11 Mar A “BIZZARE” LABOR REPORT AND HIGH FREQUENCY TRADING
February’s jobs data was surprise. Payrolls rose by the smallest amount in more than a year but prior months were revised higher. Wages rose more than expected rising by the greatest pace in over a decade and the labor participation rate remained unchanged. The unemployment rate fell to a near five decade low.
The immediate interpretation of the data is one of a possible slowing economy with rising wages. One month does not make a trend and many are urging caution to determine whether hiring will be as weak as February’s data suggested especially in light of positive revisions of prior months.
One economist used the word “bizarre” to describe the data stating “the headline payroll number was awful, the household number was solid, U3 unemployment tumbled and U6 made a new cycle low even with the participation rate steady at a multiyear high. Wage growth printed a new cycle high. The data is bizarre.”
The selloff in futures accelerated immediately following the release of the data but actual losses were about half of those anticipated, losses the result of a selloff in the Chinese market. China announced that exports are down about 20%, a direct contradiction to US data stating imports from China and overall imports are at a record.
Speaking of a selloff, the Dow Jones Transports are getting killed, falling for the eleventh consecutive day, the longest stretch since 1972 according to Bloomberg. Volume was heavy which some are suggesting a capitulation is near at hand.
The Transports are viewed as an economic indicator. I ask how much of the decline is the result of momentum based, trend following strategies that dominates all markets. There are a growing number of market luminaries who have stated the markets are now devoid of reality, trading in some type illogical void.
Speaking of which Bloomberg wrote a feature story about high frequency trading. Bloomberg reports the CME—a $63 billion exchange where some of the world’s most vital financial products trade, including derivatives on oil, Treasuries and the S & P 500—sold a building for $163 million to a high frequency trading firm in order for that firm to “obtain a millionth of second advantage” over its competitors to respond to headlines.
Bloomberg further writes high frequency traders represent a significant majority of volume.
Many are familiar with the 2014 book Flash Boys which highlights the 2011 “Flash Crash,” the rapid meltdown that was blamed on a high frequency trading firm that spent $300 million to create a straight fiber optic line from NY to Chicago. This network is now obsolete and was just sold for $131 million, replaced by microwave towers and massive sums of monies to be physically located closer to the origins of data.
This is not investing but rather technology responding to a five word headline, a headline that may or may not be accurate. I believe such trading firms are creating havoc on the markets, creating a separate reality and unbalanced markets.
If the environment is as some are suggesting, it explains a lot about recent market activity and unfortunately will take a crisis to curb such trading practices.
What will happen his week? Retail sales are released. Will it confirm December’s weak data? Also released are several inflation reports, a confidence survey as well several housing and manufacturing statistics.
Last night the foreign markets were up. London was up 0.80%, Paris up 0.21% and Frankfurt up 0.22%. China was up 1.90%, Japan up 0.47% and Hang Sang up 097%.
The Dow should open flat. Oil prices climbed as Saudi Arabia extended deeper than agreed production cuts in an attempt to match state revenues with expenses. The 10-year is off 6/32 to yield 2.67%.