What to Expect Next From Yellen and the Fed

by Sean Brodrick

Did you see Fed Chair Janet Yellen speak on Monday? I came away with one question...

What is she smoking?

In her last speech before next week’s big Federal Open Market Committee meeting, Yellen was downright “hawkish.” This despite the terrible May jobs numbers released on Friday.

She called the figures “disappointing.” But, on the bright side, she said other key labor market indicators - such as initial jobless claims - have remained low. What’s more, she noted that consumer sentiment on the labor market “remains positive.”

She added that she still believes it is right to gradually raise interest rates - and that rates should be lifted further before the Fed reaches its employment and inflation goals. That’s because the effects of monetary policy lag the economy.

Well, I have news for you, Yellen...

Despite your hawkish tone, there will be no near-term rate hike. In fact, you can put down that pipe you’ve been using to blow smoke, Madam Chairwoman.

The way I see it, we can stick a fork in the Fed for many months to come. Here’s why.

Payroll Pitches Downward

Let’s start by talking about those May nonfarm payrolls.

Payrolls increased just 38,000 in May. That’s truly terrible, and a huge miss from expectations (which called for a gain of 168,000). At the same time, the actual increase in March was revised lower to 186,000 - down from the 208,000 previously reported.

And the bad news continues...

April’s payroll number was revised lower to a gain of 123,000 from 160,000.

Did you see that? The revision in the April number was nearly as large as the entire reported gain in May.

And odds are May’s numbers will be revised soon enough.

Meanwhile, there’s a disturbing trend developing in payroll numbers. Look at the chart below and see if you can spot it.

what to expect next from yellen and the fed

Here’s the pattern:

  • 233,000 jobs added to payrolls in February
  • 186,000 in March
  • 123,000 in April
  • And just 38,000 jobs added in May.

Even more bad news... the three-month moving average for nonfarm payroll gains dropped to 116,000 from 181,000 in April.

It now stands well below the average of 203,000.

Digging Down, Things Look Even Worse!

Keep in mind, those are the headline numbers. It’s even scarier if you dig down...

Goods-producing jobs declined 36,000. That is a freakin’ plunge! It’s the biggest drop since February 2010. In fact, these types of jobs are in their own dismal trend. They’ve contracted four months in a row.

Add up the losses for those four months and we’ve seen goods-producing jobs decline by 77,000. That’s a -1.2% annual rate.

Then there are those working part-time for economic reasons. These are people who would like full-time jobs but can’t find them. That group jumped 468,000 - the sharpest increase since September 2012.

What happened in September 2012? The Fed was so worried it triggered QE3.

[Editor’s Note: For a brief history of quantitative easing and its effect on the market, click here.]

By the way, the word on the street is that the number of folks working part-time who would prefer to work full-time is a favorite metric of Yellen’s. So again I ask...

When it comes to her positive outlook on U.S. employment... what is she smoking?!

Yellen tut-tutted those pointing to the May payroll number with alarm. “One should never attach too much significance to any single monthly report,” she said. She called the bad data “transitory.”

But it’s not just one report. As I just showed you, it’s the four-month jobs trend that is terrible. In fact, based on that trend - if it continues - it looks like the U.S. will “transition” right into a recession.

Private Sector Falls Short

You may be wondering: Just where does Yellen expect these new jobs to come from? (Join the club.) Certainly not the private sector. It created only 25,000 jobs in May.

And there’s a good reason why.

Earnings are falling so fast that Goldman Sachs just lowered its estimate of S&P 500 earnings growth again. And that’s coming off of 2015, which, according to Goldman, was “the worst year for S&P 500 earnings since 2008.”

So why is Yellen puffing away, wearing rose-colored glasses? Sure, she can point to the fact that, despite the carnage in May, the jobless rate fell to just 4.7%.

Unfortunately, it was possible only because the participation rate fell to 62.6%. Yeah, the Labor Department decided that more people just don’t want to work.

That’s big of them.

You might think I’m being cruel toward Yellen. Or that I’m just resisting an inevitable rate increase. But I’m not alone in my thinking.

Something else really interesting happened on Monday. The market ran up into Yellen’s speech. Then she made her hawkish pronouncement. After this, the market dipped - but not a lot.

You know what this tells me? That Wall Street traders don’t believe her either. They know she’s just blowing smoke.

So, what’s a trader to do? Well, if the Fed is really not going to hike rates, one investment should do very well.

It’s the same thing that was doing well when everyone wrote off the Fed earlier this year... precious metals.

And if you want to score the biggest gains, be sure to check out miners that are leveraged to the underlying metals.

Good investing,


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