By: Kent Engelke | Capitol Securities
In my view, April’s jobs data greatly increased the odds of a rate hike in June. Moreover, the unemployment rate of 4.4%, which is the lowest since May 2007, coupled with recent lackluster productivity data, suggests wage gains should accelerate in the coming months.
The labor participation rate (LPR) did decline to 62.9% from the previous month of 63.0%, thus suggesting there is ample supply of potential workers, the question at hand is what the quality of these large pool of workers is. Do they possess the necessary skills?
Commenting briefly on the data, both non-farm and private sector payrolls rose more than expected thus offering evidence that March’s shortfall was perhaps weather induced. As noted last month, the reference period for March’s data was the week the east coast experienced a blizzard. Perhaps of even more significance, the number of part time workers for economic reasons fell to the lowest level since April 2008.
Market averages had little response to the data.
I have opined the volatility beneath the surface is much greater than the averages suggest. For example, oil and oil securities. In my view, the recent volatility is similar to that experienced in the fictional movie Trading Places.
To refresh all, the orange juice market was manipulated via a false “crop” report, a report that created a huge transfer of wealth.
Oil was down 4% on Thursday, but gained almost 3% on Friday, the result of different interpretations of the impact of American shale production. Does life mimic fiction or does fiction mimic life?
I will argue the massive volatility is the result of electronic based trading, trading based upon momentum and moving average lines, not geopolitical thought or macroeconomic analysis.
The economic calendar following the jobs data is comprised on inflation data and retail sales statistics. Will this data alter monetary policy views? As noted several times, inflation is now around the mandated Federal Reserve speed limit of 2% to 2.5%. A majority of the Treasury yield curve has negative real rates.
Typically, such a scenario facilitates a transfer of funds into the real economy in an attempt to generate a return. Will such a transfer begin in earnest, partially the result of job gains? Is the economy finally at escape velocity, the illusive point signaling a 3% sustained growth rate? As noted several times, the economy has not grown at a 3% annual in 10 years, shattering the previous 4 year record from 1930-34.
If annual growth exceeds 3%, monetary policy assumptions will be shattered.
Last night the foreign markets were mixed. London was up 0.11%, Paris was down 0.88% and Frankfurt was down 0.23%. China was down 0.70%, Japan was up 2.31% and Hang Sang was up 0.41%.
The Dow should open nominally lower following the expected victory of Macron in France. Fed fund futures are now pricing in a 100% probability of an interest rate hike in June. The 10-year is up 3/32 to yield 2.34%.