After a cold meal served up by Dubai over the holidays, the bulls finally got something good to chew on. On the menu this morning was the latest jobs report.
And in a bit of a surprise, the unemployment rate actually fell to 10 percent, from 10.2 percent in November, as employers cut the fewest number of jobs since the recession began.
In fact, as the news crossed my desk this morning I thought I was seeing things when the print came in at just 11,000 jobs lost for the month. What’s more, the revised data was also positive as 159,000 fewer jobs were lost in September and October than originally reported.
That sent the futures on a moonshot in the premarket and made for quite a start to today’s trade as advancers outpaced decliners by a nice 6 to 1 margin.
However, one of the knock on effects from all of this good news was a rally in the U.S. Dollar-which we have been warning for sometime would be a negative for equities if the carry trade began to unwind.
As result, stocks lost all of their morning momentum as the greenback (UUP) rallied.
Take a look:
That is the flip side of the negative correlation that has dominated the markets since July. In fact, this is much like the action we witnessed last week when the Dubai situation caused a similar rally.
No doubt part of the move was due to a spike in Fed Fund futures as traders began to raise their bets that the Federal Reserve will raise rates by mid-2010 on the heels of the positive report.
In fact, in early trade, the August 2010 fed funds contract indicated that traders expect rates to rise to 0.50% by then, compared to a 0.34% rate a week ago.
Meanwhile, the action in the December 2010 futures showed traders expect the benchmark rate to be 0.94% by then, compared to 0.81% on Thursday.
Those rather large moves, undoubtedly sparked a short covering rally in the U.S. dollar, upsetting equities in the process. And while it seems as backwards as it gets, that’s the logic ruling these markets.
The key from here, however, will be whether or not those Fed fund futures slide back weakening the dollar in the process. Longer term that could be the case since one good jobs report hardly makes a trend.
In fact, job creation is expected to remain far too weak in coming months to absorb the 15.4 million unemployed people who are seeking work — and the 11.5 million others who are underemployed. Because as more people begin seeking work, the jobless rate is likely to start rising again.
Furthermore, the report also offered evidence of how tough the job market reamins: The number of people jobless for at least six months rose last month to 5.9 million, while the average length of unemployment has risen to more than 28 weeks.
And even when you count last month’s decline, the unemployment rate has more than doubled since the recession began in December 2007, while the underemployment rate has jumped to 17.2 percent from 8.7 percent.
Those are hardly conditions that will push the Fed into a rate raising cycle anytime soon. We shall see.
Until then we are going to need to see a bigger move higher by the dollar to shake us off of our bullish bias.
Of course, at some point all of this will change as the dollar and the markets move higher together.
Until then, I guess, it is still game on. Welcome to bizzaro world…
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