Hey There Income Hunters,
The initial headline print of 199,000 payrolls added versus expectations near 500,000 was disappointing.
But the internal data told a very different story.
First, revisions to previous months brought the increase closer to 340K and the unemployment rate down to 3.9% from 4.2%.
The most significant data was related to hourly earnings, which came in at .6% versus .4% forecast.
Here are two important things to keep in mind:
- People are chasing wages. A company may hire two people on a Monday and then by Friday others are leaving to take a higher paying job at a competitor down the street.
- Get ready for a possible wage/price spiral as participation in the workforce is still well below pre-Covid levels and jobs available are at historic highs.
This makes the Fed’s job increasingly more difficult …
Today, I’ll show you why I think the market has priced in too much tightening, ad the trades to consider …
Markets are Front Running the Fed
As you can see in the chart below, the markets are now pricing in a 90% chance of a rate hike in March …
A lot can happen between now and March and most of it can come from slower growth and inflation reports, so the tightening priced in may be going too far.
We had a very similar situation built into the markets back in the 2010s. Let’s take a look …
The point of the chart below (it’s way down there) is to show that based on how much Fed tightening is already priced into the Bond market, bond ETFs are cheap and could explode higher in the weeks ahead.
You see, as traders the signals we get from bonds are much more forward looking than the information we get from the Fed or stock prices
The Fed is, by definition, reactionary to economic data, which is based on past activity
Bonds, meanwhile, predict what the Fed activity will do to the economy and how bond prices will move in advance of the data.
The chart below shows when the Fed pulls the trigger on …
- Tightening, i.e. QE taper, which is simply pulling back stimulus or
- QE reversal which is draining funds from the markets and economy
How the market reacts is very consistent …
- Stocks go down on any pullback (QE taper) or withdrawal (QE reversal) of Fed stimulus.
- Bond prices rise/rates drop when QE tightening begins or is even announced. This is because Bonds are forward looking …
You see, tightening is meant to put pressure on the stock market and reduce growth in the economy and inflation.
When growth and inflation slow the best asset to own in Treasury Bonds.
Bring It Home
Understanding these relationships can make you a lot of money.
The Bond ETFs I am focused on buying are the iShares 3-7 year Treasury Bond ETF (Ticker: IEI) and the iShares 7-10 year Treasury Bond ETF (Ticker: IEF).
Next week I will share additional info on what I’ve identified as the biggest trends for the coming months.
Live and Trade With Passion My Friends,