Wednesday, July 05, 2006

Wednesday Open -- Does NFP still matter?

Treasuries are lower, as an ADP survey showed strong job growth -- 368K!! Some traders are viewing this as a preview for Friday. The ADP study has shown strong correlation with the NFP figure, for what that's worth.

I used to be in the camp that the NFP report didn't matter anymore, that the Fed only cared about inflation figures. I have changed my mind. I think the Fed wants to keep tightening until it hurts, and as long as payrolls are still strong, it obviously isn't hurting yet. I know, I know, there's a lag in monetary policy. But if NFP are chugging along at a strong pace, it means that all the tightening up until at least 6 months ago haven't had much effect on hiring practices. The Fed can then project effect of the last 3-4 hikes, then convince themselves that one more will still result in acceptable economic growth. I think they will hike and hike until they think there is a chance causing a recession.

A lot of market commentators are asking, "These guys are fighting inflation hard, but where is the actual inflation, outside of energy?" Remember, these guys are big believers in expectations theory -- the idea that if you expect inflation of x, the odds are actual inflation will be right about x. Therefore when they hike, they are fighting a perception of an inflationary future, not actual inflation.

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