The US stock market quickly hit the ‘undo’ button after yesterday’s large decline on the heels of the Bank of China cutting the reserve rate for its banks. Interest payments on Chinese debts total 22% of its GDP, an unsustainable percentage, so the BoC decided more debt will help stabilize their economy. With interest payments totaling 22% of GDP, Chinese borrowers are having to borrow to make their loan payments.
Adding to the early buying spree was the December jobs report, which showed payrolls increasing by +312k with upward revisions from the prior two months of +58k. Wage growth also increased to 3.2% year-over-year. Even the BLS birth-death model was in on the act, showing a negative adjustment in self-employed jobs to the tune of -36k, in what appears to be an impressive jobs report.
Under the covers, the household survey showed a large increase in multiple-jobs holders and a surge in employment for 18-19-year olds. With a jump in employment for 18-19-year olds, it implies that 2% of the working-age population drove nearly 100% of December’s jobs gains. The six-month, birth-death-model adjusted, average hold around +158k jobs, which isn’t nearly as impressive.
Payroll reports are a lagging indicator, as most employers make their hiring decisions three-to-four months prior to hiring. When looking back three-to-four months, the stock market was near its all-time highs and economic optimism was equally very high. Since then, the stock market and economic data have fallen, suggesting the upcoming payroll reports shouldn’t be as rosy.
The other two aspects that put some suspicion to this report is the growth rate of the M2 money supply, which jumped for the week of Christmas, indicating a surge in borrowing, as the money supply expands as borrowing increases. We know the holiday season was financed, which is not overly unusually, but the increase in growth rate of the M2 money supply suggests it was financed more than the average holiday season.
The crude oil inventory report should also show significant declines, which it didn’t. The EIA reported inventory levels – Crude: 0.007M Cushing: 0.641M Gasoline: 6.890M Distillates: 9.529M. If all these people were working and spending money, there shouldn’t be a need to finance most of the spending plus crude oil inventories should have fallen.
This morning Fed Chairman Powell was interviewed with former Fed Chair’s Yellen and Bernanke. Many investors were hoping for a dovish tone, but after today’s nonfarm payroll report, there was no chance. Powell did state that should future economic conditions warrant, the Fed would lower interest rates and adjust their balance sheet unwinding program. For now, there was no indication the Fed will modify their forward guidance of two rate hikes in 2019 or reduce the amount of their balance sheet unwinding program.
When pressed on the balance sheet unwinding program, Powell said the amount the Fed is rolling off their balance sheet is minimal compared to the number of Treasuries being issued every month. While Powell did say the Fed is listening to the markets, he didn’t think the balance sheet unwind was having any ill effects.
Bernanke and Yellen both mentioned the Fed has other policy tools available, which was confirmed by Powell, in the unlikely event the economy falls into a recession. There appears to be no limit to which modern-day monetary-policy makers will go to keep the financial system alive. History shows they will eventually break the entire system.
Ten-year Treasury yields moved 0.1% higher to 2.65% following all the reports, but unlike the stock market, started to fade those gains by mid-morning. If Treasury yields are at 2.65% following a huge nonfarm payroll report and a labor market at full employment, just imagine where they will go when the economic data is much worse.
The equity markets closed higher in a spectacular fashion, but nothing really changed. The government is still closed, although the markets don’t seem too concerned about this. The trade war with China has not been resolved and won’t be next week. The payrolls report showed seasonal hiring. The Fed, which tried to sound dovish to appease Wall Street, is still tightening.
While Treasury yields moved higher today, 10-year Treasury yields recently broke over a resistance level, which it held today. Resistance has now become support.
Physical gold touched $1,300/oz where it immediately hit resistance. The gold miners haven’t followed, which is rather unusual, and a big part of the reason I think there is a pullback coming to confirm support. Every time gold seems to take off, it has a rather strong move down to either a support level or its 100-day moving average.
The gold miners have been trying to move higher from a strong resistance level but can’t seem to make it happen. Here again, I expect a move down to confirm support or a moving average to finally give a bullish signal.
Agricultural commodities continue to hold their six-month bottom as sellers are unable to gain any further traction. At some point, sellers will become exhausted and the Bulls will take over.