Jobs Go Up, Stocks and Bonds Don’t

Yesterday turned out to be a stunner.  As we noted yesterday, stock and bond traders picked out the parts of Fed Governor Christopher Waller’s speech that favored a bullish approach.  There’s nothing particularly new about that – it happened pretty much every time that former Chair Powell stepped in front of a microphone.  The magnitude of the rally, however, was a bit of a surprise given the relative ambiguity of Waller’s comments.  Today we see a bit of a pullback after a surprisingly strong Nonfarm Payrolls report.

The payrolls report was indeed a bit of a shocker.  Nonfarm Payrolls rose by 162,000, far exceeding the 55,000 consensus and surpassing even the highest published estimate in that consensus (125K).  Furthermore, last month’s -23,000 was revised to +21,000.  Although there was some suspicion that Waller had seen the statistics in advance, I have been told by a source I trust that the numbers are only released to those who “need to know” at 3pm on the day prior to the report.  Considering this statement, “I don’t expect that the employment data will deviate much from what we have been seeing,” it seems quite clear that he hadn’t.

Actually, the rest of the data didn’t deviate much from what we have been seeing.  The Unemployment Rate was stable at 4.1%, as expected, even as the Labor Force Participation Rate rose to 61.6% from 61.4%, 0.1% above the 61.5% consensus.  Average Hourly Earnings rose by 0.3%, matching consensus but above last month’s reported 0.1%, which was revised up to 0.2%. 

Yet the headline Nonfarm Payrolls number grabbed the bulk of the attention, and rightly so.  The stronger-than-expected headline prompted an audible “woo-hoo” from one of my fellow panelists, a well-respected economist, on live TV when the number was released.  The immediate reaction led to a 6-basis-point jump in short-term rates, though that has since faded to just about 3 bp around noon.  Rate hike expectations for November rose from about 51% to 61% today, according to CME FedWatch, though IBKR Prediction Markets remain more sanguine with a 47% “Yes” for a hike at that meeting. 

(I remain steadfast in my opinion that the first hike won’t come until December, after the midterm elections.  The President clearly favors lower rates, and while there is no chance of a rate cut anytime soon, the Administration seems adamantly opposed to higher rates.  Even a highly independent Fed is not deaf to political concerns.  Thus, I don’t think Chair Warsh is eager to draw the political fire that a pre-election rate hike would bring.  Barring a huge inflation surprise, inertia seems like the safer short-term course.)

The equity markets seemed resigned to trading modestly lower, seemingly more because that’s what they’re supposed to do rather than because of any real concern.  Although the S&P 500 is down by about 0.3%, that means that today’s dip is less than half of yesterday’s gain.  Meanwhile, the Nasdaq 100 (NDX) has been slightly higher for most of the session, thanks to demand for semiconductor and other tech stocks.  Although it seems as though traders are eager to go home before the Labor Day weekend, it would not surprise me if we saw a late advance that takes advantage of the pre-holiday volume.  It depends on who is still plugged in on the last Friday of the summer season and whether they have the risk tolerance to take long positions home with them over a long weekend.