So what is your call? Is the Fed lagging behind in raising rates to cool the hot U.S. job market? Those were some ‘smoking hot’ job and wage numbers on Friday. Wonder how long the Fed thinks that the economy can keep adding 250,000 jobs without exponentially growing wage inflation? Safe to say that the Fed Fund rate hikes will continue at an upward pace until the economy cools. Good news for investors in cash. Potentially bad news for investors in most other assets. And very unfortunate news for borrowers.

As rates rise, the market remains in transition. Risk is coming out of the market as risk-free investors now have a 3% yielding alternative. Stocks are no longer rewarded for beating their earnings estimates. Market bounces are uninspiring and weak compared with the aggressive selloffs. The Oval Office’s own China trade deal remarks are now being met with market skepticism. Market-leading sectors and names have now failed and are reasons for concern as defensive stocks look to take a leadership role. After ten years of Growth stocks beating Value stocks, maybe it is finally time for a mean reversion. (Just go take a look at the list of 52-week highs today.) Apple was certainly no help to growth stocks with their earnings outlook which lowered iPhone expectations and also got rid of the metrics to track for the future. (Ignore what they said, less data provided is never a good sign.)

So here is where we sit. Financial conditions will get tighter. Stocks will continue to have a headwind as GDP growth slows and investors prefer the safety of 3% versus the risk of losing money. Investing in bonds won’t be a picnic as rates move higher due to a tight job market, and trade war inflation combined with a U.S. Treasury which needs to sell $300-400 billion each quarter to keep the U.S. operating. Credit conditions will likely weaken as the U.S. economy slows which would ripple through both the bond markets and the lending and banking system. The global economy needs a new spark. Until it arrives, watch, wait and don’t be in a rush to do much on the risk side. Better to turn up the radio and enjoy that slow ride behind the tractor until the road straightens out.

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How many months until portfolio managers are wearing full Saddlebags?

Take Friday’s wage gains, add in rising prices from the tariffs and you can see the beads of sweat forming on foreheads. Tom Wolfe would love it.

Although the latest wage number did benefit from an easy year-on-year comparison, it came on the heels of a 3.0% year-on-year rise in the Q3 employment cost index for private-sector wages and salaries excluding incentive-paid occupations, probably the single best indicator of US wage growth. Further increases in wage growth to the 3¼-3½% range are likely over the next year.

(Goldman Sachs)

And Morgan Stanley is correct to defend the Fed’s actions…

“The Fed is simply doing its job. With liquidity now being named the primary culprit for why all global asset markets are performing poorly, some are asking if the Fed is making a mistake. Even though we’ve been one of the loudest voices this year highlighting the risk of tightening financial conditions, we do not think the Fed is making a mistake. Given the exceptional strength in the US labor market and further projected rise in Core CPI, the Fed is simply doing its job and will not stop until there is a cooling in the jobs data, a financial accident, or both. Until then, they won’t—and, in our opinion, shouldn’t—back off.”

(Morgan Stanley)

As is the Wall Street Journal…

Robust hiring and wage gains last month leave the Federal Reserve all but certain to raise interest rates in December and on course to continue gradually lifting them next year.

Employers added 250,000 jobs in October, the Labor Department said Friday. Workers’ average hourly earnings rose 3.1% from a year earlier—the fastest growth since 2009—while the unemployment rate held at 3.7%, matching the lowest level in 49 years.

The figures show the labor market has continued to strengthen a decade into the second-longest expansion on record. This has happened despite cautious efforts by the Fed in recent years to prevent the economy from overheating by lifting short-term interest rates.

While rising wages and low unemployment are great news for workers, Fed officials worry that labor shortages could eventually drive up wages and prices enough to cause inflation to accelerate. That would force the central bank to raise interest rates more aggressively to keep inflation under control, potentially tipping the economy into recession.


Average hourly earnings now has a three handle…

This is one of the strongest Employment reports we have seen in years. Strong headline gains in payrolls, strong labor force gains combined with increased participation and wage gains are at new recovery highs. The year over year average hourly earnings gain of 3.1% is the strongest increase since 2009. Not only are wage gains finally coming through, but they are occurring with job gains that are massive relative to the needs of the economy. This number will surely reinforce the FOMC’s thinking that they need to remain on the normalization path they have been on. Should a string of several months of reports this strong come together, then the Fed would actually have to consider tightening more aggressively.

(Jones Trading)


And the one year Treasury hits 2.70%…

A great risk-free alternative to every asset in your portfolio.

You might believe the Fed is behind the curve…

If so, then look at how behind the bond market is. Saddlebags is going to need another shirt change.

(JP Morgan)

The stock market looks forward, not backward, and it doesn’t like what it sees…

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