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%.