Market Lab Report - Premarket Pulse 7-10-17

Major averages rose on lower volume on Friday's strong jobs data. Nevertheless, rip-tide markets struggle for direction as the tug-o-war remains between rising interest rates and diminishing quantitative easing also known as QE. QE has been the fuel that propels stock markets higher while the prospect of higher interest rates, while bullish if it is believed the economy is truly on the mend, has a history of inducing major bear markets. The "Three Steps and a Stumble" phenomenon is well known and occurs when the US Federal Reserve hikes three times in the face of a strengthening economy. While not an exact science whatsoever, bear markets have often occurred on or after the third rate hike as the Fed's attempts to cool the economy prove too aggressive. This time, however, the economy is the furthest from overheating but rather remains questionable at best. Unfortunately, central banks have no choice but to tighten monetary policies since interest rates still sit at or near all-time record lows. 

As major central banks continue to discuss possibilities of slowing their respective stimulus programs, the prospect of higher interest rates at home and abroad puts a lid on how fast stock markets can rise. The European Central Bank suggested that they are unlikely to cut interest rates further below zero while the Bank of England may be raising rates for the first time in 10 years as soon as this November. Rates in the UK stand at a record low of 0.25%. Meanwhile, the US Federal Reserve's minutes showed that "several" members were in favor of starting the reduction of its $4.5 trillion balance sheet within a "couple of months." CME FedWatch tool shows the December FOMC meeting as the most likely time for the next rate-hike with an implied probability of 61.7%.

But central banks don’t have as much room as they think as the economy at home and abroad remains sluggish. On Thursday, employers added a seasonally adjusted 153,000 jobs during the month, below the 180,000 jobs that a consensus of economists had forecast. But Friday's jobs report showed strength coming in ahead of consensus estimates. The Fed sees steady employment gains as further proof the economy has mostly healed from the Great Recession and some worry low unemployment could trigger a surge in worker pay that sparks inflation. This gives them another reason to hike rates by their December meeting later this year. Of course, these numbers remain suspect as the number of people who have given up looking for work is an important factor while other important facets of the economy including productivity growth and GDP remain in question.