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Winners and Losers From February's Jobs Report

By    |   Wednesday, 11 March 2015 07:38 AM

Last Friday, the Bureau of Labor Statistics announced that 295,000 jobs were created in the U.S. in February. The consensus expectation was 230,000.

The obvious winner of the better-than-expected numbers was bonds and the loser was the stock market. The 10-year Treasury yield shot up 5 to 6 percent for the day, while the stock markets lost 2 percent or so. Gold (the most manipulated commodity in the world) stood idle not knowing which way to turn.

For those who are confused why good news led to a stock market decline, it is simply with the expectation that the Federal Reserve will now raise rates faster than expected, and that will be bad for the stocks also known as risk assets.

But I wanted to talk to you about the not so obvious winners and losers of this announcement. Just for the record, I do not believe the measurement of how joblessness in America is measured is correct. If we were to measure to the good old days before all this hegemony started, I would say we are at about a 23 or 24 percent unemployment rate.

One of the winners from the stronger jobs number will be the Chinese yuan. Recently, the world has turned negative on China again. This time they point to the overheated property markets and the slowdown in the growth rates of Chinese GDP. Granted China is not growing at 10 percent GDP, but it will soon overtake the U.S. as the largest economy in the world. I do not recollect anyone expecting the U.S. to have 10 percent GDP rates ever. So why hold China to that standard?

So as China slows, will the yuan come under pressure? The answer is yes and no. Yes, the yuan bulls have disappeared. The answer is also no, since the People's Bank of China tracks the yuan very closely and will follow multiple policy options to keep the yuan stable. According to a survey done by a major bank in China, 55 percent of the surveyed respondents believe that China will hold the yuan stable to higher. More than 71 percent believe that the yuan will be between 6.2 and 6.4 in the next 12 months. Today the yuan is at 6.26 to 1 U.S. dollar. So basically the majority do not expect any significant move up or down.

The Indian rupee is also expected to remain neutral to strong as long as oil stays below $60 to $70 per barrel.

If the yuan and rupee remain flat to strong, the rest of Asia's foreign exchange will want to continue to hover where they are. As a result, the U.S. dollar will assault the European and Latin American currencies as it gains strength. This means the biggest loser in the currency battle will be the euro and the Nordic currencies.

One of the main drivers of the euro decline will be the term premiums. As the bond buying in Europe gets underway, we will see a great demand for short-term bonds that will get bought. As a result, the yields will sink even lower. Today approximately 70 of the 300 shorter-term bonds in Europe already have negative yields. This is expected to grow as the bond buying gets higher. Due to the negative carry, we will see the euro sink and get closer to parity. While this is clearly distortion of the market, it is a likely scenario.

The ongoing saga of Greece and the contagion effect will also drive the markets lower for euro. It will not be the expectations of a rate hike in the U.S. that will be a key driver of the euro lower, as I believe the markets have it wrong when they think that rates in U.S. will go higher soon.

Look behind Friday's headlines and you'll see that average hourly wages rose just 0.1 percent month-over-month in February. This left the annual rate of wage inflation at just 2 percent.

And as Fed Chair Janet Yellen said last March, she's looking for wage inflation between 2 percent and 3 percent.

So, unless we see that kind of wage inflation in the coming months, we reckon the market has it wrong on a rate hike being imminent.

I would not argue the market, illogical as it might seem. I would continue to sell the euro and buy the dollar for now.

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I would not argue the market, illogical as it might seem. I would continue to sell the euro and buy the dollar for now.
China, yuan, euro, dollar
Wednesday, 11 March 2015 07:38 AM
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