The markets continue to be choppy and sensitive to every piece of news that comes out. Yesterday was no different. The market was up in pre-market trading after the PPI report showed that it dropped from 8.7% to 8.4% year-over-year. The FOMC meeting minutes were released at 2 pm and that rally was also short-lived. We eventually closed lower on the day, as shown by the 5-minute SPY chart below.
The markets wanted to wait for the CPI and jobless claims numbers released today. The consensus is a year-over-year decrease in the CPI from 8.3% to 8.1%. At least it’s not being published on a Friday. Nothing good happens on Fridays this year.
Now, let’s look at the jobless claims for a moment. I’ve said many times that I wouldn’t look at anything until jobless claims in a single week reach 300k. Right now the 4-week moving average is 206.5k. I’ve also mentioned how no one wants to admit it, but that the market wants to see unemployment rise to help bring inflation down faster. But if you look at the Fed’s meeting minutes – they are being upfront about their opinion on the job market. And it may not be what you think.
Keep reading to find out where the Fed believes the job market will be over the next few years.
One reason why the Fed has to keep aggressively raising interest rates is that they are projecting that the job market will remain strong through 2025. Here’s their projection from the September statement.
If the unemployment rate stabilizes and stays around 4% over the next couple of years, that will only continue to add to the inflationary pressures on the economy. Even if we do enter a global recession, the Fed’s highest estimate for unemployment next year is 5%. The median projection for next year is about 4.5%, which is only a 1% increase from the current levels. To put that into perspective, the unemployment rate hit 10% after the financial crisis in 2008 and peaked at 14.7% during the pandemic.
Sure, I know what you’re thinking… This is the same Fed that said inflation was going to be transitory, so how valuable are their projections about the unemployment rate?
If the Fed isn’t expecting unemployment to change, they are left with cranking up interest rates until demand decreases enough that prices of goods and services retreat.
That brings us to the 10-year treasury yield. It came close to trading near 4% – levels we haven’t seen since 2010. The steep climb in treasury rates has been one of the factors why stocks haven’t been able to find footing during any attempt at a rally. A strong dollar and good economic data continue to reinforce the “good news is actually bad news” dynamic we have going on right now.
Ok, here’s your trade idea of the day.
Biogen (BIIB) does have earnings coming up on October 26th but has risen during the 4th quarter in 20 of the last 31 years, giving the last quarter of the year a 64% win rate.
Biogen popped recently on news of their successful Alzheimer’s drug. The stock is trading at $253.67 and its 20-day moving average is around $235.
The 18-NOV 22 options give us the potential for a put credit spread. The $230/225 put spread, which is under the 20-SMA, is showing a credit of $120 per spread for every $380 invested, offering nearly a 3:1 risk-to-reward ratio. There’s a 27% probability that BIIB will close below $230 by the November expiration date, giving this spread a 73% chance of expiring worthless. Be careful of earnings though!
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