It was a mixed bag on Friday regarding US employment data. Nonfarm payrolls underwhelmed, the US economy added 136,000 new jobs to the market’s expectations of 145,000.
But it was the unemployment rate that caught a lot of people by surprise. It showed a decline from 3.7% in August to 3.5% in September. This is the lowest it’s been since 1969. As you can imagine, the headlines were all over this.
Some have attributed the figure to temporary census workers, but US equity markets rallied regardless. The S&P 500 was up 1.15% on the day, the Dow was up 1.24% and the Russell 2000 closed up 1.25%.
The S&P rallies on employment data, then gaps down on October 8
It’s been a quiet week thus far when it comes to US economic data. Both wholesale and core PPI came in at 0.3% on Tuesday, down from forecasts of 0.1% and 0.2%, respectively.
We’re waiting for today’s CPI and core CPI to confirm the disinflationary trend we’re witnessing on the producer side.
At 2.9 million barrels, crude oil inventories came in more than a million barrels over the market’s consensus expectations of 1.8 million, giving further credence to the argument that the US economy is slowing. West Texas Intermediate took a tumble on the day, returning to its recent support level of $52.
US oil sells off and re-tests its recent $52 low
Wednesday’s JOLTS Job Openings report revealed a reduction from 7.17 million posts in the previous report to 7.05 million, missing expectations of 7.35 million.
Chair Powell speaks
Without a doubt the most impactful piece of news for traders of US markets came not as an economic statistic, but was rather was inferred from the words of Fed Chair Jerome Powell. It appears that the full Powell Pivot is finally complete.
Speaking at the 61st annual meeting of the National Association for Business Economics, Jerome Powell referred to the Fed’s recent repo market operations as a more general problem with insufficient reserves and committed the Fed to combatting the issue.
“Indeed, my colleagues and I will soon announce measures to add to the supply of reserves over time. Consistent with a decision we made in January, our goal is to provide an ample supply of reserves to ensure that control of the federal funds rate and other short-term interest rates is exercised primarily by setting our administered rates and not through frequent market interventions.”
As we discussed on Tuesday, it seems that the narrative is gradually turning towards a return to asset purchases, while the Federal Reserve tries to downplay any connection between this and quantitative easing.
Powell even took the time to explain this, which only confirmed that what’s been taking place in the repo market is more than just a temporary squeeze. In fact, in the above quote he commits to an expansion of the balance sheet beyond the temporary market interventions seen recently. Just don’t call it QE.
“I want to emphasize that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis. Neither the recent technical issues nor the purchases of Treasury bills we are contemplating to resolve them should materially affect the stance of monetary policy…”
The “alternative” financial media (whatever that means nowadays), were quick to pick up on the double-speak.
POWELL SAYS FED CONTEMPLATING PURCHASES OF T-BILLS, WON’T BE QE
Fed will permanently expand its balance sheet and buy Treasurys, i.e. QE, but whatever you do, don’t call it QE
— zerohedge (@zerohedge) October 8, 2019
What does it all mean?
Markets seem to be in a state of uncertainty as they digest the mixed signals issuing from the Fed chair’s lips. On the one hand, equity markets love QE as new money tends to find its way into stocks.
On the other hand, as Powell’s tone goes from hawkish, to dovish and finally towards a confirmation that some kind of money printing is on the cards, are we being told that a recession is imminent?
The dollar sold off against its major trading partners yesterday and is looking to test its October lows.
The dollar loses ground to its main trading partners
Meanwhile, Gold has remained perched just above the key $1500 psychological level and is struggling to break above its 200-day moving average.
Gold retakes $1500 and remains perched there
Tomorrow’s preliminary University of Michigan consumer sentiment and inflation expectation reports, should add some direction, however it’s doubtful that a definite turn in the market will be decided on this alone.