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Labor Market Continues Higher…

* February jobs
* Rate hike prospects
* Dollar to hover
* Currencies on the rise

And now. Today’s A Pfennig For Your Thoughts

Good Day. Chuck isn’t available this morning so I received the last minute call to step in and bring the Pfennig to you today. While I do have some words from Frank Trotter this morning to kick things off, this is going to be an abridged version since my prep time has been minimal. With that said, let’s just jump right into it.

Puerto Iguazu – Hikes are on everyone’s mind these days. As Mike discussed in the Sunday version of the Daily Pfennig ( yesterday, “The Market” is approaching a 100% expectation for another rise in the Federal Funds Target rate when the Federal Open Market Committee meets Tuesday and Wednesday. Watch for the 2pm eastern announcement to move the markets.

On Friday the ten-year US Treasury stood at a yield of 2.60% in anticipation of the Fed’s next move. We haven’t seen rates this high since, well, the Taper Tantrum of 2013 when the ten-year US Treasury rose about 2.60% in July and stayed there for about one year – also in reaction to then-relevant Fed actions. It is interesting to note that at that time, and also in 2011, bond investors bought into the concept that the economy was on a roll and would rebound robustly from its moribund post-crash condition. Today even 2.60% isn’t exactly an endorsement of high growth. Will the markets get it right this time? We’ll be watching to see.

Out where I am, hikes are also on our mind. In fact we’re deciding shortly if we’ll go out on another trek around this magnificent national park. Here things move at a geological pace. As I noted a couple years ago from this same spot, we’re watching Brazil crash down over the massive falls and wash down into Argentina and later into the sea. Buildings have sprung up over the past 500 European years, and many have subsequently decayed in the sub-tropical weather. Nothing here cares for the bond market at all. Time rolls along.

Thanks Frank. While a Fed rate hike on Wednesday has been a foregone conclusion for almost two weeks now, the Friday jobs report simply acted as the icing on the proverbial cake as the February labor data release was solid in all aspects. The US economy added a higher than expected 235k jobs last month while the unemployment rate and average hourly earnings came in where expected at 4.7% and 2.8% respectively. The goods producing industries such as mining and construction had a solid month by adding 95k jobs, which received a boost by the warmer than normal weather, and retail was at the other end of the spectrum as the industry lost 26k jobs.

At the end of the day, the labor market remains on solid footing and there really isn’t anything to suggests this trend is in danger of reversing course right now. It remains in that goldilocks range of not too hot and not too cold, which is welcomed news for Fed members since it doesn’t appear they are behind the curve or stuck between a rock and a hard place. The risk, at this point, is the Fed does not hike rates on Wednesday but most market participants will be more interested to hear the verbiage and to see the dot plot in the aftermath. Regardless, I think the key point is the Fed does not appear to be in a spot that necessitates an aggressive rate hike campaign.

The market reaction was interesting on Friday. Conventional thinking would have called for currencies and metals to take a hit since the jobs report all but guarantees a rate hike, but that just didn’t happen. Instead, both asset classes finished the day higher. Is this an indication of buy the rumor and sell the fact? I’m not sure it goes that far, but I would say the markets are at max capacity as far as a Fed hike is concerned. The only question right now is whether the second and third hikes potentially later in the year are priced into the market. If we are fully priced in, some think we may have already seen the dollar hit a short term ceiling unless the Fed unexpectedly whispers about a significant ramp up in growth, labor, or inflation expectations.

The dollar is broadly weaker today with most currencies sitting on marginal gains and metals playing peek a boo with positive territory. With all eyes squarely fixed on Wednesday afternoon, I would expect to see things remain in a fairly tight range. We have the Labor Market Conditions Index today and then PPI numbers tomorrow, so we don’t have a lot in the way of data to move things around. We still have rumblings of European stimulus tapering and rates gradually moving out of negative territory, but when/if these things happen, I would have to think they would be at a glacial pace in order to prevent the euro from popping higher. If these types of headlines do remain in the news, the euro should have some support.

Other than that, it’s a quiet morning. With that said, I will let you get on with your day. Until next time, have a great day!

Currencies today 3/13/17.. American Style: A$ .7569, kiwi .6933, C$ .7438, euro 1.0669, sterling 1.2225, Swiss $.9920, .European Style: rand 13.1060, krone 8.5785, SEK 8.9642, forint 292.48, zloty 4.0682, koruna 25.32, RUB 58.97, yen 114.65, sing 1.4130, HKD 7.7646, INR 66.1450, China 6.8988, peso 19.58, BRL 3.1410, Dollar Index 101.28, Oil $48.32, 10-year 2.57%, Silver $17.05, Platinum $942.30, Palladium $747.00, Gold $1,204.50

Mike Meyer
Vice President
EverBank World Markets

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