We're Getting Signs of More Volatility Ahead

 | May 03, 2016 | 4:00 PM EDT
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In the column "Payroll Tax Receipts Hint June Rate Hike," I discussed the idea that the real growth in payroll tax receipts for April should be reflected in government reports on economic activity between now and the next FOMC scheduled decision on monetary policy, to be announced on June 15.  

That does not mean the Fed is going to raise rates in June. It merely indicates that domestic economic activity was actually stronger in April than is evident in the government reports available so far.

As that evidence becomes available, the capital markets should shift toward increasing expectations of a rate hike in June, with currencies and commodities being the most immediate parts of the capital market structure to respond to such. The implication is that it should cause support for the U.S. dollar to increase, which should also be reflected as pressure on gold prices.

This coupled with the fact that gold is running into technical resistance in the $1,300 range implies the possibility of an oversized negative correction in gold and the gold miners soon, too.

I view such activity as very positive over the longer term as the aggressive rebound in both so far this year has been stronger than warranted by domestic economic fundamentals.  

I'm maintaining my very long-term outlook for the metal of $4,000 per ounce within five to 10 years and for the Market Vectors Gold Miners ETF (GDX) to appreciate at an average annual rate of about 25% over the same period.

If you're a long-term speculator, I would maintain that position and consider adding to it should a substantial correction occur. I will expand on that point in future columns.

The principal reason I wrote about the payroll tax receipts issue on Saturday was in anticipation of what the data imply about the jobs report for April coming out on Friday.

So far this year, real, seasonally adjusted payroll tax receipts have moved from an annual contraction of about 5% to an expansion of about 1%. That's a very aggressive move. More importantly, the data did not move into expansion until April.

Although the trend indicated that this was likely, I was very cautious about it actually doing so following the end-of-month dip in March.

This should be evident in the employment data released on Friday, but don't assume it. As I've written about for the past few years, the Bureau of Labor Statistics data have increasingly overstated employment implied by the payroll tax receipts.

I addressed that issue earlier this year in the column, "December Job Numbers Just Don't Add Up."

Also, to reiterate what I've discussed in the distant past concerning this data series, the Treasury only reports actual receipts as reported to it by the Federal Reserve. You can follow these at the Treasury's daily statement in Table IV -- Federal Tax Deposits.  

The Treasury does not report this series in the same way as other government agencies. There is no announced release date like the other reports. Because of this, the data are not typically discussed by the financial media. The data are also not adjusted for inflation, population or seasonality.

The adjusted data I share here periodically is provided by Mathematical Investment Decisions. If you want the data on an ongoing basis, you'll have to contact them. They do excellent work and I highly recommend the company for financial advisors. I have no financial relationship with the company. There is also no universal method for adjusting the data, so this is not trading data.

The totality of the economic data available, however, continues to indicate that the U.S. economy is performing below potential and many high-profile financial types are beginning to become publicly vocal about the need for complementary fiscal stimulus by way of an infrastructure program.

Yesterday, Business Insider wrote about this and Berkshire Hathaway's Charlie Munger referenced it on CNBC.

It is logical that this should encourage FOMC members to become more vocal about the appropriateness of this, too, which I discussed in last week's column, "It's the Infrastructure, Stupid."

The point of all this for capital markets is that there is some unexpected positive cyclical news, the increase in payroll tax receipts, occurring commensurate with secular underperformance of the economy.

These are going to send conflicting signals about the health of the economy and the trajectory it's on to capital market participants.

The logical result is that there should be a substantial increase in volatility across all asset classes between now and the next FOMC meeting, about five weeks away.

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