Just a reason or two to short the 'March rate hike herd'

With the big event coming up on Friday in the nonfarm payrolls and all this hype in regards to the Fed hiking in March, I wanted to dig a bit deeper. As the skeptic that I am, I can't help but scrutinize the previous jobs report and indeed the market's mood in respect to the US dollar and the Fed.

All aboard the short-dollar 2017 ride?

The US created 227k jobs in January vs 175k that were expected. The headline was an improvement of the 157k jobs in December at least. But, let's get behind this headline for a better understanding of what is going on in the US labor force because it is not all that it seems. I do wonder if we get more of the same this time around, whether the Fed might just use it as an excuse to NOT hike rates next week and a subsequent sell-off in the dollar could be the next train to get on and run with for the foreseeable future? After all, as far back as I can recall, the opposite to what markets have anticipated tends to happen when it comes to the Fed and Trump.

Part time low paid non-skilled US labor market

As always, the jobs that were being created were not exactly the kind of jobs that will make America great again. Labour force participation, wages and the unemployment rate are what we need to look into. 

The official U3 unemployment rate went up from 4.7% to 4.8% in January. The more revealing U6 number that paints a more accurate picture of the true state of the labor market, a number that Trump says is more accurate anyway, went up from 9.2% -9.4%. But how could that be when we had such a great headline for November? Well, we had over 700,000 workers re-enter the labor force in Jan after the mass exodus leaving the labor force during the Obama administration. 

The participation went up from 62.7% - 62.9% in January - Perhaps because Trump's campaign had promised that Trump would be the greatest jobs president that 'The Almighty' had ever created? Everyone who had been out of the labor market was motivated to get back involved under Trump's presidency looking to land one of these great jobs in Q1 2017.

On the other hand, and what I think is more likely is that it was a combination of the above and a New-Year with new optimism. After all, the cost of living has been rising and who has the luxury of not working? Also, students may have decided to look for a job rather than study for that Masters Degree as debts mount up. At the end of the day, the participation rate has been low for a long time anyway and we might expect a rise towards the mean at some point, so perhaps that is what is starting to happen - but that is my point. 

What is my point? 

The point is, that Jan headline number to me is a poor number when we have a whole bunch of people re-entering the market and still not able to find work - in other words, the unemployment is just going to continue to rise. 

Do the maths 

If 730k people joined the labor force in January but the US only created 227k jobs...? 

Hypothetically thinking, if indeed people are returning back to work because of the renewed Trump campaign induced optimism about how great America is going to be again and how Trump is going to provide so many jobs, then that could mean even more people will be returning to the labor market. If that is the case, the unemployment rate is only going to keep rising unless the headline numbers are twice as much as they have been over the Obama administration - Anything below 350,000 will not cut it in my opinion.

Wages are down

However, if we really want to understand what is going on in the labor market and realize how poor it is, look no further than the wages. Average earnings were supposed to rise by 0.3% in Jan but only rose by 0.1%. At the same time, Dec was revised down from 0.4% to only a rise of 0.2%. So, if you combine the previous two months, wages actually rose 0.4% lower than what Wall Street was looking for. 

So, with an influx of people returning to the market, what makes anyone think that wages are going to rise when there is so much choice for an employer? At the same time, inflation has reared its ugly head - Prices and the cost of living keep going up. So why does the market seem so convinced that the Fed is about to hike rates as soon as this month? 

How quick the market forgets

The probability of a March rate hike after the last Fed meeting actually went down and it also went down following the last jobs report.  It might just be the case that the market is waking up to the facts only to be rounded up by Fed speakers like shepherds are to sheep, herding the crowd into the same pen when it suits them. 

Fed speakers have been known to call the market's bluff for the best part of a decade, so why is everyone so convinced that they have all of a sudden morphed into some truth-telling fortune teller just for the favour of the markets and as a heads up? The Fed has never done anyone any favors, so why start now? 

After all, the Fed have already told the market that they are not intending to reduce their balance sheet but reinvest all maturing principal and all interest that they receive. Have we all also forgotten that the Fed said rate rises will be gradual? If history is anything to go by, gradual means about one rate hike a year - we were supposed to have seen about four in 2016 - we got ONE - remember? 

When looking at the recent performance of the dollar and what it correlates to, what I actually see is that the market is not necessarily behind the dollar because of the Fed, but the dollar actually peaked at the start of the year when there had been no indication that the Fed was about to hike rates so soon after the December hike. The dollar was more fueled by what Trump's administration, or at least what economists thought the Trump administration had in store for the US economy - aka, the reflation trade. 

The DXY peaked at 103.82 at the start of the year and fell back below the 100 handle as the Trump hysteria consolidated as 'just that' - hysteria. That was the worst January for the dollar in 30-years.

A big reversal in the dollar on the cards?

We have only just seen a resurgence of the dollar again on the back of Fed speakers advocating for a rate hike soon, but I do wonder whether the Fed will hold off this time around despite all of the recent hawkishness and optimism. If they do hold off, the dollar bulls could be in for another rough ride in the very near term, especially when we all start to focus again on Trump's policies in respect to trade and currency wars along with the trade deficit. Trump has already called out the Europeans, Japanese and Chinses as manipulators of their currencies. 

You have the ECB that could be coming to the end of their dovish stance as inflation starts to threaten the 2% ceiling and the euro having made a significant bullish recovery at the start of this year, breaking down key technical resistance levels pathing the way of what may be the beginnings of a reversal in the 2016 downtrend.  

Outside of the normal mechanics of the currency market, there are also a number of geopolitical uncertainties that will only go towards supporting the yen and safe havens, and if the dollar is out of vogue at the time, for reasons above, it could well be the nail in the coffin for dollar bulls should any of these possible events escalate. So, we are keeping an eye on the South China sea and the more recent tensions between Japan, USA and N.Korea.