The ADP numbers yesterday were indeed a precursor to today's very strong payrolls number. The market was expecting a good number and that is exactly what it got - and more. Going into the report a 215K increase was the consensus - instead we got a 288K reading.
A bit later this AM, the June ISM service sector numbers came out and that also helped to confirm that strong jobs number. The employment component of that series came in at 54.4 against a 52.4 reading in May.
Stocks loved the number as the Dow rose above 17000. The S&P 500 and the Russell 2000 both moved higher as well. Any time weakness appears and it looks as if the Bears are finally going to get their day in the sun, back up these equity markets go only to set another new all time high. It is nothing short of astonishing. Fighting the tape has been a fool's errand when it comes to these equity markets.
The VIX, or Volatility Index ( I prefer to call it the Complacency Index ) is flirting with levels last seen in February 2007! Amazing!
The yield on the Ten Year rose as high as 2.69%. According to one of the CME markets, the odds of a rate hike by the Fed at its June 2015 FOMC meeting rose to 57%. Yesterday the odds were 51%. Last month the odds were 43%. It is clear that the a majority are coming around to the view that higher rates are in store next year. If the market becomes convinced that the Fed is going to be able to stay on top of any nascent inflationary pressures, gold is going to lose some of its current friends.
I suspect that today's strong number is going to shift more of the focus on the wages numbers coming our way in the future. Traders/investors are going to want to see some evidence of wage inflation. So far they do not seem concerned. As long as that is the case, the Fed can remain accommodative and will not be in a hurry to kick rates higher. Still, one can clearly see a subtle shift coming in regards to sentiment towards higher rates.
As far as gold is concerned, the metal looks as if geopolitical events in Iraq are continuing to provide some support. The stronger Dollar coming on the heels of the payrolls number, provided pressure. The lack of wage inflation did likewise. However, while the market bent, it did not break. The geopolitical premium remains. Also, while I have noticed that the TIPS spread has weakened somewhat this week, it is still up near 6 month highs.
If grain prices continue to work lower, it will be up to the energy complex to bring support to the commodity sector as far as inflationary aspects are concerned. Right now crude is continuing to weaken and has fallen down near that support zone I noted on the crude chart I put up in yesterday's post.
Coffee, sugar, cotton, soybeans, wheat and corn are all lower today - along with crude, heating oil and unleaded gasoline. Cattle are strongly higher as news hit the market after the close of pit session trading yesterday of a record $1.58 paid for cattle in the Southern Plains. I had to double check that price print as I thought I was hallucinating. WOW! those who have cattle to sell are sitting very pretty right now. By the way, as a side note, I just picked up my brisket for my July 4th barbeque - GREAT GOOGLY MOOGLY! I wonder how it now compares to caviar as far as price per ounce? AS I have said before in many posts - there is not going to be much if any relief in sight for meat prices for the remainder of this summer. We are going to have to wait for the 4th quarter, but especially for Q1 2015 for any significant relief.
On the currency front - ECB President Draghi was out making some dovish comments once again. Those, while not the main mover in the Forex arena, certainly did nothing to soothe any Euro bulls. One gets the distinct impression, especially after today's payrolls number, that interest rates, if they are going to go up, will certainly be doing that here in the US, well before they will be over in the Eurozone. That should keep the Dollar supported at the expense of the Euro.
You can see on the chart of the long bond that prices have been falling recently and have broken the uptrend line shown. Bonds have bounced however from the support zone noted. They will need to at a bare minimum, take out that level before we can say with any degree of certainty that a serious downtrend has begun. It is too early for that right now. We will need more confirmation in the price action.
If however we begin to see a STEADY series of good payrolls numbers, along with rising wages, I fully expect this chart to break down for good. The jury is out so we wait.
Happy Independence Day ( July 4th) to my American readers ( and to anyone else who might be celebrating along with us). When I look at the incredible system of government given to us by our Founding Fathers, and then shift my attention to what we now have left of it, I fear my kids and grandkids are not going to be able to see anything remotely in common with it by the time they are grown. Liberty is precious precisely because it is so rare among the annals of human history. This generation seems to have forgotten that although one wonders if they ever knew it in the first place.
I will get some updated charts up later... busy morning...
"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat
Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput
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Thursday, July 3, 2014
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