To say the US payroll number shit the bed would be like saying Lindsay Lohan enjoys the odd cocktail. The median estimate was for 160k nonfarm payrolls to be added, with the lowest forecast out of the 91 economists surveyed by Bloomberg bottoming at 90k. The actual number came in at a disappointing 38k jobs.
This number was about as bad as it gets. Although all the eco-bulls are trying to put a positive spin on this report, there is no way to hide the fact the US economy is showing worrisome signs of fatigue.
What’s truly amazing is the Federal Reserve committee’s recent behaviour. A month ago the market had correctly sniffed out the economy’s weakness. At one point, traders had even pushed Fed rate hike projections out almost to next year.
But then the FOMC bozos went on their hawkish offensive. Over the past month, Federal Reserve president after president has gone out of his way to tighten monetary policy expectations. This message was then confirmed this Friday when Chair Yellen reiterated the Fed was on schedule to tighten this summer.
I incorrectly assumed Yellen and the other Federal Reserve officials had a handle on the US economy. Surely if they deliberately altered market expectations, they must know something.
Man oh man was I wrong. These fools have no clue what’s going on. There was absolutely no need to change the expected path of short term interest rates. It was especially stupid when you realize the market had it right all along.
The bond market once again has proven way smarter than the Federal Reserve. The relentless flattening of the yield curve has been screaming that Fed is too tight.
Ever since the Federal Reserve tightened last December, FOMC members have focused on the employment picture to the exclusion of all other economic indicators. Although employment has not disappointed until now, almost every other economic release has come in below expectations. Have a look at the CitiBank economic surprise index:
It has been over a year and a half since US economic numbers have exceeded forecast. Instead of weighing forward looking indicators, or market based signals such as the yield curve, the Federal Reserve has fixated on the most lagging economic release out there - employment.
Complete loss of credibility
The Fed cannot tighten rates with employment dramatically missing estimates. The supposed tight labour market was the only reason they could have possibly justified it. Now that this pillar has been removed, it will be suicide to raise rates.
I know that I just wrote a piece a couple of days ago about how the Fed would hike this summer, but I was wrong. I gave the Fed much too much credit.
They have once again proven they have absolutely no clue what they are doing. And in going out of their way to alter expectations, but ending up with egg on their face, they have inched even closer to a complete loss of credibility.
This morning on Bloomberg TV Bill Gross said “the Fed needs to raise rates to maintain credibility.” Bill, I got news for you. That ship has long sailed away. And if they do indeed raise rates just to save face, it will prove to be a colossal error rivaling Trichet’s double rate rise that led to the European debt crisis.
And just in case you think the Fed’s message hasn’t changed, take a gander at Fed President’s Brainard’s comments this afternoon (with some great comments from ZeroHedge’s Tyler Durden):
*BRAINARD: U.S. JOBS IN MAY REPORT SUGGESTS LABOR MKT HAS SLOWED
*BRAINARD: SEES BENEFITS TO FED WAITING FOR ADDITIONAL DATA
*BRAINARD: CAN’T TAKE RESILIENCE OF U.S. RECOVERY FOR GRANTED (but but Janet said)
*BRAINARD: CAN’T RULE OUT SIGNIFICANT ADVERSE REACTION TO BREXIT (better wait then!)
*BRAINARD: RECENT DEVELOPMENTS MIXED, DOWNSIDE RISKS REMAIN (but but Janet said)
*BRAINARD: FED HAS MADE CONTINUED PROGRESS TOWARD ITS GOALS (really?)
*BRAINARD: DOLLAR SEEMS MORE SENSITIVE TO FED POLICY SURPRISES (no shit)
*BRAINARD: RISKS TO FED’S INFLATION GOAL WEIGHTED TO DOWNSIDE (but dollar means strong US economy?)
*BRAINARD: DON’T DISMISS REEMERGENCE OF RISKS AROUND CHINA (better not hike then just in case)
*BRAINARD SEES FED POLICY PATH LIKELY SHALLOW FOR SEVERAL YEARS (lower for…ever)
The Federal Reserve’s message has done a complete 180 from last week’s hawkish jawboning.
What to do?
When this morning’s bombshell hit the tape, all that ran through my mind is that I better get some more gold. The Federal Reserve has once again shown they don’t know what they are doing. There might be better trades. Maybe selling stocks will work. Maybe I will prove wrong about my inflation call. But I know that uncertainty benefits our little yellow friend the most.
The financial system is extremely unstable. Central Bankers are increasingly desperate. Some believe it will come crashing down like 2008, others, like me, believe a melt up is even more likely. Regardless, in either scenario, gold wins.
Earlier this week gold broke 1210 support. There was every reason for the selling to accelerate, but it held. And now with today’s news, gold is rocketing higher.
The gold correction of the past couple of months is hopefully over. I expect new highs this summer…
Thanks for reading and have a great week-end,