|Dow||-278.87 to 17,856.85|
|S&P 500||-29.78 to 2,071.26|
|Nasdaq||-55.44 to 4,927.37|
|10-YR Yield||+0.128 to 2.24%|
|Gold||-$30.80 to $1,165.40|
|Crude Oil||-$1.14 to $49.62|
I get tired of writing this every month. But the latest U.S. employment report was another blockbuster …
The economy created a hefty 295,000 jobs in February, far above the average prediction for a rise of 235,000. That was also up sharply from 239,000 in January.
Job growth was widespread by industry. Food service and restaurants added 59,000 workers. Professional and business services added 51,000. Construction added 29,000, while health care added 24,000. Retail gained 32,000 jobs, and transportation and warehousing tacked on 19,000.
The unemployment rate sank to 5.5 percent from 5.7 percent. That was below the 5.6 percent estimate of economists, and the lowest since May 2008.
If there is a weak link, it was wages (again). Average hourly earnings rose just 0.1 percent, down from 0.5 percent in January. That leaves wages up just 2 percent from a year ago. The average workweek also held at 34.6 hours for the fifth month in a row, while the labor force participation rate dipped to 62.8 percent.
|The strong employment numbers mean rates will rise sooner rather than later|
In the immediate aftermath of the release, interest rates shot higher across the yield curve. The yield on the 5-year Treasury surged more than 12 basis points to 1.7 percent, while the yield on the 30-year bond jumped 12 basis points to 2.84 percent. The yield on the 2-year note also surged to 72 basis points, roughly triple the level of a couple years ago.
The dollar also caught another bid, with the Dollar Index rising to 97.70. That’s its highest level in almost 12 years. I’ve argued the buck is wildly overbought, that policymakers here are starting to push back against the advance, and that growth overseas is picking up in many places where currencies have weakened. But that certainly didn’t matter today.
As for stocks, they got pasted across the board. The reasoning behind that move? Wall Street woke up and said: “Uh-oh … maybe this Do-Nothing Fed is actually going to start doing something!” But beyond those immediate market reactions, what does the latest news say about the longer term? Clearly, it increases the chances of something I’ve been warning about for several months – a “Bloody Wednesday” for the markets.
The Fed simply cannot keep holding interest rates at 0 percent if job growth is ramping higher. Nor can bond buyers keep flocking into very low yielding (or negative-yield, in some places!) fixed-income securities!
|“The Fed simply cannot keep holding interest rates at 0 percent if job growth is ramping higher.”|
The capital markets could be forced to adjust – fast – to earlier-than-expected initial rate hikes … or more hawkish-than-expected rhetoric from Fed officials. That means more dislocation-style moves, like what we saw today in interest rates, currencies and stocks, could be looming! The best strategy in that situation? Stick with highly-rated stocks in economically sensitive sectors, while avoiding those vulnerable to Bloody Wednesday-style shocks.
Longer-term bonds also look like a sucker’s bet here. I provide more specifics in my Safe Money Report. Many of the moves we’re seeing now were predicted (in advance) there.
So what do you think about the latest jobs news? Is it really as good as it looks on the surface? Or do the same skeptical arguments some of you have made on the website for several months now still apply? Is the likelihood of an interest rate-related shock increasing? Or do you think the Fed will still sit on its hands? What market reactions are you anticipating? These are very important questions, so be sure to share your thoughts over at the Money and Markets website!
|Our Readers Speak|
The discussion on Obamacare is still going strong at the website, and I’m glad to see so many of you added your comments.
Reader Richard P. said he wants to see a government-directed program, rather than one that involves insurance companies. His view: “The only sensible solution is single-payer, free healthcare for all (as in England), paid for by the government via higher taxes, of course. No insurance companies are involved. Why is this solution which is that of most advanced countries not even discussed?”
But Reader Jim believes that would result in an even more troubled system than we already have. His take: “I don’t want the government involved in my healthcare on any level. If you want a system that features hundreds of billions in fraud, waste and sub standard treatment than by all means get the government to do it.”
Meanwhile, Reader Donnell J. weighed in about interest rates and the risk rising rates pose to the banking system. His comments: “Could you tell us about the $231 trillion in derivatives the U.S. banks are trading, and also the $191 trillion traded on interest rates not going up? What happens if for some reason the fed raised the interest rates?”
Thanks for the question, Donnell. You’re absolutely right that the major U.S. banks have huge exposure to interest rate fluctuations via the swaps, options, and other derivatives they trade with other institutions and offer to their corporate customers.
The problem? It’s nearly impossible to get solid disclosure about what kinds of moves can cause what types of financial damage – until it’s too late! That’s just one reason I’m not a big fan of the U.S. megabanks. Any other thoughts you want to share on these or other topics? Then use the website link here.
|Other Developments of the Day|
Apple (AAPL, Weiss Ratings: A+) will be added to the Dow Jones Industrial Average, replacing AT&T (T, Weiss Ratings: C+). The move will take effect after the stock market close on March 18. Much more money is indexed to the S&P 500 than the Dow, but the move clearly reflects the increased dominance of Apple and the fading prestige of AT&T.
I haven’t been in any hurry to use the Apple Pay system. I mean, is it really that much easier to get your iPhone out of your pocket and waive it at a terminal than to just get your credit card out and swipe it? Seems like a “solution” for a problem that doesn’t exist. The bigger risk is fraud, though. The Wall Street Journal weighed in on that today. Thieves are inputting stolen credit card numbers into phones, then using those phones to buy everything from Apple’s own products to other expensive goods.
Great news! The Federal Reserve that utterly failed to anticipate or prevent the housing and credit market meltdown in advance now says the nation’s biggest banks are in great shape. The Fed’s stress test of 31 banks shows they can handle a sharp economic downturn, a large rise in interest rates, and/or a stock market plunge without imploding. I know I’ll sleep better now … how about you?
Are oil prices done going down? Looks that way to me, especially considering that crude doesn’t seem to be … um … “tanking” on supposedly bearish news anymore. But many analysts are talking about a key vulnerability: We’re running out of places to put the oil we’re overproducing right now. The main storage facility in Cushing, Oklahoma is getting close to peak capacity. Plus, the Energy Information Administration estimates that nearly 70% of the country’s storage facilities overall are already full. But if demand continues to come in solid, and production tails off later this year due to falling exploration and drilling activity, those nearer-term worries could evaporate pretty quickly. That’s what I’m expecting.
And how about that Harrison Ford? Apparently, he really is Han Solo and Indiana Jones all rolled up into one guy, considering he survived a small plane crash in California. The 72-year-old actor’s vintage airplane lost engine power not far from the Santa Monica airport, forcing him to land on a nearby golf course. He will reportedly make a full recovery after suffering only mild injuries.
If you have any thoughts on these stories, don’t forget to use the website to share them.
Until next time,