors. And bears will point to the fact that the balance of the year’s monthly gains will have to continue at the last two months’ pace just to get back to the 2015 average of about 229,000 monthly gains. That’s no small task.
I am not an economist so I’ll leave those state of the employment debates to others. But i’ll offer some guesses on it’s effect on markets. Let me state the obvious. It heightens expectations for a rate increase. The immediate knee-jerk reaction for traders is to sell treasuries & gold, bid up the dollar, and the S&P 500 (and your guess is as good as mine what Crude does, but we know what to expect if dollar rips).
Fed fund futures are now pricing a 26% increase at the FOMC’s Sept 21st meeting and a 28% chance of a raise at the Nov 2nd meeting, up from 18 & 20% respectively yesterday. I suspect when we come back from Labor Day weekend the odds for a Sept increase will be single digits, and Nov back in the teens as most doubt the Fed would make a move days before one of the most important presidential elections in a generation. That’s why December is in focus.
But as the Fed told us last week, all meetings are ‘Live’, meaning the market should not become too complacent on the Fed’s current accomodative policy. They will look to normalize as the data supports such a move. But that’s mostly been bullshit. They have been artfully playing both sides with a “stated desire” to normalize vs what’s turned out to be consistent accomodation (the Taper Tantrum started in May of 2013 mind you). After all the talk, we have only had one rate increase since June of 2006, and we know what happened after that in mid December 2015.
Keep an eye on Fed Fund Futures, as Goldman Sach’s research noted in May, going back 20 years, the Fed rarely hikes when the market does not expect it, per CNBC.com:
Goldman found that going back to 1994, 90 percent of the 31 rate hikes were priced in at least 50 percent 30 days ahead of the FOMC meeting. Getting closer to the meeting, the median hike was 95 percent priced in, with only a few deviations, such as from the Alan Greenspan Fed in March 1997 and November 1999.
We’re likely to see this one coming and it’s unlikely the Fed Fund Futures will be caught off guard.