This was the message market participants took from last month’s employment report.
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The U.S. dollar index, which measures the greenback against a basket of currencies, jumped to its highest level in seven months after a report on Friday showed United States nonfarm payrolls increased by 271,000 in October, the biggest gain this year and ahead of the 180,000 expected for the month.
On the close of the trading session on Friday, Citigroup Inc (NYSE:C) shares surged 3.19% at $55.88. I have never seen a bull market end that didn’t hurt badly the most vulnerable investors. But with Fed officials, including Yellen, talking about raising short-term interest, over-indulging in stocks means you are soon to be fighting the Fed.
Over the past few years, Citigroup has been able to perform better than its peers, mainly in terms of operational efficiency. She has struggled to keep a working majority on the FOMC as the money markets and the conventional wisdom have clamored, with increasing intensity, for a rate hike. So the only impediment to an imminent rate rise is global financial market instability between now and mid-December when the Fed next meets.
The good news is that the economy is creating jobs at the fastest pace since the Clinton administration. Watching and waiting for central banks to return to more “normal” rates is kind of like sitting in the stands while a baseball game is in late extra innings.
Producer Price Index (Fri): Economists estimate producer prices climbed by 0.2% month-over-month in October, while falling 1.2% year-over-year.
On Wednesday, Fed Chair Janet Yellen said that an upward move is increasingly a “live possibility”, leading gold to give up most of the gains of the last six months. However, it was not clear whether this was just an error or the beginning of a new crisis.
Not only was the strength of the jobs report exaggerated, but the Fed should not depend on one month’s employment data, which will be revised several times, to decide when to raise rates. “The rate of job quits was unchanged and has now stagnated for almost a year”. “I think that just increases the probability that we make more mistakes”, Rosengren said, in an interview with Reuters.
But no other area in finance has had so much noise around it than the whens, whys and by-how-much’s of interest rate moves.
Average hours worked rose by 0.3% in October, signaling a small increase in the demand for existing labour over that period, but this followed a drop of 0.8% in hours worked in September, so we only recovered part of the prior month’s drop. Most investors seem to be optimistic about a strong rate hike by the end of December. Interest rates have been zeroed out since 2009 and now the talk of negative rates.
Central bankers are the ones who have the power, after all. However, this isn’t the conventional way of dealing with such a problem.
At this moment in time, it can not be said for sure whether the latest wage numbers indicate an upward trajectory in the near future or are simply misleading.
“What sort of Fed tightening are we getting in December?”
Downturns in the global stock markets, slumping oil prices, devaluation of the Chinese currency and the recent turmoil around the globe has added an additional layer of risk to the decision Federal Reserve has to take. Five-year fixed-mortgage rates rose across the board and are now available in 2.54% to 2.69% range.
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As I discussed earlier this year, in the Market Perspectives paper No Exit: Can the Fed Normalize Rates-And How Will It Impact Stocks?, an initial rate hike has historically been a temporary headwind for stocks; it has rarely been a harbinger of a bear market. Nonetheless, Colquhoun warns that rising rates will push borrowing costs higher in a region that has turned to debt to fuel growth as trade ebbs.
