KRUGER INSIGHTS MONDAY, JANUARY 13, 2014

By: Joel Kruger

Bernanke's Foresight - Hope everyone had a nice weekend. So quite a reaction from markets in response to Friday's monthly US employment data. In the end, it seems like it will still take a few more sessions before market participants truly figure out with this all means. I will say that Bernanke's super qualitative amended and updated remarks at the previous meeting with respect to higher rates are making a lot more sense in light of Friday's data. Bernanke had said that rates wouldn't be moving up until "well after" unemployment dipped below 6.5%. It seems like the Fed Chair (until the end of the month) had a good sense that we could be dipping below 6.5% a lot sooner than markets had anticipated. So with unemployment now potentially a print or two away from 6.5% (latest 6.7%), doves will find some comfort in Bernanke's comment. Still, the facts are the facts and with unemployment at 6.7%, we are that much closer to higher rates, no matter how far off it might be. Of course, the danger in linking policy directly to the unemployment rate, is that it can be somewhat misleading. 

The Goldman Piece - Take Friday's overall data results for example. While unemployment dipped that much closer to the rate rise threshold, the NFP print was far worse than expected and sent an entirely different message. But generally speaking, the Fed is now in a tough spot where the bias needs to start slanting towards a tightening. The two markets that I think got it right on Friday (and into Monday) were USD/JPY and EUR/CHF. Both of these markets are still tied to risk sentiment, and both of these markets have been reacting to the latest print with a deep concern. I think this is rather revealing and should once again be sending a message to equity market participants that stocks are vulnerable at current levels by record highs. This past Friday after the close, Goldman Sachs (David Kosten) was out with a bit of a surprising piece, after outlining its view that US equities were "lofty." I certainly don't think you could argue for higher equities on the merits of Friday's discouraging employment report, with the only supporting variable coming from the expectation that this will keep the Fed in freeze mode even longer. But I don't believe this is the case. I believe the Fed is already moving towards reversal whether it likes it or not, and I also believe that any market bullishness on the back of this historic, ultra accommodative Fed policy, has already been well priced in. At this point, there really doesn't seem to be too much room for additional upside before some form of a major correction takes hold.