LISTEN TO THE MARKETS, AND THE ECONOMY!

On Friday, the Department of Labor reported a higher-than-expected increase in non-farm payrolls by 287,000 in June.  It is important to remember that one month does not make an economic trend.  That’s because, in May, the DOL reported a pitiful increase of just 11,000 jobs, and the goal is at least 150,000 per month.  The Dow Jones Industrial Average, with an assist from clueless TV “personalities,” rose by 250.86 points, or 1.4%, following that report.  There was little context given to lessen the excitement.

Friday’s stock market surge brought the Dow to within a stone’s throw of its all-time high.  The S & P 500 briefly touched above its record high point, before settling back to just under it.  NASDAQ is also edging near its prior high point.  Global stock markets have likewise shed their concerns about future slow-downs. The U. S. Jobs Report gave European stocks a boost, around mid-afternoon (their time).  Asian markets, however, didn’t get a similar boost since they had already closed when the report was released.

While global stock markets have traded quite optimistically, bond markets are providing a double whammy.  Bond prices are higher; but, the yields are the indicator to watch.  When bond yields drop, that means that money has moved from growth-type equity assets into the relative stability of bonds.  Also, the slope of the “Yield-Curve” (a graph of a government’s bond yields over, for instance, three months to thirty years) is flattening.

Many global market watchers, monitor the Federal Reserve, the American central bank, and they parse the words that it uses after each of its policy-making meetings.  It last raised rates in December, but only up to a range of 0.25% to 0.50%.  Before that, it hadn’t raised rates in a number of years. So, what action might it take on July 27?  Shifts by the Fed can impact money flows on a global basis.

Recent comments by Chairman Janet Yellin and other Fed Governors have suggested that it would like to raise rates, perhaps once or twice more this year.  The overall U. S. economy could absorb the slightly higher rates.  But, the problem is that the US Dollar is just about the only currency that has strengthened since the Brexit.  The Pound Sterling, obviously ground zero for the impact of Brexit, has dropped 14% versus the Dollar, just since the Vote on June 23.

In recent blog posts, I have already suggested that I expect global trade to weaken somewhat, both during the time building-up to the Brexit finalization, as well as afterward.  Developing markets will particularly see a fall-off in foreign investment, and commodity-dependent nations will suffer a loss of needed incoming cash, prices of their major exports have dropped.  All the while, global cash reserves will flow to the Dollar.  So, a July increase in U. S. interest rates would make the Dollar even stronger, further boosting the U. S. currency.  That would just siphon necessary cash, further weakening many other economies.

In summary, don’t worry if much of this seems like Greek—or perhaps Sanskrit—to you.  The important thing is to understand that the markets have a lot of moving parts—many participants, and with various objectives.  The important thing, however, is to realize that people who pose as experts in the media are there mainly because they either talk or write well, and not necessarily because they know much about anything.

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  1. #1 by cheekos on July 11, 2016 - 5:44 PM

    Andrea Leadsom, one of the two remaining finalists to replace David Cameron as U. K. Prime Minister, withdrew today. As the Energy Secretary, she received a much lower vote of the Conservative M. P’s than Home Secretary Theresa May. David Cameron announced today that, as the only remaining Conservative, Mrs. May will become Prime Minister as early as Wednesday.

    With the much earlier hand-over of Power in U. K, part of the Economic Uncertainty, which has existed since the surprising Brexit vote, is reduced. The potential date of the actual Article 50, announcing the withdrawal from the E. U. still has to be decided upon. Then, the actual Exit will be finalized two years afterward.

  2. #2 by andrepartridge on July 20, 2016 - 2:21 PM

    Hopefully we see a good proportion of the decline since the brexit vote actually recover before the outing officially happens. I see its recovering slightly each day but the highs of $2 to a pound are a long long long way away. At least the markets have recovered nicely with the Dow hitting its highest and the FTSE all share doing the same. Onwards and upwards for a while please! My iron stomach is slowly being dissolved by the volatile movements in some FTSE 250 companies- hair line receding also!

    • #3 by cheekos on July 21, 2016 - 3:43 AM

      Mr. Partridge, thanks for visiting and commenting on my blog. Investors–even the pros, tend to have short memories. Until the “Divorce” os finalized, perhaps in late 2018 or early ’19, we are gradually going to see business plans shifting, perhaps more so a shift of some operations, from UK to Continental Europe. The real question is: What will happen to “The City”. (For us Yanks, that’s London’s Financial District.)

      That gradual decline in GDP, on both sides of the Channel, will accelerate as the Brexit nears finalization. No doubt, you’ve seen the substantial GDP decline projections from reputable economists, from virtually everywhere–government, business, academia, etc–within the British economy. So far, Europe hasn’t been as open in predicting the impact on the various economies there, as well.

      • #4 by andrepartridge on July 21, 2016 - 10:45 AM

        Definitely, I’ve done some research into some of the clothing companies in the FTSE 100 and they have accelerated their plans to open Distribution Centres in Europe, from opening in 2019 to opening late 2017 amid fears of barriers to export from the UK. Certainly we have seen the the projections flop quicker than Frank Lampard in the MLS! The fear factor caused havoc with the markets, when ultimately within three weeks the FTSE was higher than pre-brexit levels. The sad thing with the leave campaign was that it’s main points were to scaremonger, and once that was achieved the head rats abandoned the hip. How easy the media influences peoples and investors lives is worrying because it’s difficult to plan for that!

      • #5 by cheekos on July 21, 2016 - 11:07 AM

        Mr. Partridge, I believe that you might be missing my point on longer-term economic declines. For instance, all but one of our last several winters, in the Northeastern U. S., have been horrendous. One of the climate-change deniers brought a snowball onto the Floor of the Senate. He used it to support his fact-less denial of meteorological science. But, he missed the point too.

        Climate-change, however, effects the high-speed wind patterns that swirl around the poles; however, the key point is the average temperatures—not the short-term ones, indeed, do suggest Climate-Change. In effect, the Senator was proving himself wrong.

        Investors who have been assuming that its OK to go back into the markets, since they have bounced-back, are not listening to the financial climate—the rapid decline in especially Reserve Currencies and the dropping of interest rates—in both absolute terms, and the flattening of the Yield Curve. They both point to an on-going economic weakening.

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