CMC Markets

It was a beat-down yesterday as concern over the prospect of tightening domestic monetary policy was exacerbated by poor economic data at home and abroad with Argentina defaulting and the US and EU sparring with Russia for a new cold war.

US Markets look like they’ll be following European stocks lower at the open with the expectation that a good US jobs number will bring the Federal Reserve even closer to a rate hike, despite the Fed saying otherwise.

Futures suggest the Dow Jones will open 85 points lower at 16,478 with the S&P 500 expected to open 10 points lower at 1,920 and the Nasdaq 22 points lower at 3,870.

The unemployment rate has been declining for several months but the Fed statement still includes a concern over the “significant underutilisation of labour resources.” This implies it is not the unemployment rate that is the concern. As long as the jobs number is above 200k, market direction may come down to average hourly earnings and the participation rate.

The concern is that low wage growth is eating into consumer disposable income, if there’s signs of a pickup beyond the 0.2% monthly increase in average hourly earnings expected then this would partly address the Fed’s concerns.

There is an increasing percentage of the US population that are no longer seeking a job and becoming structurally unemployed. It’s debatable if the participation rate is the domain of monetary policy and whether the Fed in fact feel they can address this with lower rates.

A largely ignored possibility is that the number falls below 200k. The Fed, although slightly more hawkish with a nod to inflation, has remained dovish because of labour market weakness.

Should today’s unemployment data miss expectations then the Fed would be vindicated in their labour market concerns and their determination to keep rates low for a “considerable time”. If the unemployment numbers signal a later date for the first rate-hike, markets could soon be making new highs again.

Only last week, markets were very earnings-focused, for now that has gone out the window and today’s earnings news from Chevron, Proctor & Gamble and Burger King will probably go largely unnoticed ahead of the US jobs report.

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