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Market Brief – Friday 2/1/19

Congrats to the Fed who outplayed everyone and to the financial media who lured the retail public back into the stock market. Before I share with you today’s release of the January Nonfarm Payrolls report and ISM manufacturing surveys, be aware the Federal Reserve had prior knowledge of these reports going into their meeting. They are not allowed to release this information to the public, so while their monetary policy decision was made with this information in hand, they could not tip off the public during their press release.

January Nonfarm Payrolls came in at +304k jobs created with some downward revisions last month. When factoring the controversial birth-death model, the number jumps to a staggering +479k jobs created. While Eurozone, Japanese and Chinese manufacturing surveys are headed lower, the ISM manufacturing survey came in at 54.9, showing that the U.S. manufacturing sector is still expanding.

The Fed had to give the markets what they wanted to hear, was that the Fed would capitulate to a slowing economy, all while knowing the economy is not slow, at least not based on this data. The stock market and Treasury yields should be soaring on this news, but they aren’t.

The public believes the reported number to be for the number of new jobs created in January. While January is the first month these employees received a paycheck, the hiring decision was made back in September, when the economy was far more robust and the economic outlook was bright. There is a four-month lag between the decision to hire employees and their first paycheck, which means the next three months, or more, should show very weak payroll numbers.

The Fed was correct when they said Wall Street is showing weakness, but the survey data is not. The Fed will continue to unwind their balance sheet going into their March meeting, which isn’t until the third week of March. It’s worth noting, they likely won’t have an advance look at the March payroll report, since it will be too early in the month.

Fed Chair Powell also warned of the weakness in the coming economic data due to the government shutdown, so any weakness in the economic data between now and the Fed’s March meeting will be dismissed as transitory. I doubt the Fed will raise rates in March, but they will have no problem continuing their balance sheet unwind.

Since the balance sheet unwinds directly effects World Dollar Liquidity, global growth is going to grind to a halt. Even if the Fed holds the course, by that point it will be too late, since the lags of the global economy will be starting to hit U.S. shores. Even though Powell thought any downturn in the economic data will clear by the second quarter, the Fed will have overtightened as the global economy starts to recess.

What we are witnessing first hand is how central bankers always end up making policy mistakes since they rely solely on lagged government data.

Stocks closed mostly unchanged for the day, while Treasury yields closed higher as 10-year Treasuries bounced off a key support level. The S&P 500 was rejected at its 100-day moving average, which is just below its 50-week moving average. If this stop holds, look for a larger move down and confirmation that the equity market is in a Bear trend.

For the week ending on January 25, the large banks shed a small number of their bond holdings, which matches the small rise in yields that week. With Treasury yields falling this week, the banks should be adding back those bonds and more in next week’s report.

With expectations of a Fed pause and more bad news to come, investors began piling into gold over the last two weeks. Today’s payroll report saw some selling of gold and mining stocks. Look for the dollar to rally into its overhead resistance zone on the bank of today’s payroll report, which should send the mining stocks back down to their support. A hold against the longer-term moving averages and against support would confirm the initial stages of a Bull market for the mining stocks. I anticipate this opportunity coming in the next few weeks.

Agricultural commodities have now made their fifth bottom in the last six months. It is rather unusual to see so many tests of a bottom, but it should be obvious to the Bears where the buyers are at. Once all the sellers are exhausted, look for a rally in this sector. All the bad news that can be priced into this sector already has been.