The Bureau of Labor Statistics released their monthly jobs report on Friday March 6, announcing gains of 295,000 jobs over the estimated 240,000. Genuine or not (which of course it’s not), this increased expectations that the Fed may decide now’s the time to raise those rates.
But something else happened: Stocks and interest rates fell sharply.
Yahoo Finance ran a headline that Friday suggesting stocks plunged because of rate hike fears. Hmmm… that’s a pretty substantial disconnect since rates were plunging as well.
I suppose those investors could have been moving into the safety of U.S. Treasury bonds fearing a collapse in stocks. But, if those traders really expected a rate hike, would that be a smart move? That would be like jumping out of the frying pan and into the fire.
Here’s the thing: Bond traders know that wage growth is more important than the amount of crappy jobs we’re adding to the economy. And those who invest in the stock market know that a rate hike will burst that bubble. But there are even more variables at play…
First, the U.S. dollar has continued to strengthen relative to the euro and other major currencies. Central banks around the globe have been busy lowering their interest rates or implementing QE to weaken their currencies and try to spur economic growth.
In this situation, the dollar will only continue to get stronger. This hurts U.S. exports as it makes our goods more expensive to buy in other countries, and it also hurts U.S. corporations doing business in other countries, because they get fewer dollars from whatever sales they’re making in other currencies.
But perhaps more important than the strong dollar is the overwhelming amount of bad economic news driving the stock market up, down, and all over the place! Weakness in the housing sector, tepid wage growth, disappointing consumer spending, and declining prices bracket the few positives, like the overall number of jobs created. Of course, these moves spill over into the bond market as well.
We’ll see tomorrow if the Fed deviates from their recent policy stance or if they telegraph a change in position after they meet. My money is on a slight change in wording, and maybe we’ll even hear Janet Yellen agree that our economy is on thin ice. If so, look for the market to react!
As I’ve mentioned before, I believe the Fed is backed into a corner. While the economy really can’t afford it, they have repeatedly indicated they intend to hike rates. That in turn, would further strengthen the dollar and might trigger a collapse in the stock market.
If you’re interested in learning how to profit from the rollercoaster interest-rate market, please take a look at my Dent Digest Trader. I’ll show you how to make healthy profits by trading options that capitalize on relatively small moves in interest rates on U.S. Treasury bonds.
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