When 224,000 new jobs aren’t enough…

Thursday, 11 July 2019
Adelaide, Australia
By Bernd Struben

  • Pop the Champagne!
  • The other big winner…

Do you remember last Friday?

Let me narrow it down.

Do you remember how good economic news out of the US looked like it might derail the easy money gravy train? And end global stock markets’ runs to ever higher highs?

This headline from last Friday’s Market Insider should jog your memory: ‘US stocks are set to slide after a stellar jobs report slashed hopes for an interest rate cut this month’.

Economists had forecast 160,000 new jobs for June. Not bad for a single month. Even better in a nation with an unemployment rate of only 3.7%. That’s right around its lowest level in 50 years.

But the US economy surprised to the upside to the tune of 64,000 additional jobs. And this in the midst of a trade war with China, no less.

With 224,000 new jobs coming through in one month, traders were right to be concerned that Fed Chair Jerome Powell might ease back on the easing talk. But they need not have worried.

The Fed won’t make its official decision on whether to cut interest rates until the end of this month. But in his testimony to the US Congress yesterday (overnight our time), Powell all but guaranteed he’s got a rate cut locked and loaded.

Only five days on from the unexpectedly robust labour figures, Powell walked a tightrope in signalling pending rate cuts while assuring lawmakers the US economy remained strong.

On one side of that tightrope Powell stated the, ‘baseline outlook is for economic growth to remain solid’.

On the other side, he warned of slowing investment in the US. And, more worryingly, a global economic slowdown.

Here’s the most relevant snippet:

Many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strengthened…

Growth indicators from around the world have disappointed on net, raising concerns that weakness in the global economy will continue to affect the U.S. economy.’

The FOMC, if you’re not familiar, stands for the Federal Open Market Committee. Its 12 members vote on interest rates.

And ‘accommodative monetary policy’, in plain English, means lower interest rates.

Last year, as you likely recall, the Fed raised rates four times to get to the current 2.25–2.50%. As recently as December, the central bank was signalling two rate rises for this year. Much to Trump’s ire…

But the heady days of central bank independence appear to be behind us.

If the Fed does drop rates at the end of July — which now looks almost certain — it will mark the first cut since December 2008. By then US rates had sunk to 0.25%.

But rest assured that at no point in 2008 did then-Fed Chair Ben Bernanke say the ‘baseline outlook is for economic growth to remain solid’. Instead the mood was one of ‘all hands on deck’. And ‘if you’re not bailing start rowing’.

We’ll look at some of biggest beneficiaries of Powell’s easy money course after a peak at the markets…

Markets

Overnight, the Dow Jones Industrial Average closed up 76.71 points, or 0.29%.

The S&P 500 closed up 13.44 points, or 0.45%.

In Europe, the Euro Stoxx 50 index finished down 8.23 points, or 0.23%. Meanwhile, the FTSE 100 lost 0.08%, and Germany’s DAX closed down 63.14 points, or 0.51%.

In Asian markets Japan’s Nikkei 225 is up 111.58 points, or 0.52%. China’s CSI 300 is up 0.34%.

In Australia, the S&P/ASX 200 is up 33.01 points, or 0.49%.

On the commodities markets, West Texas Intermediate crude oil is US$60.54 per barrel. Brent crude is US$66.88. per barrel.

Turning to gold, the yellow metal is trading for US$1,425.81 (AU$2,047.40) per troy ounce. Silver is US$15.31 (AU$21.99) per troy ounce. (More on gold below…)

One bitcoin is worth US$12,065.16.

The Aussie dollar is worth 69.64 US cents.

Pop the Champagne!

Investors in US markets cheered Powell on by driving the S&P 500 to a new record high. The S&P 500 touched 3,002 in intraday trading before closing at 2,993.

As you can see in the chart below the index has never breached 3,000 points before.



chart image
Source: Google Finance
Click to enlarge

I also marked December 2008 on the chart. Remember, that was the last time the US Fed cut interest rates under then-Chairman Bernanke.

At the time the S&P 500 stood around 887 points, having tumbled more than 43% since October 2007.

You can see how even a fiscal hawk — which Bernanke was certainly not — had little choice but to cut rates during this period.

Looking at where we are today, it’s just a tad harder to justify. Rather than seeing share prices lopped in half, we’ve watched them more than triple.

Indeed, it’s not just the S&P 500 breaking new records. The Nasdaq also touched a new record in intraday trading. A decent run today (overnight our time) should see both US indices close at new highs.

Here in Australia both the ASX 200 and All Ords are just one good trading day from claiming their own new record highs as well.

Then there’s Canada. As Bloomberg notes:

The S&P/TSX Composite Index rose about 0.4% to 16,608.35 in Toronto Wednesday morning. The Canadian benchmark is within striking distance of its 16,672.71 intraday high reached on April 23.’

Canadian stocks rose on the news out of Washington DC. The Bank of Canada is keeping its own cash rate on hold at 1.75%…for now. But the Canadian central bank did note its concern over global growth, citing the impact of trade disputes.

With major central banks across the world looking at further easing, it’s likely only a matter of time before Canada follows suit.

The party won’t last for ever. And like all out of control fetes it’s not going to end well…at all.

So remain vigilant. No one can tell you precisely when the big crash is going to come. But it is coming. And when it does there will be a lot more sellers swamping the market than buyers. Meaning you could watch your stocks tumble far below your stop-loss levels before you can unload them.

In the meantime, if you’ve been watching your stock portfolio rise with each dovish utterance from the central banks, there’s no harm in a little Champagne.

The other big winner…

Gold was another big winner in the expectations for a new series of interest rate cuts.

The yellow metal is up 2.3% since this time yesterday. It’s now up 11.9% since a recent low on 22 May.

And investors in the right Aussie gold miners are reaping the gains.

Shares in Newcrest Mining Limited [ASX:NCM] are up 2.2% in intraday trading. That puts the year-to-date share price gains for the $24.7 billion miner at 48.0%.

Some of the smaller Aussie gold stocks are having an even better day.

Take Resolute Mining Limited [ASX:RSG] for example. It has a market cap of $1.2 billion. And RSG is up 9.75% in intraday trading. This brings RSG’s share price gain to 32.8% so far in 2019.

Central banks lowering rates across the world, and investor angst over trade wars and possible hot wars, are likely to keep driving the gold price higher.

But there are other factors at play as well.

As I’ve written to you over the past few days, Greg Canavan highlighted one of these factors in his latest special report for his investment advisory service, Crisis & Opportunity.

No one in the mainstream — to my knowledge — is even talking about this yet. Let alone providing tailored investment advice.

But if Greg’s right the gold market could be in for a shock unlike any its ever experienced before. And the four small Aussie gold stocks he’s recommending could be among the biggest beneficiaries.

But don’t take my word from it.

You can get the full scoop from Greg right here.

Cheers,
Bernd