Thu, Jun 24, 2021 @ 04:07 GMT
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Substantial Progress In US Jobs, Overstretched Valuations, Easy Fed And Doge To The Moon

How interesting! The Federal Reserve now thinks that the market valuations are overstretched, as if its ultra-lose monetary policy wasn’t directly responsible for the mega-inflation we see in asset prices over the past decade. The Fed’s remarks are a bit disqueting, now that the US economy is growing at a robust pace, the company earnings beat expectations in a jawdropping fashion, inflation is about to take off due to an otherwise unsustainable surge in raw material prices, and everyone is waiting for the data confirmation that a susbstantial progress is really happening in the US jobs market.

On Wednesday, the ADP report showed that the US economy added 742K new private jobs last month. The number was softer than expectations, but strong, still, in absolute terms.

The unemployment claims are falling at a sustained pace as well, and fell below the 500K mark last week for the first time in a year.

And today’s NFP figures are expected to reveal near a million nonfarm job additions to the US economy during the course of last month. Even if the NFP read misses estimates by a couple of hundreds, in absolute terms, the progress we see in the US jobs market looks ‘substantial’, even though there is more way to go before the US employment market recovers to the pre-pandemic levels.

When expectations are at extreme levels, such as we’ve seen at the beginning of the pandemic and now, beating expectations may not matter much. As long as the data is strong, even a softer-than-expected NFP figure could revive the inflation worries. For now, the US yields don’t let appear any sign of stress. But the Fed doesn’t have much time left before higher inflation kicks in. Even the most dovish investors start feeling uncomfortable with the Fed’s ultra-supportive monetary policy which results in abnormal market valuations. The Fed itself is concerned. And of course, the more extreme we go in terms of market valuations, the more difficult it will be to readjust these levels.

So what’s in the store? Nothing much. The Fed won’t change its policy stance overnight, it will remain accomodative even though it thinks that the valuations are overstretched and inflation will soon be a serious discussion topic.

Second, in any case, the Fed can’t let the market fall free, because that would end up in a renewed financial crisis, which would in return force the Fed to re-deploy supportive policy tools anyway. So it is a vicious circle. Therefore, a strong jobs figure could trigger a short-term panic across the market, boost the reflation trades, but should not have a durable negative impact on the overall market sentiment. A negative surprise however, a read below 500K, could somewhat sooth the Fed doves’ nerves.

In the commodity space, gold finally cleared the $1800 resistance and rallied on stops to above $1820 mark. There is no better combo for the gold bulls than the soft US yields and the rising inflation expectations. The major risk to the gold’s advance is a potential, and a quick rise in soveriegn yields. Other than that, gold which lagged industrial metals such as copper and aluminum is now ready to get back to the game as an inflation hedge and amass some capital flows in case we see a downside correction in these industrial metal and other commodity prices that recently went off the roof.

Let’s leave the good, old economic and corporate calendar aside and talk about one of the most anticipated events on this week’s agenda: Elon Musk’s appearance on Saturday Night Live, which has a material impact of sending Dogecoin, a joke asset, to fresh record highs. What’s no longer a joke is the Dogecoin’s market capitalization, now more than $70 billion. Speaking of overstretched asset valuations and market anomalies, Dogecoin is the new symbol of a liquidity overdose.


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