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Exhibiting Patience in the Face of Volatility

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Tuesday, December 4, 2018

So it would seem market participants are walking back their enthusiasm a tad this morning, putting index futures in the red 24 hours after bidding up equities across the board in response to a U.S.-China trade deal. Not that there isn’t much to like about a proposed 90-day cease-fire on new tariffs, especially considering we were headed for an additional 25% tax on goods after the first of the year. But new questions have begun to emerge, such as: How sticky are these proposals?

Assuming for a moment everything stays peachy with the agreement, we still must contend with potential changes in attitude from Fed Chair Jerome Powell and his associates in the FOMC — less than a week after he reassured investors that the current interest rate was “just below” neutral, setting up traders to believe the Fed would stand pat once the quarter-point hike expected December 19th is passed. The absence of trade tensions across the Pacific yesterday had the immediate affect of a run-up in stocks; this continuing would put the onus back on the Fed to take a harder look at rate hikes in the new year.

And that’s before considering November jobs totals, which we’ll see beginning Thursday morning with the ADP ADP private-sector employment report, followed by non-farm payrolls from the U.S. government’s BLS results Friday before the bell. Jobs growth has only been going higher of late, with nearly 250K new jobs created in the month of October and another 200K expected last month. These numbers are more than double the amount our economy “needs” to offset retiring baby boomers from the workforce. The Unemployment Rate was 3.7% last month, and may be headed further down.

Obviously, more jobs is a good thing, and also satisfies one half of the Fed’s mandate (full employment). But with sustained employment growth — which in this case goes well back into the timeline of the Obama administration — eventually comes increased wages, which can trigger inflation, which is the other half of the Fed’s mandate (and feels 2% is ideal). For October BLS numbers, we saw a 3.1% growth in wages; if we see that again this Friday, while it’s a very good thing for members of the workforce, it again may behoove the Fed to get busy with interest rate hikes beyond December.

Why? Because interest rates are largely designed to absorb inflation, and are generally expected to align atop wherever inflation numbers are. In fact, inflation percentages surpassing interest rates is called an “inversion of the yield curve,” and that’s important to economists because it has often signaled economic recession. We haven’t talked about recession in the U.S. for quite some time, but just the suggestion being re-entered into the conversation can have a way of unnerving market activity.

We’ll stay “data dependent” for now, and that means exhibiting patience. Expect the Fed to do the same. Powell gives another address tomorrow afternoon, ahead of new employment numbers, but his verbiage may point to their significance upon release later this week. Time will tell.

Mark Vickery
Senior Editor

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