Surprise Labor Report?

Posted by: Michael Williams on Friday, July 8, 2016

The market has seen significant volatility since the BREXIT and the circus in the US, which we certainly can’t proudly call a democratic election, is laying a rather bleak blanket of uncertainty over the US economic future. The bounce off the lows to push back into the highs came just as violently as the sell-off. The only certainty is the Fed will NOT be raising rates prior to the November election.  

Surprise Labor Report

courtesy of wikipedia Last month was a shocker at only 38,000 jobs created. It was horrible, no matter how you spin it. It certainly eliminated any Fed short-term rate hike expectations, but even for the horrible number for many it only meant a DELAY to next meeting for a rate hike. I have to hand it to those who believe in rate hikes (or for that matter the Fed rhetoric), they certainly are sticking to their guns. June’s Labor Report beat expectations coming out at 287,000. Expectations were for 175,000. It was as surprising to the upside as last months was surprising to the downside. Clearly either the world’s economist have a rather large margin of error or US government methodology remains suspect for variety of reasons. I of course believe in the latter. The bad news hidden in the report was that May was lowered from 38,000 growth to only 11,000 jobs created. Of course a big part of last month’s was the 35,000 striking Verizon workers, but if we backed them back in May would still be a dismal 46,000. So flattening out the Verizon strike, June’s number is still an impressive 252,000 –still out pacing the 175,000 expectations. So you can’t really explain away the bad May numbers because of Verizon. The total previous revisions stripped out a net 6,000 jobs from the private sector that was the first time since 2010. The short-term (3 month) job creation moving average has also fallen to 147,000, down from 200,000 in the 1st quarter. While this huge upside surprised has given the pre-market futures a jolt higher, I am not sure one month data point is any better or worse than the next. The economy is in flux with host of issues and that is translating into volatility across the board. U3 unemployment ticked up to 4.9%, but the U3 is more optics than reality. The participation rate remains at decades low of 62.7%, which has been a large factor in lowering the U3 rate. The pre-market futures jumped on the news, but could bring more volatility after the opening because I suspect we will hear again the talk of possible rate hikes on such strong Job numbers. Let the silliness ensue.
BREXIT Confusion I would say the vast majority, mostly driven by shallow and surfacing reporting from the media, has created more confusion as to the BREXIT. Prior to the vote, the heavily bias statist media on both sides of the pond echoed “end of the world” type headlines. After the vote and the sell-off, the market bounced back strongly – mostly because a vote is not policy, so nothing hasn’t changed. However, as the fog cleared, the reality of math and real economics became apparent. This situation is NOT doom-and-gloom that the statist would have us believe, in fact there are certainly some benefits to the UK with a BREXIT. Any exit will certainly not be smooth, but it is also not the end of trade, economics, or immigration. Only time will tell, as to how the UK will position themselves in trade, economics, and policies. Played well, it could be a boon for the UK as it separates itself from the EU problems. In the short-term I think BREXIT uncertainty and ping-pong headlines will and can drive market volatility.
Dollar / Bonds The Fed raised rates ONCE, back in December 2015. Since then it has been a “wait and see” policy as to any MORE rate hikes. Yet, despite the US’s easy monetary policy, it is hawkish when compared to our Keynesian allies that have taken rates into negative territory and ramped up their money printing and stimulus programs. The US being the least dovish has help the dollar remain strong and the BREXIT only further gave it strength as we saw the Pound get hammered. The concerns that have strengthened the dollar has also sent bond prices higher and yields lower. The 10-year broke below 1.35%. If you have been following the preview, I continue to remain bullish the bonds (bearish yields) – as I can’t fathom the Fed raising rates and continue to expect government stimulative efforts going forward. No doubt the bond yields are shocking, but not surprising with the Fed interventionism, which I suspect will continue. I suspect that the dollar will remain strong and yields low, while the Fed does nothing it will be their attempt at hawkish spin that will drive perception. No doubt the Labor Report will help with their message crafting.

Support & Resistance

INDU 18,000 We are pushing up into the 18,000 range and we should expect to see selling pressure in here. The pre-market futures look strong, but I am not sure if that is just a pre-market pop on the upside job numbers. Watch the close to see if the strength can hold. NDX 4500 I would look at 4500 as a target price before resistance kicks in. There has been some volatility in the tech sector. Unicorns are born and some dies – only adding to the absurdity of trying to figure out real valuations. SPX 2100 Much like the Dow Jones we're are pushing into a resistance zone. There is room up into 2120 – but I would look at the close to see if buyers step away and sellers come to play. RUT 1150 The Russell is looking strong in the pre-market after the jobs numbers. I would see the 1150 as more of a straddle strike. While the Dow Jones and S&P 500 are looking to push and potentially make a run for a break-out rally, the RUT is lagging behind its 1190 recent high. If the RUT doesn’t show the strength into the close that the other indices do, I think this rally is short lived. A strong Russell close will indicate a good chance of a breakout.
Shyt Show Conclusion With all the silliness, BREXIT, political circus, volatile Labor Reports, and Fed rhetoric – nothing, I mean NOTHING has changed. It’s like all these forces are trying to instill change, but there is so much government and central bank interventionism that is holding it back. The BREXIT was just a vote, for now we don’t know and can only speculate what will actually change. Central banks continue to keep a jack boot on the throat of interest rates while printing more money. Debt problems are kicked down the road and ignored. Politics is more optics and empty rhetoric. Labor Reports have moved into the realm of the absurd 11,000 jobs and then 287,000 jobs the next month. The wheels want to come off this cart, but they stay on. I continue to believe that implied volatility under-prices risk and this market can turn (up or down) on a moment’s notice. Oh yeah, did I mention Unicorns?

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