NFP Day

Today’s NFP data has the potential of being extremely significant to the market — more so than usual. Why? Blame Interest rates and Japan.

For the longest time, investors have managed to avoid the obvious — that inflation has been fairly robust — and not just in energy prices.

The scales have begun falling from Investor’s eyes, as the not-very-efficient market place of ideas has begun coming to grips with reality. That means rates are going higher, with all the appurtenant repurcussions thereto. The recent selloff in the 10 year Bond saw rates spike to 4.73%; the Fed will take their target rates to 4.75% later this month, and then a likely 5% at the following meeting.

Wall Street is hoping that’s the last of it. And we know what happens when The Street starts relying on Hope for its Salvation.

That Hope may be misplaced, as its no longer just the US Fed’s game: The Central Bank in Japan has moved away from its "super easy" stance, raising rates for the first time since Disco was in vogue. European Central Bankers are likely to follow.

Which brings us to today’s Non-Farm Payroll report. The Consensus from Dow Jones is 220,000 (Bloomberg is 210k). The range is 105,000 to 300,000, with expectations that unemployment ticks up to 4.8% or so, and a month-over-month Average Hourly Earnings increase of 0.3%. 

Today’s NFP report is one of those lauded "data points" that the Fed has said it will be watching closely. A number that’s too strong — and we haven’t see a real strong upside surprise in a long time — would start tongues awagging that 5.5% will be the new Fed target. Even the Average Hourly Earnings increase could spook them, despite the real possibility that the bulk of the gains are in construction, particularly NOLA.   

A number that’s weak would confirm the fears that the economy is slowing and the Fed has already done its damage. That would (perversely) lead folks to the conclusion that perhaps the Fed is done, and a rally could be in the offing. That’s the short term reaction; longer term, slowing economy and weaking earnings are hardly a tonic for equities.    

With the market now down 5 consecutive days — 6 for Nasdaq — an oversold rally remains a possibility. But don’t go by
me for very short term trading — I incorrectly thought a week ago that
we could see a pop.

But beyond the equity market’s initial twitch, the key to today is to watch the Bond market. That will provide insight into expectations for how fast and furious the Fed will drive rates higher.

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Forecast:   I gotta stick with the Under (which again perversely helps the Bullish case) if only because its worked so well for so long. The Over (perversely X 3) plays into the longer term Fed overtightening Bear thesis, and shifts the focus to the bond ghouls sudden rediscovery of the forces of inflation . . .