Data, Data, Data

One by one, the unbelievers are coming around to the idea that the Fed is not going to taper come next week. 

The Department of Labor reported earlier that the number of individuals filing for initial jobless benefits declined by 12,000 to a seasonally adjusted 350,000. Analysts were anticipating U.S. jobless claims would fall by 22,000 to the 340,000 level last week.

Earlier this week, the Department of Labor reported that the U.S. economy added only 148,000 jobs in September, well below expectations of an increase of 180,000. 
"Overall, gold should be supported in the short term, especially if U.S. data keeps falling short of expectations... that should put further pressure on the dollar and reinforce the argument for the Fed to keep its stimulus," said MKS SA Senior Vice President Bernard Sin. 

This news and the reaction led a further flight from the dollar, some of that investment money going to gold. The equities claimed the lion's share, however. More stimulus means a weaker dollar, a situation one would think ought to lead to more inflation. 

But... we live in a new "normal." All analysts are struggling to describe and record the geography of this new world. 

Gold is up about 1% today. Silver is up about 0.75%. Equities markets in the U.S. and Europe were up strongly. Crude was up and the yield on the 10-year U.S. T-note was up marginally.

The witch's brew of employment data that was saggy well before the shutdown and debt-ceiling drama; growth that doggedly disappoints - which was supposed to be "accelerating" by now; and inflation so persistently meager that deflation could soon take center stage all mean the bar for any let up in tapering is now higher than it has been for some time.  

Additionally, the housing market is slowing down at exactly the time of year when seasonal factors - the winter, holidays, kids established in schools for at least a semester - will kick the dog when it's down. 

Last month we mentioned the possibility that not only would the FOMC not taper in September but depending on the softness in the economy, it might actually increase the flow of capital. This possibility grows more distinct. And now we've been joined by other voices, much more revered than ours.   

Société Générale managing director and head of U.S. interest rate strategy Mary-Beth Fisher today said that the scenario in which the FOMC announces an increase in QE at its October policy meeting next week is "not a possibility we can ignore."

Deutsche Bank's "rate strategist" Domenic Konstam said he is continuing to run with his recent theory that the labor market is exhibiting "late cycle" tendencies, which lead him to believe that the current cycle only has a 50/50 chance of extending beyond 2015. "Late cycle" means we are verging on a new recession. 

Therefore, he is considering the prospect that the Fed possibly only has a narrow window to taper before it's faced with economic headwinds again and if this is the case then why bother to taper at all? If employment is indeed late cycle maybe the conditions don't quite get strong enough in 2014 to persuade the Fed to be very aggressive in pulling back the liquidity of QE3.

A great many analysts - from those at Fannie Mae to the Labor Department to Morgan and Credit Suisse all are trimming forecasts. The IMF (in early October) seems to be the only optimist regarding U.S. growth.

However, again, we've been saying that there is also a strong ideological bent to stimulus hawks' thinking. The people of the United States are getting itchy for serious growoth. They can't hold the Fed responsible, but come next November they will be holding elected officials responsible. 

Wishing you as always good trading,