Here's how to read this topsy-turvy economy

Why are stronger numbers considered bad news? Investors are worried about the impact on inflation and interest rates.

By InvestorPlace Jul 30, 2014 3:54PM

Credit: © Image Source/Corbis
Caption: Bull and Bear MarketsBy Anthony Mirhaydari


Stocks were chopping around the unchanged line on Wednesday in response to some stronger-than-expected economic reports, including the government's first estimate of second-quarter GDP growth.


The Dow Jones Industrial Average ($INDU) tested below its 50-day moving average for the first time since May -- a bout of volatility investors haven't seen for a long time.


Normally, good news would be considered good news. But these days, with the market so dependent upon cheap-money stimulus from the Federal Reserve, any indication of a strengthening economy (and rising inflationary threats) is considered bad news since it brings forward the likely timing of the first short-term interest rate hike.


Indeed, the policy hawks are already making their reservations known with Dallas Fed president Richard Fisher letting loose with a Wall Street Journal op-ed on Tuesday titled "The danger of too loose, too long."


In Wednesday's Fed meeting statement, Philly Fed president Charles Plosser dissented and voted against it because of his objection to the commitment to hold interest rates near 0 percent "for a considerable time" after the QE3 bond buying stimulus ends (likely in October, and ratcheted down another $10 billion today) because "such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee's goals."

Here are three things you need to know about the economic data heading into the next big data release that could change the calculus for the Fed -- Friday's jobs report -- and what you should do in the meantime.


GDP growth rebounds

After a weather- and inventory-related plunge in the economy in the first quarter, things bounced back nicely as winter's chill faded. From an upwardly revised 2.1 percent annualized drop in Q1, one of the worst non-recessionary performances in the history of the U.S. economy, GDP jumped at an annualized 4 percent rate in Q2 thanks to a swing in inventory growth. This beat the consensus estimate of a 3.1 percent gain.


Digging into the numbers, the sub-components reflected broad strength with resident investment, business fixed investment and consumption expenditures all putting in good performances.


Macroeconomic Advisers is looking for Q3 GDP growth to slow a little to 3.2 percent as the rebound in inventories normalizes.


Inflation steadily rising

One of the big points of concern for the policy hawks has been the healthy rebound in inflation, with consumer prices already rising at a 2.1 percent annual rate -- above the Fed's 2 percent inflation target.


There are multiple ways to measure inflation, with some measures hotter than others. But today, another inflation measure -- the GDP price index -- provided more evidence that inflation has returned to normal levels. The growth in the GDP price index increased to a 2 percent annualized rate, a level that it hasn't seen 2012.


The Fed was forced to acknowledge this in its policy statement Wednesday, highlighting that inflation has moved back toward its longer-run objective and that the risk of inflation "running persistently below 2 percent has diminished somewhat."


Jobs keep coming

Heading into Friday jobs report, the ADP report on private payrolls came in at a softer-than-expected 218,000 jobs in July. This was below the 230,000 that was expected and indicates that Friday's nonfarm payroll number could be soft (consensus is looking for 230,000).


But analysts at JPMorgan note that the first prints of the ADP data and the government's nonfarm data have deviated by an average of about 40,000 since late 2012. That suggests that the softer ADP number doesn't preclude a strong nonfarm report on Friday.


Still, the run of 200,000 plus ADP reports now goes back to April, continuing a run of strong job gains that has the team at Capital Economics looking for a drop in the unemployment rate on Friday to 6 percent.


For investors

How should investors play all this?


The strengthening of the U.S. economy, and the upcoming end of the Fed's bond purchase program, has been a boon to the U.S. dollar. The greenback as represented by the PowerShares US Dollar Bullish Index Fund (UUP) is up nearly 3 percent since May as the Japanese yen and the euro suffer from weakness.


This help keep a lid on inflationary pressures as it's pushing down energy costs.


One way to play this is to bet on the dollar by betting against the yen via the ProShares UltraShort Yen (YCS), which is breaking up and out of a wedge consolidation pattern going all the way back to January.


More from InvestorPlace

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm. As of this writing, he had recommended YCS to his subscribers.

Tags: UUP
40Comments
Jul 30, 2014 5:01PM
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We are 5-6 years into our jobless recovery. And even this tepid recovery shows signs of stalling!

Today's GDP numbers ARE a positive sign, but unfortunately are just not very relevant to the typical American these days.

The combination of Outsourcing, Automation, and Illegal Immigration have decimated the working class and working poor, with no end in sight. Wages can't rise with these headwinds... and if they did then the Fed would immediately raise interest rates to ward off the "wage price spiral" crushing wages again. They think it's ok for Stocks to jump out of control... but wage raises for the plebes is unacceptable!

Just take myself for example - I was laid off in 2010 shortly after the start of the recession. I’m highly skilled in my field, yet have been bouncing around from job to job all making starting salary numbers, despite being 40 years old. Paying my mortgage is a struggle. Paying my health insurance is worse ($375/month from Freelancer’s Union). I am forced to buy cheap bare minimum car insurance ($18/month from Insurance Panda). My daughter is forced to attend a public school that is in increasingly worse condition thanks to illegal children and welfare leeches moving in. Yet here I am, unable to afford a quality education for her.

