It was inevitable.
And yet the stock market is struggling to digest it, and the mainstream financial media is grasping for stories to explain it.
‘Normalisation’ is a smooth-sounding word. But it happens with moves like last week’s spike in treasury yields.
It’s happening; rates are going higher. And don’t expect Federal Reserve policy to change until something breaks.
Fed Chair Jerome Powell made that clear in two public speeches last week. He doubled down on the confidence he expressed following the September Federal Open Market Committee meeting.
He reiterated his view that the US economy is ‘currently enjoying a remarkably positive set of economic circumstances’. He also noted that even though the current cycle probably won’t last forever, it can continue for ‘quite some time, effectively indefinitely’.
The current cycle can continue indefinitely… Well, I’m sceptical. And I expect normalisation to create many overreactions along the way.
According to Powell, Fed interest rate policy is still ‘accommodative’, and the central bank will continue to hike rates gradually until we reach the ‘neutral’ rate.
I can promise you this: The economy won’t grow and markets won’t go up forever. Something always gives.
We’ll see if we get back to neutral before that something eventually hits the fan.
Take these jobs…
The mainstream financial media will struggle to explain what we’ve understood to be the inevitable.
Humans generally love a story, to offset their eternal struggle with randomness.
For instance, and it was easy to cite Automated Data Processing’s (ADP) employment summary as fuel for last week’s initial move.
Treasury yields did indeed jump last Wednesday, when ADP did report that the private sector added 230,000 jobs during September. And that did exceed a forecast of 179,000.
Yields followed up with an even bigger bounce Thursday.
But ADP data don’t always track the official Bureau of Labor Statistics (BLS) survey. And, more than that, markets usually only react to the BLS numbers.
In other words, the market simply does not take the ADP report as seriously as a lot of folks appear to want you to.
Indeed, Friday’s BLS report was totally at odds with the ADP report.
According to the government, non-farm payrolls increased by just 130,000 in September. And that’s 50,000 fewer than expected.
August’s new-job total was revised higher by 69,000, though. And the unemployment rate dropped from 3.9% to 3.7%. That’s lower than the 3.8% observers expected, and it’s also the lowest point since 1969.
The labour force participation rate was unchanged at 62.7%.The change in the unemployment rate is a function of how it’s calculated, not so much the pure gain in jobs.
Hourly wage growth was in line with expectations at 0.3%, but it was a slowdown from 0.4% in August. Year-over-year wage growth slowed to 2.8% in September from 2.9% in August.
Overall, the employment market remains relatively healthy. And this report will likely serve as further confirmation of the Fed’s current judgment.
Whether the market and the media read it as such is a different question…
Editor, Harry Dent Daily