Yesterday was "one down, one to go". Today was the "one to go" day. We got the employment numbers and they came in stronger than the number that the market was looking for. The reported number was 217K for the month of May beating analyst expectations of a 210K increase. The unemployment rate fell to 6.3%.
The response of both the Dollar and the gold price was very interesting. The Dollar initially bumped up while gold dropped slightly but then both reversed course with the Dollar moving lower and gold moving higher. Both markets then reversed course once again. The result of this is to provide evidence that investors/traders are uncertain in their outlook for both interest rates and inflation.
I find this price action noteworthy enough to repeat something that I have been writing about for some time now - that the main factor preventing any inflationary pressures from gaining a foothold in the US economy has been slack in the labor markets.
Along this line, let me make a special note here - coming from the emails that I receive blasting me for being ( insert unprintable curse words here) 'stupid enough to believe the government's numbers'.
Whether it is the stated inflation rates coming from the CPI/PPI, the GDP numbers, or as is the case for today, the employment numbers, I am constantly insulted and reviled in private for detailing what the feds are reporting and how the market is responding to such numbers, as if reporting on those and commenting on those is now considered by that crowd to be "consorting with the enemy".
I have said it previously and will repeat it here however, those GIAMATT perma gold bulls had better STOP ROOTING for lousy economic numbers as if somehow that is going to be bullish for gold, and had instead better be rooting for evidence of growth that is strong enough to generate inflation.
They can repeat their mantra that QE is going to last forever and that the Fed is never going to end it until the cows come home but the facts are quite simple - the Fed has engaged in 4 rounds of QE ( if you count operation twist in there you could change that number ) and is now tapering the last round. The commodity markets, including gold and silver, both rallied strongly during rounds One and Two, as most everyone on the planet expected that policy to produce a rate of inflation that the Fed was looking for. It DID NOT. Why should any more QE ( as they affirm constantly is guaranteed) going to produce something different, namely no inflation? Answer - it won't - at least not until the employment picture improves in my opinion. That has been the problem all along - namely that the liquidity that the Fed is providing has not made it into the broader economy in a large way as evidenced by the falling Velocity of Money rate.
People must have jobs and they must feel that their jobs are secure enough before they are going to dig themselves deeper into debt by taking on new credit. It is that serious growth in consumer credit that is needed to at least, at the bare minimum, put in place the groundwork necessary for Velocity of Money to increase. Without that, inflation is not going to be an issue.
Traders/investors who dig deeply into such things understand this. This is the reason gold (and silver for that matter) have gone nowhere the last few years. Not because they are constantly manipulated at the Comex or regularly smacked down by evil bullion banks doing the bidding of the government but because investors have NO EXPECTATION of GROWTH fast enough to generate any upward inflationary pressures. If you doubt that, go back and reference that TIPS spread chart that I have provided as evidence. As far as the broader market participants are concerned, it is a near perfect environment for stocks - slow and steady growth with little inflation and extremely low interest rates.
If gold is going to mount a sustained rise, it will at least need inflation to be a concern in the minds of traders, not that it is the best inflation hedge out there ( I happen to think that crude oil is actually a better one ). Nonetheless that means any pickup in interest rates must lag the inflation rate and we need to have an environment in which the general commodity sector as a whole is rising. We have had neither. Simply put, inflation is no where remotely a concern of most traders and the reason it is not, is because of the employment picture and the data connected to that ( consumer credit, VM, etc.).
I am wondering, now that we have gotten some back to back readings of +200K job gains, if the market is now beginning to take a look inside the headline number of these jobs reports and keying in on the "Average Hourly Wage Growth" number. The jury is still decidedly out on this, based on the movement in the bond markets today with yields actually declining. Still, that being said, the YoY ( year over year) rate of growth for that hourly wage is 2.1%. The Average Workweek came in a 34.5 hours but it is that former number that has peaked some interest. Neither number is evidence that growth is anywhere near strong enough along that front to fan inflation pressures; yet. That average hourly wage growth number is going to take on increased scrutiny in the upcoming months in my view. Investors are going to be looking to see if these wage gains can get back to the level that they were PRIOR to the 2008 Recession.
I guess what I am trying to say here, and perhaps not clearly enough through all of the statistics that I am referencing, is that investors might be coming around to accepting that job growth, while not setting the world on fire, is at least steady enough so that they can now shift their focus somewhat to wage growth or the lack thereof. In other words, they are less concerned about the outright employment numbers and perhaps becoming more interested in whether or not the ingredient to push inflation into the mix is beginning to appear- namely, increasing wages.
We'll have to see if that is the case but that will require that we get no more sub 200K job number readings. There is a bit of chatter out there today that the rebound in this month's readings were due somewhat to pent up job demand that resulted from the inclement weather early in the year and that there is a risk of this demand leveling off somewhat resulting in the number in subsequent months to actually decline from this month's reading. Again, that may be the case - we will just have to wait and see.
I will get some more up later on as the session progresses and we get to see the action across more of these individual markets. For now ( and this could change ) traders are buying stocks, interest rates are ticking slightly lower ( no inflationary concerns), the Dollar is slightly firmer, and gold is a bit lower. Silver has fallen below $19 once again, which is now serving as overhead resistance and copper is down nearly 2%. That China news is dominating the red metal. Let us hope for the sake of the gold bulls out there that China does not turn its attention to gold-backed loans! If you want to see what might happen to the yellow metal should they do so, just look at copper.
Corn and especially wheat, are higher today. Looks to me like some pre-weekend short covering is occurring right now after their big drops this past week.
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