Federal Reserve monetary policy moves (although necessary) have mainly benefitted Big Business (especially Finance) and speculators, to the detriment of savers. Zero Interest Rate policy and Fed Purchases in the Open Market simply don't help the Average American much. Thus we see a booming Stock Market (which is clearly an echo bubble based on Fed policy and not on macroeconomic data) and we saw a mini echo RE bubble (especially the "luxury rental" segment).

People ask why the Stock Market isn't jumping with today's news. The answer is obvious. It likes the increase in GDP, but it doesn't like the idea that the Fed may need to stop goosing the market. The Fed is trapped with no exit strategy. 

There is no Fiscal Policy these days due to Republican intransigence. 

We need a drop in REAL unemployment and increased WAGES, and should focus on those.
Jul 30, 2014 5:37PM
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obama tells GOP to stop hating.  Another left tactic.  There is no hate involved.  It's called incompetency.  GOP doesn't want to impeach obama but the main stream will report differently. The foundation of liberalism, LIES.
Jul 30, 2014 7:56PM
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Median family wealth is worth one third less than it was a decade ago and 35% of Americans have a debt in collections.Where are we going to find the consumers to keep up 70% of the economy?My thanks go to Bush,Obama,Ben,Yellen and anybody they get advice from.
Jul 30, 2014 4:33PM
Jul 30, 2014 4:51PM
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Investors today are fickle, greedy, and looking to make a quick buck by constantly pumping and dumping stocks and other financial instruments.  The day traders work with their partners in the media to sell a negative story today and a positive story tomorrow, only to sell a negative story the 3rd day and so on. High frequency trading has put the average retail investor -- the working stiff- at a huge disadvantage. 

Investment should be long term, commodities should NOT be traded, short positions should be abolished (not taking a long position shouldn't be an opportunity to manipulate the markets; you either believe in the company or you abstain). 
Jul 30, 2014 4:58PM
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So there we have it where we have finally taken ourselves from bad news doesn't matter to good news is bad. That about sums it doesn't it?

 

Nothing wrong here, move along sheeple.

 

 

Jul 30, 2014 11:04PM
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"Federal Reserve monetary policy moves (although necessary) have mainly benefitted Big Business (especially Finance) and speculators, to the detriment of savers."

HATE to tell you THIS Amit, but the fed is the ONE entity SCREWING the American middle and working class. And, believe me the ONLY "necessity" the fed sees is to SHOWER Wall St. with cheap, fake FIAT money, so the big boys can "pump and dump", for the BENEFIT of the rich, and the DETRIMENT of ANYBODY working for a living.

Jul 30, 2014 5:53PM
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My company is off about  40% from 2009  on gross sales of  $1,000,000.00 June To June YTD

2012-2013  sales June -June $600,000.00

2013-2014  Sales  June - June $657,000.00

It's trying to go in the right direction, But a far cry from where it was.


Jul 31, 2014 6:37AM
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I note again my comments on the GDP growth were deleted...


The censors didn't like my single line comment...


"Does anyone believe these numbers?"

Jul 30, 2014 5:52PM
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"Investors" would worry if there was nothing of substance to worry about. Surely there must always be something out there.
Jul 30, 2014 4:43PM
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So, are you surgically attached to the sand box you're head is buried in? All you do, like the other market shills and presstitute media, is regurtitate the extensively manipulated, modified, content deleted, essentially worthless Oboob administration and Fed 'data.'   There is no recovery, the economoy is NOT improving, but we ARE on the verge of a complete systematic collapse.  

Jul 30, 2014 6:15PM
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Get more creative MSN.  Your articles are really dull and repeated on a daily basis.
Jul 31, 2014 12:03PM
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Is this the "summer of recovery" we have been foretold of these last 6 years ?
Jul 31, 2014 10:33AM
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Hi Anthony;  We both pretty much know where each other is coming from but I will make one point I strongly believe in and will share. I just can't accept with so many wealthy and moneyed folks feeling pretty good about their portfolios that the danger to the "system" and why it has been so quiet is there has been no correction for what seems like forever.  I do not believe this is an accident or do to any fundamentals.  The accommodations given these markets makes them somewhat insulated from reality.  I understand your somewhat old school vigil about technical's and movements but I don't believe they are of any large value because of the interference of outside factors like QE and outright buying to maintain these markets.  It will be interesting in the next few days and weeks as I sense a very concerted negative effort is underway to produce volatility such that Wall Streeters can make some dough.  But over time I see they are just getting tossed a temporary bone as I can't foresee any substantial drop in markets because the political fallout would be much too massive. JMHO
Jul 30, 2014 4:51PM
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Want to know the direction of the market, just look at the correlation between the expansion of the Fed"s balance sheet, run up to the next election, and the increase in subjective data that is subject to manipulation.
Jul 30, 2014 11:05PM
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Greed at the top is the problem.


What should be a stream of money flowing down to the bottom is nothing more than a dripping faucet.

Jul 31, 2014 10:40AM
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so I haven't seen any blaming of Ukraine or Argentina so far today. they blame on  anything except the P/E's and the CEO's and other insiders stock options.
Aug 1, 2014 9:12AM
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unemployment rate is climbing despite obama and the media telling us that tons of jobs were created and the economy is strong.

 

if its strong, then why is the rate going up?

Jul 30, 2014 9:23PM
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Why read it-- cash out and protest it. When the nation rises up to BBQ investors, don't be on the business end of the spatula. QE... you WILL be paying us back with interest. 
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