Fed Funds Futures

Wow. The unemployment rate actually fell from 10.2% to 10% according to this morning’s surprise payrolls number. Employers cut only 11,000 jobs in November. The median estimate was 125,000. The closest guess was that 30,000 jobs were lost.
The strong number appears to have been the result of hiring at service companies. Defined as banks, insurance companies, restaurants and retailers, the service sector added 58,000 workers. The government chipped in for 7,000. 
Growth in services is a good sign for consumer spending. Even though retail sales numbers were a bit disappointing, there still seems to be momentum building for consumer spending.
*****Of course, every time we get some positive economic data, investors begin to look ahead to when the economy will be strong enough for interest rates to rise and stimulus policies to be reeled in.
Fed funds futures – a futures contract that allows traders to wager on when and how much interest rates will rise – are moving. Traders are pricing in an 18% chance that interest rates will rise in March, and nearly a 53% chance that rates will rise in June 2010.
Fed Chief Bernanke has been adamant that rates will stay low for a while. But that doesn’t mean forever. And we know he’s already testing the waters for removing stimulus.
The best possible outcome here is that employment and the economy grows without sparking inflation and the Fed can raise rates without having to acknowledge that inflation is a threat. *****That’s probably wishful thinking, though. Oil prices are very sensitive to economic numbers, even more so than to the U.S. dollar. When the economy shows signs of strength, oil prices automatically rise because investors assume a stronger economy means more demand for oil.
It’s no surprise that oil prices are higher today. And as the economy improves, tthey will go even higher. I’d say it’s likely that by the time the Fed raises rates, oil prices will be over $100 a barrel and we’ll be seeing oil-related costs (like food) on the rise.
It’s hard to imagine oil trading significantly lower at this point. Oil either rallies as the economy improves or it at least stays stable as the economy struggles and the dollar remains weak.
*****Gold will be another asset to watch carefully. Gold’s off sharply today as the dollar rallies on the good employment news. But like oil, it’s hard to paint a truly bearish picture for gold going forward.
It’s likely that inflation will pick up at some point, and that will support gold prices. Plus, we are seeing central banks from India, Russia and China adding to their gold holdings to help diversify their foreign currency reserves. And finally, it should not be forgotten that global economy is far from healed.
New shocks to the economic system could very easily arise. Europe could enter a recession, U.S. banks could falter again under the weight of delinquent loans and foreclosures, commercial real estate could collapse – there are any number of crisis situations that remain in the realm of possibility. And any of these could send gold prices much higher.
Even more importantly for investors, the longer gold prices remain at or near record prices, the more gold mining companies can lock in future gold production at high prices. There is a profit explosion coming for gold mining companies…
Suppose a miner can mine gold for $800 an ounce and sell it for $1100. Its profit is $300 an ounce. Suppose gold rises 9% to $1200 an ounce? Now our miner’s profit margin just jumped 33% to $400 an ounce.
Gold mining stocks are headed higher. And I just recommended what has to be the cheapest gold mining stock on the planet to my SmallCapInvestor PRO readers. It’s only $1 a share, it has 1.5 million ounces of gold reserves, and the market cap is just $189 million. That’s $1.7 billion worth of gold selling for just $189 million!

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