The Next Interest Hike is Just Around the Corner

By: David_Chapman

Shortly after the release of the most recent nonfarm payroll numbers, the pundits were quickly talking up the potential for another Fed interest rate hike at the September FOMC. The BLS reported that the July nonfarm payrolls were up 255,000 jobs, when they expected only 180,000 to 185,000. The June nonfarm payrolls were also revised upwards. Unemployment (U3) was unchanged at 4.9%. Despite the seemingly strong job numbers, the monthly nonfarm payrolls remain highly questionable. Further, other economic data has been anything but robust, with the recent Q2 GDP numbers coming in at half the level expected. The most recent trade data was also lower than expected. Canada reported job losses in July of 31,200, well below expectations, and the equivalent of the US nonfarm payrolls being down 300,000.

The Canadian unemployment also ticked higher. Two countries, it seems, moving in two different directions. We took a closer look at the reported unemployment (U3) along with the BLS’s labour force participation rate (the population working or wishing to work), along with the employment population ratio (the percentage of the population that could work). What we discovered is, as the unemployment rate falls, generally the labour force participation rate rises, and the employment population ratio rises. Except in the most recent period, following the 2008 financial crash and great recession, the labour force participation rate fell along with the unemployment rate (U3) even as the employment population rose somewhat from its depths. Seems that the improvement in the unemployment (U3) rate is largely due to people dropping out of the labour force, because they can’t find work and have been out so long they are no longer counted. As well, we note that we are currently long in the cycle between unemployment (U3) troughs. Overall, not what one would call a healthy economy. Numerous charts shown.

Trade numbers rolling over

The US reported a larger-than-expected trade deficit. Canada reported a record trade deficit. We take a look at the effect of trade deficits on the economy and jobs through a graphic presentation and discussion. Trade has become a very sensitive issue in the current US election, especially trade with China. But do they really understand all trade ramifications, and how trade deficits are usually offset by capital surpluses? Probably not.

Deutsche Bank again     

Deutsche Bank can’t stay out of the news. Following the recent bank stress tests carried out by the ECB and in the US by the Fed, the conclusion was that the EU banks were within the required limits, although the Italian banks had some serious problems, while the US banks were, for the most part, fine as well. Not according to ZEW, a German economic research institute that applied the Fed’s tougher stress test to the EU banks. What they discovered was that the Deutsche Bank in particular, along with some others, had serious capital shortfalls. It raised the spectre of nationalization of Deutsche Bank. Nationalizing banks is not new and has been carried out in the past, including most recently after the 2008 financial crash and great recession. Both the UK and the US effectively nationalized certain institutions. The market liked the idea, as Deutsche Bank’s stock rose.

Weekly Market Review

Stocks

Another new high by the S&P 500, and this time the NASDAQ joined the party. But the Dow Jones Industrials (DJI) stayed away, and the Dow Jones Transportations (DJT) appeared not to have even been invited. We take a look at some of the history of the divergences between the DJI and the DJT. Dow Theory, written over 100 years ago and the basis for technical analysis, states that the averages must confirm each other. The DJI has made new all-time highs. The DJT is not even close. In the past, that has signaled trouble, even if the trouble doesn’t show up right away. The stock markets are moving into a traditional weak period in August and September. There is an extremely contentious and divisive election campaign going on in the background. Who knows what might happen. At these levels, it is caveat emptor.

Currencies

The US$ Index continues to confound and confuse. It is stuck in neutral. Indeed, being stuck in neutral has lasted now for almost 18 months. The euro is also stuck in neutral, which is no surprise given that the euro makes up 57.6% of the US$ Index. It is difficult trying to figure out why the euro would rise, given endless rounds of QE, trillions of dollars of debt trading at negative rates and banks teetering on the edge. The US$ Index would rise, because the Fed might hike interest rates. It certainly can’t be because the US economy is humming along, although the job numbers give the appearance it might be. At least the British pound knows where it is going and that is down, following the latest round of interest rate cuts and more QE. Japan's yen is strengthening largely because of its move to supply more QE, especially QE for infrastructure to create jobs.  But the two main currencies, the US$ and the euro, are stuck in neutral, and all one can do is to await a break, one way or the other, for clarification.

Gold and Precious Metals

Fear of an interest rate hike following the stronger-than-expected nonfarm payrolls caused gold to spike lower last Friday, August 5, 2016. But by Wednesday, August 10, 2016, the talk was dissipating, and gold prices jumped again. Gold is trying to figure out its next move. Some technicals suggest down, while others, including seasonals, suggest up. Platinum and palladium leaped to new 52-week highs, while the gold stocks fell just short of making new highs but managed new high weekly closes. The current resistance level for gold is at $1,380 to $1,400, as it represents the Fibonacci 38.2% retracement level of the entire bear market move from September 2011 to December 2015. A breakthrough would suggest a move towards $1,500. A breakdown under $1,310 might suggest further consolidation and correction down to $1,250. The fundamentals remain strong, and the World Gold Council reports good investment demand. The market awaits the next move.

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David Chapman is Chief Economist with Bullion Management Group Inc. He regularly writes articles of interest to the investing public. David has over 40 years of experience as an authority on finance and investment, through his range of work experience and in-depth market knowledge. For more information on Bullion Management Group Inc., BMG BullionFund, BMG Gold BullionFund and BMG BullionBarsTM, visit www.bmgbullion.com, email info@bmgbullion.com, or call 1 888.474.1001.

© 2016 Copyright David Chapman - All Rights Reserved

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