"So it WAS just a seasonal blip after all" .... the hawks seize upon US jobs data.

Monday 8th June 2015

 

"So it WAS just a seasonal blip after all" .... the hawks seize upon US jobs data.

"Strong Gains in Hiring Put Eyes on Fed" , the Wall Street Journal Online

We were waiting for Friday's US employment numbers, and in the event they came as welcome news for those who have been maintaining that the fairly feeble economic performance of the US so far this year has been a function of severe winter weather and a damaging West Coast port strike. The key figure for non-farm payrolls jumped by 280,000 (expected 225,000). Wage growth also improved and the Labor Department also revised upwards its figures for March and April. The slight upward tick in the overall jobless rate (5.5% from 5.4%) can be put down to technical factors, we're told.

 It's always dangerous to read too much into one set of numbers, but with regard to the timing of the first US rate rise the ball does seem to be in the hawkish court. Assuming the data does truly reflect an economy gaining momentum now that the effect of seasonal factors has played itself out, the pressure is on the Federal Reserve to raise rates sooner rather than later. The oddsmakers are suggesting that the most likely date for a rate rise is now September, rather than December or even early next year as some were predicting so recently after far less convincing economic data. As ever, confirmation will be required but the Fed has not seemed averse to the idea of pulling the trigger as soon growth numbers warranted it despite the likely undesired effect of an even stronger dollar.

Presumably, Friday's news was less welcome for IMF boss Christine Legarde. On Thursday she urged the Fed to show restraint with regard to a rate rise, no doubt mindful of the negative effects it might have globally, particularly for debt-ridden emerging markets. But the Fed's brief is a domestic one, and frankly they will pay little heed to the desires of the IMF if they think a move is appropriate.

There'll be more on this topic (probably much, much more) as we approach the September date and it's too early to speculate on the short-term market effects of a rate-rise should it happen. But it's never wrong to remind ourselves of the "Buy on rumour, Sell on fact" scenario that can often operate across all markets. It could of course equally be known as "Sell on rumour, Buy on fact", and refers to trading patterns in advance of and just after a long-awaited and predicted (by some) announcement or event. Many players will have put on their trading positions well before any such announcement, and assuming their predictions are confirmed this will be the signal to close their positions, hopefully for a profit.

So, just as an example ...... a trader has sold bonds in expectation of a rate rise. Bond prices fall as a rise becomes more likely. The rise is confirmed and the trader rushes to close out his position, i.e.buy back his bonds. Thus it's perfectly possible that a rate rise, theoretically bad for bonds (yields up, prices down), might actually have the opposite effect of what would seem logical  -- a short-covering rally pushing prices higher. In effect, the rate rise had already been discounted.

We'll have to judge nearer the time whether we feel the market has discounted a rate rise for September  --  if it's a 50/50 call, probably not. If by then it's become widely predicted, quite possibly. How likely is it ? Just like the Fed, we'll have to keep watching the numbers.