Insightful analysis and commentary for the US and global equity investor
Contributors: Douglas McIntyre Jon C. Ogg

Previous Posts

Friday, August 04, 2006

Update on NFP & Hourly Wages

By Yaser Anwar, CSC of Equity Investment Ideas

I know i mentioned on July 27th that i expect Fed to raise two more times. I happened to check up a recission indicator & it has made my theory weak, atleast for now. In any case its too early to tell, 'cause i still believe the Fed will raise rates next week, maybe i got a little ahead of myself or maybe not, that depends on the data.An indicator i like to watch to dissect about what the market thinks about Fed's rate policies is the Eurodollar action. With the weaker than expected NFP numbers, there is only 19% chances of Fed rate hikes next week, according to the Eurodollar action.

Recission Indicator: 3-month T-bill yield is > than the yield on the 30-year T-bond. Historically, whenever this ‘inverted’ rate relationship has occurred, the risk of a recession has increased dramatically.Inflation Indicator: Annual core CPI figures of 2.4% mean that the Fed is unlikely to pause yet in its cycle of rate hikes, hence further increasing the risk of an economic down-turn. I would strongly suggest getting some bond exposure. Bond prices usually bottom several months before the last Fed Funds hike as the market begins to anticipate the Fed, which in turn is attempting to anticipate the economy and inflation.

With the Fed near the end of its tightening cycle and the economy increasingly looking vulnerable, it may present an opportunity to add some bonds in your portfolio.Hourly earnings rose 0.4%. This follows a strong 0.5% increase in June and leaves the YOY gain at 3.8%. Wage increases are clearly on the rise. That can add to inflation pressures. Wage hikes are partially offset by productivity gains, but a faster rate of wage hikes will be of some concern to the Fed.

Other than bonds, Gold is a classic hedge against downturns & inflationary periods. I'm finishing an analysis on Gold, out next week, which will show you why Gold is a must. I expect gold to strength during next week, just like it did the last time i mentioned to buy gold during Fed week.

Powered by Blogger