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U.S. equities markets closed last week on the rise after May’s jobs report showed respectable gains in employment but was modest enough to give investors some confidence that the U.S. Federal Reserve will not change its easy-money policies in the near future.
Tech stocks lifted the S&P 500 index 0.9 percent on Friday, boosting it 0.6 percent for the week.
Apple rose 1.9 percent for the day, Microsoft 2.1 percent.
Smaller companies’ stocks also did well; the Russell 2000 edged up 0.3 percent on the day.
The economy added 559,000 jobs in May, far stronger than April’s revised number of 278,000 but short of the 674,000 to as much as one million new jobs that analysts had predicted in various media.
TREND FORECAST: While not up to expectations, these weaker-than-expected employment numbers are signals on the Street that the Federal Reserve will not raise interest rates for at least another year. As we continue to note, when interest rates go up, the booming real estate and equity markets will dive. Indeed, it is the unprecedented injections of cheap money that have kept them both from crashing when politicians launched the 2020 COVID War.
Also on Friday, the yield on 10-year Treasury bonds slid from Thursday’s 1.62 percent to 1.55 percent, a factor that lifted rate-sensitive tech stocks.
Lower interest rates push investors toward riskier investments in search of higher returns. Stocks that are expensive relative to their earnings, which defines many tech stocks, are often beneficiaries.
The modest jobs report, coupled with inflation climbing by more than 3 percent annually, according to the Labor Department, is leaving the Street uncertain about the Fed’s longer-term policy direction.
The Fed has set “full employment” as one benchmark for raising interest rates; but, as we have forecast, in the U.S. and much of Europe, workers are slow in taking jobs already available, meaning employers might have to raise wages to lure enough employees back onto payrolls.
TREND FORECAST: Higher wages = higher inflation. As another benchmark signal to revisit soft-money policies, the Fed continues to sell the line that inflation must remain above 2 percent for an “extended period” and that the inflation spike is temporary.
As we greatly detailed in the Trends Journal over the last few weeks, while some prices may drop, they will remain very high. And while there will be some declining prices, others will continue to rise. Thus, we maintain our forecast that despite the Fed line that they will not raise rates until 2023, we say they will raise them sooner… possibly by the end of this year.
And, again, when rates rise to the 1.5 percent range, equities and economies will dive.
Indeed, go back to two years ago when equities were under pressure and the Fed began pumping trillions into the repo markets to artificially pump them up. What juiced stocks and the economy back up?
Trump Says Fed Should Cut Rates to “Zero, or Less,” Attacks Jerome Powell Again
That was the 11 September 2019 Wall Street Journal headline.
And, again, in March 2020, when the COVID War was launched and the stock market suffered its worst day since the Panic of ‘08, then-President Trump told the Fed and its Chairman, Jerome Powell, to slash rates to 0 percent or lower to match much weaker economies in Europe and Asia.
Trump had tweeted:
“Our pathetic, slow moving Federal Reserve, headed by Jay Powell, who raised rates too fast and lowered too late, should get our Fed Rate down to the levels of our competitor nations. They now have as much as a two point advantage, with even bigger currency help. Also, stimulate!”
In addition, the disconnect between lagging employment and spiking inflation has Wall Street worried the Fed will raise rates. Absent booming economic growth numbers, equities will keep trading in the narrow range.
The Interest Rate/Money Pumping
“We’re going to have discussions about our… policy overall, including our asset purchases and interest rates,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, told CNBC in response to the job numbers.
“I would like to see more on the labor market to really see that we’re back on track,” she said.
However, “we’re still quite a ways off” from curtailing the Fed’s $120-billion monthly bond-buying program, John Williams, president of New York’s Fed bank, told Yahoo Finance on 27 May.
TREND FORECAST: The Fed has been buying $80 billion a month in Treasury bonds and $40 billion monthly in mortgage-backed securities since June 2020 to keep credit markets artificially pumped up and has held interest rates near zero percent since March 2020.
Again, despite the hard data, the central bank said it will continue buying bonds and leave interest rates untouched until the economy restores “full employment,” inflation rises above 2 percent, and it shows signs of remaining above 2 percent for an extended time.
The inflation rate in April was 4.2 percent, year over year, according to 12 May data from the U.S. Labor Department.
Fed officials insist that today’s surging inflation is a hiccup as the global economy rights itself and will ease in the coming months. We maintain our forecast, however, for rising inflation to spread across the economy and last longer than the Fed anticipates.
Markets Muted
After closing out last week near record highs, yesterday, the Dow Jones Industrial Average closed down 126 points and the S&P 500 slipped 0.1 percent while the tech-heavy Nasdaq etched out a 0.5 percent gain.
