Friday January 7, 2005 - 11:41:24 GMT
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Black Swan Capital - www.blackswantrading.com
Dollar direction: Rates should trump jobs
“But of all the political ideals, that of making people happy is perhaps the most dangerous one…the attempt to make heaven on earth invariably produces hell.”
And on the 5th day, the almighty dollar had gazed upon what it had done and decided to rest. The buck is lower against the major currencies heading into the seemingly all-import US non-farm payroll report for December. But no matter how the jobs report is sliced and diced and dissected, the fact remains the narrowing spread in the chart below (10-yr note yield vs. Fed Funds) appears too narrow…
Source: The Wall Street Journal
Forecasting the non-farm payroll number has been difficult for economists lately. We have seen huge gaps between forecast and reality. But, given that, this sentence from Bloomberg News this morning I think is telling:
“U.S. employers probably added 175,000 workers to payrolls in December, completing the best year for job growth since 1999, according to economists surveyed before today's government report.”
The part to emphasize, if one is searching for facts to fit his story, as I am doing this morning, is the part that says “the best job growth since 1999.” Not bad for a country that’s about to toppled headfirst into banana republic status should its Double-D’s of Doom (twin deficits) grow much larger.
Now back to that narrowing gap between the Fed Funds and 10-year yields. We will probably see the usual reaction in 10-year yields if job growth disappoints. But, unless today’s jobs number is horrendous beyond comprehension, the Fed will continue to siphon the hooch from the punch bowl by raising the Fed Funds rate as planned. And if we step back and look at a longer term relationship between the dollar and Fed Funds, I think we can discern a relationship that clearly indicates the Fed Fund is leading…and at this time that direction is up.
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