We have a big jobs report on Friday.

As we discussed in my last note, the result of the Fed’s very restrictive policy rate has been damage to the labor market.

That damage has been revealed in the rate-of-change at which the unemployment rate is rising.  It’s at a speed that is consistent with the past four recessions.

And with that, the weak jobs data that was reported early last month (Aug. 2) was the signal to markets that the Fed had arrogantly held rates too high, for too long — and that perhaps aggressive rate cuts were coming, as the Fed finds itself cleaning up another policy mistake.

What else was revealed that day?

The Fed’s stubbornly hawkish policy over the past two-and-a-half years has created a vulnerability in global markets.

It was the persistent telegraphing by the Fed of high and stable relative interest rates in the U.S., that attracted capital from around the world, particularly from Japan (where investors borrowed yen cheaply, and invested in higher yielding and high return U.S. assets … i.e. “the carry trade”).

With that, we looked at this chart heading into that jobs report last month (from my July 25 note) and talked about the prospects of that trade reversing …

In this chart, you can see the dollar/yen exchange rate in purple, and the Nasdaq in orange. 

As you can also see the two have, no coincidence, tracked closely. 

The story of this chart above is 1) borrowing yen for (effectively) free, 2) converting that yen to dollars (dollar/yen goes up), and 3) investing those dollars in the highest quality dollar-denominated assets (U.S. Treasuries and the big tech oligopoly stocks).

As we know, the weak labor market picture early last month did indeed trigger a sharp unwind of this trade.  

And here is the update of this chart …

While stocks have made a full V-shaped recovery since that sharp unwind, USDJPY has not.

And with another check-up on the health of the job market coming down the pike this week, this divergence (within the white box in the chart above) looks likely to close in the direction of the purple line (i.e. stocks lower).