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.