Gold Can’t Stave Off Rising Dollar, Optimism On Economy That Could Spur Rate Hike

The U.S. economy created 280,000 jobs in May, a stellar outcome after a weak late winter and early spring. Earlier employment data were also revised upward. Possibly more important and a harbinger of things to come, average hourly earnings rose by an extremely healthy 0.3 percent. If projected across 12 months that would mean a big boost in spending power and more fodder for those promoting a September interest rate hike by the Federal Reserve to keep inflation tame. The U.S. is facing a strange economic contradiction that could be due to statistical aberrations or simply a temporary anomaly.
 
While employment rose strongly in April and May and was revised upward in March, GDP and other output measures are sluggish. Gross domestic product contracted at a 0.7% annual rate in the first quarter. And based on the data available now, analysts expect a lukewarm 2% growth reading for the Q2, which ends on June 30th. Maybe there will be a late-May-early-June surprise that reflects the spurt in employment growth.

Seemingly counter-intuitively, U.S. equities fell then came back to near even then fell again, following their European brethren and two of the three Asian markets into uncertainty. Only Shanghai, which apparently is floating ever higher on helium, was up today. However, each region had its own reasons for sliding.

In New York, the fear is, of course, that easy money will be on its way out the door when the Fed begins to raise rates. (As if 25 basis points will harm Wall Street’s credit access.) Europe has the Greek jitters again as the distinctly non-heroic inheritors of an amazing tradition appear more and more like hucksters at a carnival trying to game the rest of the continent. In Japan, trading was lower in a slow session as export giants in the automotive and electronics sectors dragged down the Nissei 225.

In other areas of interest, crude oil as well moved lower on dollar strength and some hesitancy in the markets as analysts await news from the meeting of OPEC ministers. Howewer, West Texas Intermediate is up nearly 2% on a drop in U.S. oilrigs in operation.
The U.S. 10-year bond yield surged while prices virtually collapsed in the face of the threatened rate rise in the early autumn. 

In the “wait-just-a-gol’darn-minute” department, the statement by the IMF yesterday that the U.S. should wait until 2016 to raise rates obviously has to be taken with a grain of salt today, given the economic news on the labor front.
Yet, there is plenty to be intrigued by in the IMF assessment. The Federal Reserve is charged with keeping the American economic ship on course. The IMF always has, by its nature, the worldview in mind. But both are big dogs and one’s tail is wagging happily today, while the other is barely wagging at all.

We lean toward the IMF view. Even if it seems “sort of” right to raise rates right now, it would hurt the rest of the world and that would come back to bite the United States.

So, the IMF executed a kind of basketball pick play on the Fed. Like many predictions, if the IMF take on things is wrong and the American economy rumbles toward a slam-dunk, their outlook will soon be forgotten. If the IMF is right, they’ll say I told you so many times that your head will spin. 
Regardless, the Fed will take the IMF viewpoint under careful consideration. One other thing that is on our mind concerning rate hikes – it may be that the Fed is not monitoring employment, inflation and wage pressure as much as it is monitoring irrational exuberance on Wall Street and elsewhere.
Tuck that away in the back of your mind. You’ll be hearing more about that issue as the summer approaches.

Wishing you as always, good trading,