The headline number is 20% below the previous 3-month average of 200,00 jobs created and the February and March figures were revised down by 19,000 jobs. While the NFP number is discouragingly below expectation of 202,000, average hourly earnings has risen by 2.5% over the year. While encouraging, hourly earnings alone will not provide enough ammunition for the FED to raise rates come June. External factors such as the slowing growth in China, Japan, Europe, and US will mix with negative interest rates to halt any hopes of increases in inflation. This toxic combination of low growth and stagnant inflation will create the next bout of volatility in equity, rates, and FX.
We’ve seen the growth forecasts being revised down in China, Japan, Europe and the US over the last few weeks/months. Each country has its own woes contributing to slower growth. China has a looming debt bubble (Economist: The Coming Debt Burst) and state enterprise restructurings killing jobs. Japan is just a perennial mess so why waste the ink here? Europe is now buying corporate bonds in an attempt to increase growth and the US Q1 GDP was a mediocre 0.5%. All in, this is slow motion malaise where central bank policies are running out of effectiveness.
Negative interest rates are not positive. Period. Readers of my blog will have seen my April 19th Negative Interest Rates: A Disincentive to Risk piece and already know that I believe negative rates only exacerbate the problems in the countries that implement them. With negative interest rates and generally low rates globally, we are staring at a central bank induced asset bubble again! While slowing growth and falling equity markets has historically led to further central bank easing, once the rates turn negative, the game is ostensibly over in my opinion. Penalizing savers for governments failed fiscal policies is counterproductive (Bloomberg: Here’s Why ECB and BoJ Can’t Copy Danish Negative Rate Success). And don’t count on your neighbor either to pull you growth up. Your trading partners won’t and can’t help you because they too have slow growth and missed inflation targets.
Slow growth is a yellow flag. Negative interest rates are also a yellow flag. When combined, these two macro inputs are a huge red flag and are a major concern. As the global macro picture deteriorates, look for the Japanese YEN to gain against USD and NZD as a safe haven trades and buy 1 and 3 month implied currency volatility. 1-month volatility is today off almost 19% from yesterday and trades at 10.9% and the 3-month is trading 11.75%. As the YEN strengthens volatility will increase. If you prefer a lower premium option, buy out-of-the-money (25% delta) YEN calls vs. the US dollar. Grab your tin hat!
Underwood FX Consulting