NFP Will Not Stop the FED

The question that needs to be answered is this: does the miss in the non-farm payroll (NFP) numbers make central banks rethink the pace of normalization or not? The answer will come in the not-too-distant future; the European Central Bank (ECB) Governing Council will release its next monetary policy decision this Thursday, and the Federal Reserve (FED) makes its interest rate decision on June 14.

Eurozone growth was strong in Q1 and the GDP of France, Italy, Austria, and Finland have had positive revisions which may lead to an upward revision of GDP in the Eurozone this week. This could produce a policy statement that shifts the balance of risk to the upside, but when it comes to inflation, the data is more disappointing. If the ECB is going to ease-up on the easy money — causing upward pressure on rates — then they will want higher inflation which makes the nominal interest rate look more accommodative (more negative) in real terms.

In the U.S., the FED is unlikely to hold-off raising rates on June 14 (the market is pricing in a 94% probability of a hike) just because the NFP numbers were below expectation. It should be kept in mind that jobs continue to be created and the unemployment rate continues to drop.

The FED’s dual mandate is to keep unemployment at 5% or lower, and to keep inflation at 2%. It has not succeeded in the latter, but a 4.3% unemployment rate certainly will allow for a June 14 rate hike. If the data on inflation and wage growth continues to print weak numbers, then future rate hikes may be in jeopardy, but that remains to be seen.

The dollar, however, reacted as if future rate hikes were off the table. We do not agree with the dollar’s assessment. We think that the economy is turning around and that hourly wage growth, which has not responded to the low unemployment rate, will start to increase and, in turn, fuel the economy. When the bottom of the economic pyramid — where the producers (workers) and consumers reside — is healthy, then the rest of the economy grows. Wage growth lags employment, but eventually it rises and stimulates the entire economy and inflation, which leads to higher rates and to higher dollar values.


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The put-to-call ratio continues to point to higher prices (chart below).

The long-term technical picture looks good (chart below).

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The last chart above shows that unemployment has not been this low (4.3%) since 1999, but the 10-year minus the 2-year Treasury differential, even though it has dropped to 0.87 from a recent 1.2, is still safely in positive territory. This leaves plenty of room for the market to continue its bull run.

We continue to monitor the similarities between 1999 and today (charts below).

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European stocks (IEV) are likely to out-pace the SPX as they play catch-up with North American markets (chart below).


Gold jumped on Friday in response to a drop in the dollar, which itself had reacted to lower 10-year and 30-year Treasury rates, which in turn happened because the NFP report came in below expectations. Long rates dropped despite the CME FEDWATCH 95% probability of a June 14th rate hike. The 10-year and the 30-year rates have fallen below their upward-sloping channels just like the dollar did back in April, but the dollar has been able to stay (so far, at least) above the Fibonacci 62% retrace line at 96.50. If the dollar cannot hold that line, then we can expect more upside for gold beyond its own 62% retrace line at $1281 Chart below). As we stated last week, a close above $1300 would put the long-term ‘head-and-shoulders’ pattern into doubt, and a close above $1400 would confirm a new up-leg in the gold price. At this point, we are not convinced that a new up-leg has started.

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The lack of inflation means that this rise in gold has gone against the normal positive correlation that exists between gold and inflation. Since inflation is unlikely to increase, we expect gold will not be able to mount much of a rally from here (chart below).

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