The Fed, the ECB, and the Employment Numbers

Trump took the safe path, he kept the Bernanke/Yellen continuity in place by nominating Mr. Powell as Chairman of the Federal Reserve. This was a “safe choice” not just because Powell is unlikely to deviate from his predecessors’ playbook of gradual normalization, but also because he has bi-partisan support which should facilitate the confirmation process (Trump needs every small accomplishment he can get). We think Powell was the best and most stable choice.

Stronger-than-expected economic data out of the U.S., which featured the first back-to-back 3.0%+ GDP readings since 2014, the highest reading for consumer confidence in nearly 17 years, and the highest reading for the Chicago PMI in more than six years, counter-intuitively caused the yield on the 10-yr note to drop from 2.46% to 2.37%. Despite the economic strength, the market is expecting inflation to remain low — with or without growth.

To make sense of this, points out that, perhaps, inflation expectations are not being properly reflected in the 10-yr note yield. “Rather, they could be getting covered up under the guise of an interest rate differential trade.” The European Central Bank (ECB) announced on October 26 that, starting in January 2018, it will continue to purchase assets at a monthly pace of €30 billion until the end of September 2018, or beyond, if necessary. The ECB added that, if conditions change to warrant a pickup in monthly asset purchases, it stands ready to make that adjustment and that its key policy rates will remain static for an extended period. In summary, the ECB delivered a “dovish tightening”. In response, the German bund has fallen nine points to 0.36% which has set-up the rate differential trade. In other words, the drop in the 10-yr yield is not a true pricing of inflation expectations. If this assessment is correct, then 10-yr rates should rise from these levels (chart below).

The employment numbers for October were released on Friday, and considering that there is a continuing hurricane recovery, they were impressive and indicative of growth:

  • +261,000 jobs added.

The wages and participation rates, on the-other-hand, do not look so rosy:

  • Average Weekly Earnings for Production and Non-supervisory Personnel: down -$.0.1 from $22.23 to $22.22, up +2.4% YoY.

The U.S. is close to “full employment” relative to the last two expansions, but the productivity gains from the expansion continue to be sequestered at the top of the economic pyramid and separate from the real economy. The reasons for this are complex and profound, involving demographic, technological, and political realities that will influence how this expansion will unfold in the future. We are working on a paper that will attempt to better understand the situation.



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The eight-week moving average of the put-to-call ratio has reversed what was starting to look like a down spike, and has moved lower as the SPX moves along the rising trend-line. This, of course, has the potential of becoming a down-spike at any time, especially since the SPX is at the upper limit of its trading channel (chart below).

The Rydex Bear-to-Bull fund asset ratio hit an all-time (30-year) low of 0.126 before recovering slightly to 0.135. This means that there is seven times more money invested in bull funds than in bear funds. That is an impressive level of confidence in the stock market which increases the likelihood of a correction, although a major stock market top can still be many months away (chart below).


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The long-term moving averages continue to paint a strong bullish picture (chart below).

Short-term, the technical picture is showing an over-bought situation that is likely to correct (chart below).


GAAP earnings continue strong and are supportive of the continuing bull market (chart below).

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Gold closed the week unchanged at $1270 (the 38% Fibonacci retrace level) after bouncing slightly earlier in the week. The dollar and the 2-yr rate continued their rallies, but the 10-yr and the 30-yr rates fell back below the lower channel trend-line (chart below). As mentioned in the introduction above, this may be a mispricing of inflation that is tied to the ECB’s policy stance. For now, we still regard the bias in rates as up and, therefore, the bias in gold as down.

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The net commitments of futures traders were relatively unchanged again this week. While down from their recent highs, the net positions are still elevated by historical standards and these levels are consistent with our expectation of lower gold prices to come.

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