How to interpret unemployment data and predict the Fed Next Move.

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    Sum­ma­ry:
  • We leave you the SP500 chart with the key lev­els defined. 
  • The cur­rent opti­mism could be exac­er­bat­ed and pre­cip­i­tat­ed, we call for calm, cau­tious investors and hedg­ing posi­tions, the more astute investors.

Now that the debt ceil­ing prob­lem has been solved, which the mar­ket has been dis­count­ing for the last few days, we can see how, at last, the world’s largest stock mar­ket, the SP500, seems to be mov­ing away from the 4200 point ceiling.

The mil­lion dol­lar ques­tion will be whether it will be able to hold it. Let’s hope that today’s Fri­day clos­es above those levels.

I want to look at what could hap­pen in the long term from now on.
On the one hand, we have the unem­ploy­ment rate today, which is up but very slight­ly, remain­ing below 4%, and with super pos­i­tive non-farm pay­rolls data.

Will the Fed rate hike continue?

We have been asked in some media out­lets whether the Fed will decide to con­tin­ue to raise rates this year or not, giv­en these data. The answer is sim­ple, as long as the unem­ploy­ment rate is below 4%, it can be con­sid­ered full employ­ment in the US.

A sit­u­a­tion of full employ­ment makes it eas­i­er for work­ers to demand a wage increase that is in line with the cur­rent infla­tion rate, oth­er­wise their pur­chas­ing pow­er will be reduced due to ris­ing prices.

So far so legit­i­mate, if prices are ris­ing, wages will have to rise so that peo­ple do not lose qual­i­ty of life. Those wage increas­es will lead to high­er labour costs, and those high­er labour costs will lead to high­er unem­ploy­ment. The increase in the unem­ploy­ment rate will reduce demand and con­sump­tion, and this will even­tu­al­ly cool inflation.

In sum­ma­ry, as long as the US labour mar­ket remains strong, we do not expect a reduc­tion in the infla­tion rate, and there­fore it is not out of the ques­tion that the Fed­er­al Reserve will con­tin­ue to raise inter­est rates, giv­en that we are still far from the 2% infla­tion tar­get rate.

US Unem­ploy­ment Rate. 
US Infla­tion Rate. 

Will there be a cor­rec­tion in the markets?

The announce­ment of the debt ceil­ing increase has been inter­pret­ed as good news for the mar­ket. How­ev­er, as we have explained in oth­er media, the first thing the US gov­ern­ment will do with this debt increase is to bor­row new funds from the Fed’s inter­bank reserve sys­tem. This will replen­ish the bal­ance of its TGA pub­lic spend­ing account, but at the same time reduce the mon­ey avail­able for oth­er finan­cial assets in the markets.

This is what hap­pened in 2011 with the nego­ti­a­tion of the debt ceil­ing, pre­cise­ly this liq­uid­i­ty drain­ing effect is what caused the SP500 to fall by almost 20% in the fol­low­ing months after the agreement.

In con­clu­sion.

We leave you the SP500 chart with the key lev­els defined.
The cur­rent opti­mism could be exac­er­bat­ed and pre­cip­i­tat­ed, we call for calm, cau­tious investors and hedg­ing posi­tions, the more astute investors.

SP500 Key Lev­els Week­ly Candle. 

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