Over the weekend China's annual inflation accelerated to a three-year high in June. Overall food prices increased by 15%. Non-food prices climbed 3%, the largest gain on record. Pork prices alone soared more than 57%, while egg prices jumped a steep 23% on the back of a seasonal squeeze in supply.
We came into Friday morning (July 8) with futures pointing higher. My wager was for a gap up, a surprise non-farm print and a sell-off. This prediction certainly came to fruition. The reality of being wrong doesn't come equivocal to the 18,000 payroll number that was revealed. Corporations have said they weren't adding to their payrolls (except McDonald's
(MCD) which saved May and June from being much worse) and Friday wasn't news, it was confirmation. Economic Indicators are lagging market indicators to comp-sales, earnings and company news.
The U.S. economy needs to add 125,000 to 150,000 jobs a month just to keep up with people entering the labor force for the first time. We are nowhere near that type of job growth. Canada added more workers last month (28,000) and they are one-tenth the size of America. Our current rate of unemployment stated to be 9.2%, but reality stands at 16.4% when factoring for the discouraged worker. Consumer credit cards expanded for the second straight month. With unemployment going the wrong way, credit card balance sheets growing, 5.67 million homes in the foreclosure/delinquency process and unemployment benefits drying up daily, are we looking at the recession in the rearview mirror or is it in the passenger seat?
The Fed will certainly be polishing its fiscal monetary can. The government throwing taxpayer money at the problem looks inevitable; this is what the price action in gold hinted at Friday. From the early days of the credit crisis, economic contractions should follow a natural path and sort themselves out, such as economic expansions do. The government does not interject during moments of euphoria. I don't recall Congress or the Fed growing overly concerned regarding the dot-com bubble, housing/credit bubble, and financial institutions with bloated waistlines.
What was more revealing and more important Friday? The response that equities showed. If this were a bear market (wait, it is), I would have expected the Dow to trade 300+ points to the downside. Charts are still overextended, but looking for strength in a lackluster tape is creating interesting opportunities. Overbought conditions in a bull move provide little opportunity to get in and force participants to chase price action. Investor sentiment has improved, but is not at a topping juncture. The market looks vulnerable in the short-term; individual longs against index shorts is my preferred positioning. If and when we correct, spy the S&P 50-day moving average, I would then expect another rally to ensue.Stay on top of the best financial news and commentary on Wall Street by following us @Minyanville.
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