A questionable reaction to the big BLS revision

The minutes from the latest FOMC meeting showed yesterday that ‘several’ Federal Reserve (Fed) officials were ready to cut rates at the June meeting, while ‘vast majority’ of them were convinced that September would be a good time to start cutting. Some officials were concerned that cutting the rates prematurely could risk reversing the progress made on taming inflation, but others saw a rising risk for the tightening jobs market to transition ‘to a more serious deterioration’. And the latter worries could be funded as the BLS made a whopping 818’000 downside revision to the annual payrolls figures, giving reason to Goldman Sachs where economists were expecting between 600’000 to a million downside revision. That means that the US added 68’000 less jobs per month than the numbers announced over the past year. That’s the biggest revision since 2009.

The FX and commodity side of the story

The combination of dovish Fed minutes and the big downside revision to the annual payrolls number sent the US yields lower and the dollar lower yesterday. The dollar is oversold at the current levels but the news supportive of the dollar bears keep coming in in a way to keep the bears in charge of the market despite the stretched positioning. As such, the EURUSD extended gains to 1.1174 yesterday, Cable advanced to 1.3120, the USDCAD slipped below the 200-DMA – and that despite a further fall in crude oil prices which could’ve prevented the bulls from rushing in, but did not, and the USDJPY consolidated near the 145 level. All of these currencies have one thing in common: their RSI indicators – the relative strength indicator – are flashing overbought conditions against the greenback and continue to suggest that a correction would be healthy at the current levels.

In commodities, gold consolidated near the $2500 per ounce as the risk on environment directed capital toward the stocks rather than the safe haven gold, while crude oil extended losses to the lowest levels since August despite a 4.6-mio barrel decline in US oil inventories last week. The ugly payrolls revision didn’t do much good to sentiment in oil, apparently. The black gold is preparing to test the $72pb support to the downside, and the bearish momentum has enough strength to carry the move toward the $70pb psychological mark.

The stock side of the story

About three weeks ago, when the US had released weak jobs data, the US dollar had fallen on the rising recession odds for the US and the stocks had fallen as well. The latter had even triggered a massive global risk selloff along with a broad unwind of the yen carry positions. Interestingly, yesterday, the market’s reaction to the BLS revision wasn’t quite similar. The S&P500 and Nasdaq both gained on expectation that the Fed will start cutting the rates, the Russell 2000 outperformed, and no one seemed to care that a bad jobs market was a sign of recession that could hurt company profits – the only place we saw that worry was at crude oil, and even the SPDR’s energy sector eked out a small gain yesterday.

Something must give

The Jackson Hole meeting starts today, Fed President Powell will speak on Friday, and many other central bankers will have the opportunity to give hints about their monetary policy plans, as well. Walking into the meeting, the swap markets are back to pricing in a 100bp cut from the Fed before the end of this year. The latter implies a jumbo rate cut at one of the last three FOMC meetings of the year. And because a jumbo rate cut wouldn’t arrive unless there is a deeper economic and financial trouble, the market pricing of the moment is unsustainable for either the US dollar – which has gone too low with the expectation of a 100bp cut, or the stock markets – which have gone too high with the same expectation disregarding the fact that economic trouble is never good for profitability. In summary, I think that something must give: either the US dollar will rebound, or equities will fall. But a weaker dollar and higher equities don’t make sense together.

Elsewhere

Data-wise, the flash PMI numbers and the European Central Bank (ECB) minutes will be on the menu du jour. The figures in Japan showed a slower-than-expected rebound in the manufacturing activity but the services PMI printed a 7th month expansion and the fastest expansion since April. The figures in Europe will likely be mixed, and the figures from the US are expected to point at weaker numbers compared to last month – that could back the dovishness Fed expectations.

In Europe, investors will also be looking for hints of a September rate cut. Many think that the Eurozone’s economic weakness suggests one more cut before the year ends – on top of the September cut. That’s one less cut compared to the Fed, and a possibly 50bp cut less compared to the Fed if the Fed goes ahead with a 50bp in one of its remaining three meetings. And looking how poorly the Eurozone economies performs compared to the US’, it seems that there is a mispricing here, as well.