Despite another very encouraging read on the U.S. jobs front, we are trading virtually flat in all the broader averages heading into the afternoon session after being notably higher in the pre-market.
In my opinion, a few factors are at play (based in large part to recent analysis by James Rickards):
1 – The latest round of better-than-expected U.S. economic data has lead to some rumblings on trading desks this morning regarding the growing belief that these recent signs of U.S. economic improvement have now taken the possibility of additional Fed intervention (QE3) off the table. Hence, we are seeing a very muted reaction to the strong employment numbers we received this morning.
My specific take on the trader sentiment above is that additional QE hinges in large part on the currency cross rates between the strengthening dollar and weakening euro. In my estimation, a Euro that drops closer to $1.20 will be unacceptable for the Fed and policy makers – keep in mind that US corporate earnings in 2011 were lifted by cheaper exports abroad due to a weak dollar (i.e. QE1 and QE2). Many market participants will agree that these “strong” corporate earnings have kept the market “alive.” I would continue to watch the Euro closely – if we see further weakening, I would not be surprised to see the Fed do more QE, or something like it.
2 – I also believe that the lackluster reaction to today’s jobs data may be a classic example of the old Wall Street adage “buy the rumor, sell the news.” More specifically, the S&P 500 has seen a nice 2% gain this week heading into today’s trading session, as traders have pushed the index back into the 1,280 level, which is at the top end of our recent trading range from a technical perspective. Hence, it appears that traders have been bidding up the market all week in anticipation of a good report this morning and have now decided to take some money off the table in reaction to the actual results heading into the weekend while trading at these lofty technical levels.