Waiting, Wondering, Hoping, Worrying

Everyone is hoping that tomorrow’s July employment report from the U.S. Department of Labor clarifies the mixed bag of data we’ve seen much of this week and last. Projections are for 223,000 new jobs to have been added, although today Goldman Sachs upped its own estimates from 215,000 to 225,000.

If the numbers come in at 215K to 220K, fuel would be added to the speculative fire concerning a Federal Reserve rate bump at its September meeting. If the numbers come in much below 215K, the rate increase would be seen as more likely in December. We still feel it’s going to be December (if this year at all) regardless of any labor data timing.

We say this for a number of reasons. The most important of those are inflation as it stands now and the expectation of inflation in the future.

Inflation in 2015 has been running below the Fed target of 2%. And, much of the inflation in ’15 is simply a catch-up play from 2014’s ridiculously low inflation. A sober analyst can’t look at a one- or two-month period and say, “Aha, inflation is rising.” From what level? Why? All we need to do is watch how crude oil has bounced around in the last six months to re-remember that.

Additionally, a meaningful measure of U.S. inflation expectations in the bond market tumbled today to its lowest level in nearly five months as U.S. crude oil prices fell close to their cheapest level of 2015. This will absolutely complicate the Federal Reserve’s blueprint for raising short-term interest rates for the first time since June of 2006.

Here’s one take on where rates may be going and why.

The 10-year break-even rate – the yield spread between the 10-year T-note and the 10-year Treasury inflation-protected security – pegged recently at 1.66 percentage points, the lowest level since late March.

The level suggests that investors are ascertaining that the U.S. inflation rate will be running at an annualized 1.66% on average within a decade, down from 1.92% a month ago and below the Fed’s 2% target deemed as appropriate for price stability for the economy.

Regardless of whether you believe that federal inflation indicators are accurate or adequate, we know from common sense that inflation is not hot in any sense. It’s lukewarm to slightly cool. A rise too soon in interest rates would suppress inflation even more.

A rate rise would also make it more difficult for businesses to invest and banks to loan. An interest rate also raises the costs for government services and for all the long-delayed infrastructure we need in the U.S. Maybe 0.25% doesn’t sound like that much, but when the various levels of government have borrowed trillions per year and private individuals are borrowing a similar amount, even 0.25% creates a mammoth amount of money that would have to be dedicated to interest payments and thus not used for other things.

Gold is up reasonably nicely today. U.S. crude is down while the Brent benchmark is up. The U.S. dollar ticked down slightly, so, obviously the euro was nudged up.

Wishing you as always, good trading,