Markets traded lower Friday on August’s employment data. I believe the statistics were mixed and can be used to make a case for or against a rate hike at the upcoming FOMC meeting. I again ask does 0.25% really matter economically? Unfortunately it matters for the equity markets.
Many times I have commented about the outsized influence of ETFs and HFT (technology based trading), a view shared by the Commissioner of the SEC. Movements in interest rates greatly influence these algorithms. It was inferred by the Commissioner that the largest financial firms utilize similar algorithms thus selling or buying can be amplified.
As already stated, August’s data can make a case for or against a rate hike. Equities concluded a rate hike is eminent thus the averages traded lower.
I still firmly believe that ultimately the market will reflect expected conditions but the volatility is deafening.
Speaking of the volatility, historically the three weeks prior to Labor Day is quiet and the three weeks after Labor Day volatility increases. Will 2015 will be the inverse?
Commenting about the labor report, non-farm payrolls were lower than expected albeit there were considerably revisions in the two prior month’s data. Average hourly increased by a more robust amount than expected and the unemployment rate fell to a seven year low of 5.1% from 5.3%.
The decline in the unemployment rate leaves it in line with the Fed’s 5.0% to 5.2% estimate of the equilibrium long run employment rate. On that basis, the Fed just achieved the full employment part of its dual mandate.
However the decline in the unemployment rate was partially the result of a 41,000 decline in the labor force. The pivotal labor participation rate (LPR) remained unchanged at a 38 year low of 62.6%.
If the Fed does not hike rates because of concerns about global economic growth and financial market volatility, some may conclude the Central Bank could be falling behind the proverbial curve given that economic growth is faster than what been projected and the unemployment rate has fallen to the levels associated with “full employment.”
As noted several times, the equity markets interpreted the Committee will increase rate in two weeks, hence the selloff, a selloff I believe was amplified by HFTs. This begs the next question? Has the market already discounted possible Fed action?
What will happen this week? There is a dearth of data until Friday when inflation, inventory and sentiment surveys are released.
Last night the foreign markets were up. London was up 2.06%, Paris up 2.35% and Frankfurt up 1.60%. Japan was down 2.43% and Hang Sang up 3.28%.
The Dow should open significantly higher following a rough week. The early week strength is predicated upon a rally in the Asian markets, markets that were closed last Thursday and Friday for holiday. The 10-year is off 5/32 to yield 2.17%.
