Non-farms shows nothing is linear in the market

The non-farms payroll print from Friday night showed than nothing in the market is linear.

74,000 jobs were added in December - this is the lowest reading from the US department of labour since January 2011. Everyone from the street, to analysts, to the Fed are blaming the Arctic freeze for the slowdown in hiring, as construction and recreation saw sharp declines in hiring over the month of December.

The results show that although nothing in the market is linear, the trend may be linear; the line of best fit sits nicely in between the dots, but the reality is far from this. What does the data mean for the upcoming Fed meeting? The reality is that the figure is unlikely to keep the hand of the Fed at bay on January 29; it is likely to taper again by $10 billion, however caution will rise.

What also makes the figures even more interesting is the unemployment rate fell to 6.7% - the lowest read since the GFC, which should be seen as good news. However, the unemployment figure was tied with a participation rate that is now at its lowest level since 1976.

The reaction in the bond market perfectly illustrated the effect of the unemployment rate as it approaches the 6.5% ‘trigger’ level.

US ten-year treasuries fell 11 basis points to 2.86% from 2.97% on the news (which is the complete opposite to what theory would suggest) and slid further over the weekend. In my eyes, this is the market reacting rationally to an unemployment read that is not to be taken in isolation.   

The question is, if there was a second figure of the same magnitude both in the non-farm numbers and the unemployment for January, would it see fear returning? Would the Fed re-enter the market? What also blurs these questions is it would be the first major decision for the newly-instated board, which is made even more interesting considering its make-up.

Janet Yellen (a known dove) may be taking the chair, but the Obama-nominated Vice Chair Stanley Fischer is an uber hawk, as is voting nominated Jerome Powell. Of the members that are moving out of voting rights inner circle - Ester George, Jamie Bullard and Eric Rosengren - one is hawk and two are doves. Of those moving in - Richard Fisher and Charles Plosser are both hawks.

This will make the Fed funds rate a little nervous over the coming months. We have seen it holding firm under Bernanke’s tender as the board strongly reiterated that rates are likely to remain at near zero up to mid-2015, and even as far as 2016. Under the new board they may waver until its members settle into their roles; the Fed funds futures will be interesting to watch.

The other interesting news coming out of the US this week is the start of earnings season. Expectations are fairly buoyant; earnings are anticipated to grow by 9% over the period as confidence rises and spending has increased.

However, here are a few quick stats from the past six months; of the 108 companies to report guidance changes to the market, over this time 96 of them issued warnings, and only 13% upgraded their outlooks. Currently 17% of the stocks listed on the S&P are overvalued on fundamentals. This provides more for global markets to ponder.     

Ahead of the Australian open 

Here in Australia this week is just as interesting. Tomorrow see a mass of Chinese data released with the biggest being GDP numbers; consensus has expectations year-on-year GDP at 7.6%. The trade balance on Friday may see it reaching this mark and possibly beating it on a nominal basis.

Other interesting news from the region is Indonesia’s decision to ban mineral exports. The commodity that will be most affected by this news is nickel – I will be watching Western Areas to see if it gets a pop as nickel supply falls.

Finally, gold; the surprise non-farms print lead to a pop in the gold price on Friday night and it is likely to see the gold space receive a helping hand today after being sold off in droves last week.

Having seen the S&P close flat on Friday, the ASX is likely to chart its own course today as investors position themselves for the prints out of China tomorrow and react to commodity moves from the weekend.

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