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Tuesday I Wrote this Week has the Potential to Dictate the Direction of the Markets for the Immediate Future.

Tuesday I wrote this week has the potential to dictate the direction of the markets for the immediate future.  Based upon market performance, the data has been a nonevent as the S & P 500 is virtually unchanged, down 0.33%.

Today at 8:30 the all-inclusive BLS labor report is released.  I will not comment upon the accuracy of the data but will instead comment the markets will trade off the statistics.  The data may or may not be flawed but the market reaction is not.

As widely telegraphed monetary policy is now mono dependent.  It is all about jobs, labor participation rate and wage inflation.

Wednesday’s release of the Beige Book indicated there is some wage inflation as employers are having “greater difficulties in finding qualified workers across most skills and occupations.”  The operative word is qualified.  How will this lack of qualified workers skew the data?

Regarding the labor participation rate (LPR), yesterday a Fed report stated “the continued aging of the population alone will subtract 2.5% from the aggregate participation rate over the next ten years.”

The report further stated economic weakness is “depressing the participation rate by 0.25% to 1.0% in the second quarter of this year.”

The report concluded “the steep decline in the LPR since 2007 [from 67% to 62.9%] owes to ongoing structural influences that are pushing down the participation rate rather than a pronounced cyclical weakness related to potential jog seeker discouragement.”

While I will not discuss the merits of this report other than to write it is a contradiction to other Fed studies.

I will also write if this report is accurate, based upon the Beige Book the economy is potentially on the verge of cost push or wage inflation, the type of inflation that devastates purchasing power of the lower middle class and below.

Additionally if this report is accurate, then the integrity of FRB Yellen is questionable as she has stated the pool of available workers is a major reason to maintain current monetary policy.

Yesterday I referenced another Fed report that indicated inflation should be around 33% not 2% based upon current monetary policy if monetary velocity was near historical levels.  [Today’s monetary velocity is 290% below this average.]

I rhetorically ask based upon two recent Fed reports, is the Fed falling behind the proverbial inflationary curve, an environment exacerbated by yesterday’s ECB action?

The market is expecting a 230K increase in non-farm payrolls, a 215K gain in private sector jobs, a 6.1% unemployment rate, a 0.2% increase in average hourly earnings, a 34.5 hour work week and a 62.9% LPR.

Last night the foreign markets were down.  London was down 0.60%, Paris down 0.27%  and Frankfurt down 0.07%.  Japan was down 0.05%and Hang Sang down 0.23%.

The Dow should open moderate lower on profit taking, fearing the markets are ahead of itself  but his could change radically given the inevitable different interpretations of the 8:30 data. The 10-year is off 1/32 to yield 2.46%.


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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.