07 Oct A TALE OF THREE HEADLINES
The 8:30 headline describing September’s jobs data read “US Payrolls Miss Estimates as Wages Cool in Signs of a Significant Downshift.” The article stressed the nominal miss in both private sector and non-farm payroll gains and the smaller than expected increase in average hourly earnings.
An 8:44 headline read “US Stock Futures Rise, Bond Fall as Jobs Data Indicated Economy Remains on Solid Footings.” This article emphasized the significant revision upwards of August’s job gains, the drop in the unemployment rate and a steady labor participation rate.
A 9:54 headline read “Fed likely to View Payrolls as Showing Less Urgency to Move.” Before the data was released, the markets were suggesting a 100% probability of a rate cut at the end of October, up from 40% earlier in the week. The odds at 9:54 fell to less than 50%.
To write the obvious broad based conclusions are immediately made, conclusions that may be contradicted in a short period of time.
The issue at hand is market activity is dictated by these headlines, activity that is amplified by the total domination of technology based trading and passive investing.
Several weeks ago a senior FINRA official commented on CNBC that price discovery may be lacking given the overwhelming influence of today’s trading systems and passive investing. The official commented that trading appears to be dominated by headlines not any type of analysis.
Such knee jerk reactions has always been associated with Wall Street but today it has gone nuclear given the demise of the specialist system and regulatory fiat that has decimated liquidity. The changes made were expected to make the market less volatile and less risk to money center banks. In my view it has not for the risk has been transferred to non-bank financial actors who will disappear at any times of stress. Fear is more powerful than greed.
We have just experienced a liquidity crisis in the repo market, a crisis that was successfully managed by the Federal Reserve. I am hoping market regulators will act proactively to ensure that a liquidity crisis does not evolve for the broader fixed income and equity market.
Speaking of the repo market, the Fed just extended the repo operations until November 4 from October 10, offering cash injections of at least $75 billion. Previously there was a limit.
Speaking of the Fed, FBR Chair Powell spoke Friday. He commented the economy is in a “good place” but “is facing some risks.” These remarks are considerably different the hyper recessionary narrative of last week.
What will happen this week?
The economic calendar consists of various inflation indices, sentiment surveys and the Minutes from the recent FOMC meeting.
Last night the foreign markets were mixed. London was up 0.39%, Paris up 0.33% and Frankfurt up 0.42%. China was down 0.92%, Japan down 0.16% and Hang Sang down 1.11%.
The Dow should open moderately lower on trade concerns. The 10-year is off 2/32 to yield 1.54%.
