The Trend

Why a Fed Hike is not likely…

Over the last week, fear and tension dominated the Street.

Many have speculated if the jobs data was good enough, the Fed could raise interest rates at the September 2016 meeting.

It doesn’t matter that the U.S. election is just months away.  It appears the Fed wants to hike.

But that may no longer be in the cards.

DIA Chart courtesy of Lightspeed Trader, by Lightspeed Trading

Shortly after the U.S. announced that employers added 155,000 jobs in August 2016 (missing estimates for 181,000) the odds of a rate hike dropped to 18% from 82%.

Some of the biggest gains in that number were because of temporary jobs, too.

Bars and restaurants added 34,000 jobs.  Leisure and hospitality added 29,000.  Retailers added another 15,100.  Seasonal and temporary jobs aren’t exactly the jobs that will help fuel an economic boom over time.

What was worrisome is that the manufacturing sector (struggling with a weaker economy and falling oil prices) cut 14,000 jobs.

But it wasn’t just the jobs number that is the most concerning.

Wages only grew at a 0.1% pace, also missing expectations.  It was also down sharply from the 0.3% wage growth rebound for July 2016. 

Average weekly earnings also dropped sharply from $884.08 to $882.54 – pushing the annual growth rate to its lowest since 2014.

Meanwhile, the labor participation rate did remain flat at 62.8%, as the number of people no longer in the labor force jumped by 58,000 Americans to 94.39 million.

The U6 unemployment number – which includes all Americans that are unemployed -- held steady at 9.7%. 

Still, that’s not exactly a recipe for higher interest rates at the Fed’s September meeting because it begins to raise questions about America’s consumer-driven expansion.

So what does this mean to the Federal Reserve?

“I believe the case for an increase in the federal funds rate has strengthened in recent months,” noted Janet Yellen at her August 2016 Jackson Hole speech.  However, the latest jobs data and wage growth news doesn’t exactly strengthen her position.

Worse, there was further decline in second quarter productivity to -0.6%, marking the biggest decline in the number since 1979.   Given the stark reality of the latest jobs news, low GDP growth, poor wage growth, productivity, and the fact that U.S. elections are nearing, there is added pressure for the Federal Reserve to not raise rates this year.

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If they were to raise rates next month with a poorly prepared U.S. economy, there is a possibility that the markets could fall much like they did earlier this year after the December 2015 hike.

While the odds of a rate hike have greatly diminished, and temporarily forcing markets higher, we must still be cautious of excessive near-term fear and volatility surrounding the U.S. presidential elections.

To prepare, you must be familiar with stop losses and trailing stop losses.

Stop losses are price triggers that protect you in case of falling stock value.   It’s an insurance policy that’ll protect you if the stock falls.  Some traders use a -25% stop loss for example.  If the stock falls 25% from your buy-in price, the stop is triggered and the trade is over.

You should also be familiar with a trailing stop-loss, or the order given to a brokerage to sell a position once it drops by a certain amount or hits a certain price level. 

Trailing stop losses are essential in today's trading environment. They can go a long way toward helping remove emotions from your trade.

This article is provided for educational purposes only and is not considered to be a recommendation or endorsement of any trading strategy. The author is not affiliated with Lightspeed Trading and the content and perspective is solely attributed to the author.

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