Gold Goes High Riding As Dollar Deflates On Jobs

When life looks like Easy Street, there’s danger at your door.
                – “Uncle John’s Band,” The Grateful Dread

As you are well aware of by now, the Department of Labor’s employment numbers came in at a staggeringly low number. Thirty-eight thousand? That’s only the population of a large small town.

We don’t think this pause is anything to be concerned about in the broader scheme of things. Yet, anyway.

And we will have to do some digging to reconcile the federal government’s number with the private number issued by ADP on Wednesday. There is a yawning chasm between the two numbers. We are scratching our heads, rubbing our chin and dangling from a tree limb trying to figure out what actually happened.

Nevertheless, without naming names, we can safely say that the zealous rate hawks among members of the Federal Reserve probably are wishing they were among the (lower case) “grateful dead.” After all the beating of the drums, the torches and pitchforks at the village gate and the wailing admonitions addressed to the profligate doves, it seems the hawks could not have been any more wrong.

Worse, there is a strong possibility that they scared the U.S. economy into a mini-slump by giving Wall Street the heebie-jeebies.

We will say, “Told you so,” and then be on about our business. We have said repeatedly that we are not really close to rate-raising territory. Oh well, if we ruled the world…

A few bullet points for the day:

• The U.S. dollar plunged against the euro by 1.70%
• It plunged even more drastically against the yen – 2.00%
• The dollar swoon helped gold to soar $30+ per ounce
• European equities fell on the U.S. economic news and did not have time to recover before it was closing time
• U.S. equities dropped over 1.00%+ across the board immediately following the news, but have since recovered dramatically
• The Dow is off 0.30%, the S&P 500 off 0.40% while the NASDAQ is the worst-performing among the majors, off 0.70%
• West Texas Intermediate crude is off 1.25% with Brent North Sea faring a bit better

It is well worth noting that U.S. stocks recovered in the afternoon session. It means that the jobs news is not a trigger for broader pullbacks in business activity and investment.

Many of the short trades were programmed contingent on the labor report and when calmer (human) heads prevailed, short coverers and bargain hunters stepped in.

We would be very leery of all the ups and downs cited above. A reversion to the norm is most likely. Think of a close-up video of a tuning fork as it resonates. It quivers far to left and right when first struck. Then it settles in the middle as the sound continues.

We are unfazed by the employment snapshot for a number of reasons.

A second straight significant rise in workers’ pay was a bright spot in the report.

Average hourly earnings rose by 0.2% in May after a 0.4% gain in April that was a touch stronger than initially reported. Worker pay increased 2.5% over the 12 months ended in May.

If you apply a similar pay rise to those from the last two months over the next twelve months, wages will grow by 3.6%. That would be significant.

The growth in wages could very well be keeping a damper on hiring – for now. We think there is still plenty of pent-up labor demand and that there is little slack in the market.

Our warning is on the mismatch of skills to jobs, though. We may be reaching the legendary land of full employment, but there are many millions of unfilled positions. There are 5.8 million jobs going begging to be precise. (And people are shouting about immigrants, legal or otherwise, taking the jobs of Americans!)

The report showed weakness in sectors vulnerable to slow or stagnant overseas markets. There were also cutbacks in energy investment and therefore hiring in oil patch services, transport, marketing and so forth.

Until demand for oil picks up significantly, a dubious prospect, hiring in that sector and its ancillaries will stay sluggish.

There was also a one-off problem for this month’s payroll figures that has already vanished. Stats reflected a work stoppage at Verizon Communications that involved some 35,100 workers, the most in four years. The Verizon workers were idle for the entire payroll survey period.

We also have to ask this question: is the lower price of the greenback a good thing for the American economy? We would answer, at about the levels we are currently experiencing, “Yes.” If the buck goes down any more the lower dollar invites inflation that may be hard to tame.

We would like to close with three observations. First, it seems as if Europe has turned a corner and is finally recovering. Second, what the heck can Japan do to fix its economy? It is a worry. Three, China is a sick man and no one is calling for a doctor.

Wishing you as always, good trading,