Derailed! A June Rate Hike Is Off

Expecting a rate hike this month? Well…

The Labor Department released its latest jobs report this morning. It showed the economy added only 38,000 jobs in May — the lowest number since September 2010. The Dow coughed up about 100 points on the news. It’s clawed its way about 70 points higher at writing, but the point was made.

Meanwhile, gold soared $30 higher today on the news. It had been dropping for weeks on the talk of a possible rate hike. No longer.   

If you question the predictive power of economists, give yourself a gold star. These numbers were more than twice as bad as the lowest forecast in a Bloomberg survey of economists. The most pessimistic economist in that survey predicted 90,000 jobs.

Cherry atop the sundae: A record 94,708,000 remained outside the U.S. labor force last month — 664,000 more than in April. The labor force participation rate dropped to 62.6%, to a 38-year low.

But are the latest jobs numbers a mere one-off, a chance detour on the road to jobs nirvana? After all, all the talk lately has been of the strengthening labor market.

“The slowdown in job growth looks pretty pervasive across industries,” says Michael Feroli, chief U.S. economist at JPMorgan Chase, as reported in Bloomberg. “It raises some questions about the momentum of growth and about the outlook.”

Sure does. But everyone wants to know about its effect on a possible rate hike this month. How about it, Mr. Feroli? “The easy thing to say is this takes June off the table for a Fed hike.”

“That was very disappointing and adds a lot of uncertainty to a market that was gearing up for a summer rate hike from the Fed,” adds Allan von Mehren, chief analyst at Danske Bank.

The Fed’s always blabbing that its decisions are “data dependent.” If so, then the latest jobs report appears to rule out this month.

But does it necessarily?

James Bullard, president of the Federal Reserve Bank of St. Louis, says that a June rate hike could still get the green light because the markets have already baked it into the cake.

“But that’s flat-out wrong,” says Jim Rickards, snapping his fingers at Bullard. “Markets have increased the probability of a rate hike this year, but the expectation is still below 50%. If the Fed hikes rates in June, markets will react sharply to adjust expectations from 50% to 100%, because expectations of future rate hikes will increase also.”

Bullard isn’t looking far enough down the road. A rate hike this month will increase expectations of additional hikes. And what does Jim expect if the Fed does raise?   

“If last December’s ‘liftoff’ is any guide, the Dow Jones industrial average could crash 2,000 points by the end of July… Bullard is simply incorrect if he thinks a rate hike is priced in.”

Traders agree with Jim, as they now give a June rate hike dark-horse odds of 6%.

Whose eyes will be riveted on the Fed this month? China’s.

China wants a soft dollar to keep a lid on the yuan. A weak dollar also stems capital outflows that would otherwise seek higher-yielding dollar-denominated assets (further explanation below).

The U.S. and China will be holding their annual Strategic and Economic Dialogue (S&ED) in Beijing this coming Monday and Tuesday. And Jim Rickards will be paying close attention:

“China’s message to the U.S. is to go slow and don’t rock the boat with rate hikes right now. So what’s China’s secret plan to find out the Fed’s intentions? They plan just to ask their U.S. counterparts when they’re all together in Beijing! We’ll see if the U.S. gives them a straight answer and if the Chinese drop any clues afterward. Either way, I’m watching them.”

Below, Jim shows you how investors who understand the “Shanghai Accord” will see “big gains in the year ahead.” But they’ll come from a source few investors consider. What is it? Read on…

Regards,

Brian Maher
for The Daily Reckoning

P.S. The Federal Reserve might reduce rates again or launch another round of QE to stimulate the failing economy. And gold should soar on the weaker dollar. That’s why we’ve produced a FREE special report called The 5 Best Ways to Own Gold. We’ll send it to you when you sign up for the free daily email edition of The Daily Reckoning. We break down the complex worlds of finance, politics and culture to bring you cutting-edge analysis of the day’s most important events. Click here now to sign up for FREE and claim your special report.