Friday, August 1, 2014
The Fed is keenly focused on the labor market, and if private forecasts are correct, private sector employment continues to rise at a moderate pace. ADP reported on Wednesday that private sector payrolls rose by 218,000 in July, following a 281,000 rise in jobs in June. Although July's gains were the 4th consecutive month of 200,000 plus jobs created, traders were looking for an even larger 230,000 jobs increase. This shows that market participants are becoming more optimistic about U.S. employment, but we may need to see jobs creation surpass 300,000 per month for the Fed to be satisfied that the U.S. labor market is in a sustained recovery and will be more likely to consider raising short-term rates for the first time since 2008.
Federal Reserve officials saw some good news on the pace of U.S. economic growth in the second quarter, as gross domestic product rose by a seasonally adjusted rate of 4.0% according to the Commerce Department. This was above the +3.0% rate economists were expecting, and the highest rate since the 3rd quarter of last year. 1st quarter GDP was revised upward to -2.1%. A huge build in inventories as well as increased consumer spending in Q2 were behind the strong GDP figure, although an increase in imports kept the growth rate from accelerating even higher. While second quarter growth was robust, there were also signs that the rate of inflation also accelerated, with the personal consumption expenditure price index(PCE) rising by a larger than expected annualized rate of 2.3%, which is higher than the Fed's target of 2%. While both economic growth and inflationary pressures appear on the rise, the Fed is still content with its current tract of reducing its debt purchases and holding short-term rates at low levels for an extended period of time, according to the statement released after the July FOMC meeting on Wednesday. However, the statement was a bit more optimistic on current economic conditions, which led traders to sell U.S. Treasuries and purchase equities initially following the announcement.
Looking at the daily continuation chart for the E-mini S&P 500 futures, we notice bulls having a "Fed hangover" on Thursday, as prices fell to their lowest levels in a month. While we are starting to see some near-term weakness in equities, the mid-term uptrend starting at the 2011 lows and the short-term uptrend starting at February 2014 lows are not yet close to being tested. The long-term 200-day moving average is currently near the 1850.00 price level, and equity bears will not be able to flex their muscles until we see a weekly close below this widely watched indicator. Near-term support is found at 1921.00, with resistance found at the contract high of 1985.75.
Mike Zarembski, Senior Commodity Analyst