On the market front today, despite the U.S. Labor Department’s report that there were 9.3 million vacancies and job openings in April, a new record high, equities were mixed with the Dow down 30 points, the S&P up 0.02 percent, and the NASDAQ climbing 0.31 percent.
Why the muted response? The markets are waiting for Thursday when the Labor Department releases its latest monthly inflation numbers.
As the latest large number of job openings show, despite high unemployment numbers, companies are having trouble hiring people. With the high demand for workers and the lower supply, wages will increase.
The higher wages rise, so, too, will inflation rise. As we keep noting, the higher inflation rises, so, too, will interest rates… and when interests rise, equities and the economy will decline.
The word on the Street is that the Consumer Price Index will spike 4.7 percent from a year earlier. As we have noted, the CPI increased 4.2 in April on an annual basis, its fastest rise since 2008.
Oil: Pick up today’s Wall Street Journal. Read the headline in the front page of the Business & Finance section:
Traders Bet on Return of $100 Oil
Brent Crude, up some 40 percent this year, closed 1 percent higher today and West Texas Intermediate rose 1.24 percent… this, despite greater supply than demand. Indeed, China’s crude imports were down 14.6 percent in May on a yearly basis.
Why are prices rising? Inflation fears persist.
As we have forecast, should oil trade in the $100 range, it will push inflation higher and drag down economies and equities.
Gold/Silver: As the U.S. dollar rose a bit today, gold fell $3 to close at $1,893 per ounce, and silver moved up 0.33 percent to close at $27.71 per ounce. As with the equities market, precious metals are also on pause, as traders wait for the Labor Department’s inflation read this Thursday.
Should the inflation numbers spike, expectations that the Fed will raise interest rates and exit its money pumping scheme will push the value of the dollar higher. The stronger the value of the dollar, so, too, will bond yield rise, which will allure safe-haven traders.
Should inflation rise sharply, that will be very positive for gold. With a continuation of monetary methadone money-pumping schemes, such as those encouraged by U.S. Treasury Secretary Janet Yellen who said last week that “We’ve been fighting inflation that’s too low” and that Joe Biden’s $4 trillion spending proposal would be “a good thing,” more cheap money may be coming soon.
Bitcoin: The brutal cryptocurrency dive continues. This week, the “downer” was alleged concerns related to the U.S. government’s recovering of most of the Bitcoin ransom paid to hackers who targeted Colonial Pipeline.
As we have been detailing over the past two months – from governments such as China calling for crackdowns on crypto mining to central Banksters warning that cryptocurrencies were great for money laundering schemes –the harder governments crack down on crypto’s, the lower the prices will fall. (See our 25 May “CRYPTOCURRENCY: SPECIAL REPORT.”)
We maintain our forecast that should Bitcoin, which is now down some 50 percent from its recent high and up 9 percent this year, fall to around $25,000 per coin, it will continue to rapidly decelerate.
EL SALVADOR MOVES TO MAKE BITCOIN LEGAL TENDER. Nayib Bukele, El Salvador’s president, will submit a bill this week to the country’s legislature that would make Bitcoin legal tender in the country, Bukele announced in a speech last week at Bitcoin 2021, a convention in Miami of Bitcoin traders and enthusiasts.
The country has partnered with Strike, a digital wallet company, to expand El Salvador’s financial infrastructure to accommodate blockchain technology, Bukele said.
Strike introduced its payment app in March in El Salvador, where it quickly became the country’s most downloaded app.
About 70 percent of El Salvadorians lack bank accounts or credit cards, CNBC reported, adding that 20 percent of the country’s GDP is made up of money sent home by citizens working in other countries.
Those foreign remittances can take days to arrive, often requiring a trip to a place to collect them, and handlers can take a 10-percent fee.
In contrast, Bitcoins can be transferred instantly without cost.
Bukele’s government has assembled a team of Bitcoin experts to help it design a new financial system for the country with Bitcoin at the foundation, CNBC said.
Blockstream, a Canadian company providing products and services for the storage and transfer of digital currencies, will contribute technology and satellite connections to the project, CEO Adam Back said in a statement quoted by CNBC.
“We’re pleased to help El Salvador towards adoption of the Bitcoin Standard,” Back said.
Bukele’s New Ideas political party controls the legislature, so the bill is almost certain to pass.
TREND FORECAST: El Salvador is a small country, and its adoption of a Bitcoin standard will not resonate globally. As we have long forecast, as nations, of which China is taking the lead, speed their efforts to create digital currencies, they will take stringent measures to ban Bitcoin and other competing private cryptocurrencies. (See our 28 July 2020 article, “IT’S OFFICIAL: FROM DIRTY CASH TO DIGITAL TRASH.”)