A Strong Week Stumbles A Bit At The Hands Of Profit Takers

While Monday is not an “official” trading holiday, look for traders in New York to treat it as such. Junior crews will be working the desks while senior traders take a three-day weekend. (Schools; courts; most, but not all, banks; and other federal and state offices are closed in New York, New Jersey and Connecticut.)

We go into the weekend with our focus drawn back to the Fed and what they think or might think – or what we would like them to think. A lot is being factored into the thinking of FOMC members.

The number of Americans filing new applications for jobless benefits dropped more than expected to near a 42-year low last week, pointing to ongoing tightening in the labor market despite the recent slowdown in hiring.

The data released yesterday (Thursday) gives an upbeat snapshot of the health of the labor market after last week's monthly employment report increased doubts the Federal Reserve would boost interest rates by the end of 2015

Initial claims for state unemployment benefits dropped 13,000 to a seasonally adjusted 263,000 for the week that ended October 3, the Department of Labor said.

Lowest since – well since Nixon was president! That was the lowest since mid-July when the number of claims was at its lowest since 1973. Hitting that historical low is remarkable considering the size of the U.S. workforce has expanded dramatically since the 1970s.

The FOMC will meet again on October 27 and 28. Looking forward to that meeting, William Dudley, head of the New York Federal reserve Bank, said in an interview today (Friday) that he expects solid U.S. economic growth to offset weakness overseas, which is hurting American exports. He observed that the economy would need to further improve for the Fed to raise rates from long-in-place record lows.

“There’s certainly a risk that the economy evolves in a different way than I expect, and obviously (it would) be totally inappropriate for me to not take that into consideration in terms of what I think is appropriate for monetary policy,” Dudley said.

If Dudley was leaning any way at all, it seemed to us he was tilting toward December.

Dudley said that while a decision to raise rates at the October meeting was “possible,” he added: “Have we seen enough information between September and October to convince us to do in October what we didn’t do in September? That would be the question I would ask.”

That is why we mention the weekly unemployment claims immediately above the notes on the Dick Dudley interview.

Combining Dudley’s comments with the FOMC minutes released this week we have to say that even December is looking iffy for a rate rise. Some markets seem to agree with us, although not the U.S. equities (today, anyway).

The prospect of low U.S. interest rates pushed the dollar down about 0.75% against the euro. Yields on the 10-year Treasury bond slipped slightly.

The weaker dollar helped pushed gold higher, and indeed the whole precious metals complex, up. Gold is up in mid-afternoon trading about 1.5% while platinum is up more than 3.00%.  Palladium and silver are both up slightly under 1.00%. Fundamentally speaking, demand for base metals seems to be picking up significantly. Zinc is up more than 10.00%, a big gain.

West Texas Intermediate crude was knocked down a scant couple of pegs by profit takers, rather than by longer-term investors who think crude’s rally is done with. We say, “Why not?” Even with the slight pullback, oil is up 8% on the week. Nothing wrong with taking some money and going home on an 8% rise.

The Dow, S&P, and NASDAQ also faced profit taking after a solid, if unspectacular, week. The only near-term future headwinds stocks might be facing are earnings disappointments. However, many of those problems may be already baked in, particularly when it comes to banks and other financial companies. Banks could be a good buy if they dip on earnings.

Wishing you as always, good trading,