Yes, we were placing our bets on a Fed Funds rate hike in October's FOMC meeting, but that's pretty obviously not going to happen. Hours ago, the much anticipated September NFP jobs report turned out very dismally, vaporizing any residual expectations (or why we like to call hope) of the proverbial 'liftoff' being in 2015.
So were we wrong about calling for an October hike? Yes of course. But were we positioned on that thesis? No, we weren't. In actual fact, we had been warning of such an uncertainty on these pages, and that although we thought a hike in October was plausible, we highlighted that until new facts emerge, betting on the timing of the Fed's liftoff (if at all) was akin to gambling.
This is exactly what we have been preaching. Being able to turn on a dime and flip sides. Staying nimble and quick to act; all these pays valuable dividends in the current environment where anything and possibly everything can happen. The market doesn't care about what you think, it just trades the way it wants to. So play along.
But first, more on September's disastrous NFP jobs report. When we first saw the headline figures, we were wowed. Literally. The last time NFPs missed this badly in April, the dollar tanked pretty strongly.
September saw a meager 144,000 jobs added, when the consensus expectation was at 203,000, a huge miss (-59,000). Wage inflation also disappointed badly; average hourly earnings were unchanged on expectations of +0.2% and down hugely from August's +0.3%.
The labor force participation rate (something Yellen mention was still in bad shape) fell yet again to 1977 lows of 62.4% (62.6% in August). On top of all that bad news, August's figure was also revised lower.
Except the U3 unemployment rate which remained at 5.1% inline with expectations, everything about the report was bad and missed expectations. This is a big shift from the months of positive developments in the labor market, and something markets were not prepared for.
September's BLS NFP report:
"Total nonfarm payroll employment increased by 142,000 in September. Thus far in 2015, job growth has averaged 198,000 per month, compared with an average monthly gain of 260,000 in 2014. In September, job gains occurred in health care and information, while employment in mining continued to decline. (See table B-1.)
Health care added 34,000 jobs in September, in line with the average increase of 38,000 jobs per month over the prior 12 months. Hospitals accounted for 16,000 of the jobs gained in September, and employment in ambulatory health care services continued to trend up (+13,000).
Employment in information increased by 12,000 in September and has increased by 44,000 over the year.
Employment in professional and business services continued to trend up in September (+31,000). Job growth has averaged 45,000 per month thus far in 2015, compared with an average monthly gain of 59,000 in 2014. In September, job gains occurred in computer systems design and related services (+7,000) and in legal services (+5,000).
Retail trade employment trended up in September (+24,000), in line with its average monthly gain over the prior 12 months (+27,000). In September, employment rose in general merchandise stores (+10,000) and automobile dealers (+5,000).
Employment in food services and drinking places continued on an upward trend in September (+21,000). Over the year, this industry has added 349,000 jobs.
Employment in mining continued to decline in September (-10,000), with losses concentrated in support activities for mining (-7,000). Mining employment has declined by 102,000 since reaching a peak in December 2014.
Employment in other major industries, including construction, manufacturing, wholesale trade, transportation and warehousing, financial activities, and government, showed little or no change over the month."
Let'a be factual here. One bad jobs report isn't enough to convince FOMC members to postpone a coveted liftoff. But don't forget the key word "context"; September's NFP report makes the picture uglier.
Fed Funds futures are now pricing in March 2016 as the most probable month for any hike. So far, this market has been correct in its predictions, so we're listening to what it's telling us.
Our bias? No hike in 2015, with most FOMC members likely to remain cautious until positive developments emerge. It's almost unthinkable to tighten monetary policy at this juncture. Again, we aren't making a prediction, just a slant.
The filter down consequences of this shift? We're not too sure yet. For the interim period, we tend to be bearish the U.S. dollar and bullish assets that are positively correlated to expectations of monetary policy easing (i.e. gold, treasuries). We're ultimately still waiting to see what equities will do and are currently neutral to slightly bearish risk.
Most importantly of all, we're fully willing and ready to turn on a dime and flip sides when new facts come. Until then, play it as it is.