Talks Are Fine Unless There’s a Food Fight

Andrew Wilkinson talks with Steve Sosnick and Jose Torres about what’s driving markets higher—despite mixed economic signals. They cover bond yields, labor data, and why investors are staying optimistic as long as there’s no bad news.

Summary – IBKR Podcasts Ep. 265

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson

U.S. stocks ended the week strong—June the fifth—with the S&P 500 Index back above 6,000 for the first time since the 2nd of March, driven by a not-unhealthy labor market reading on Friday. Investors seemed relieved to get some positive hard news. To discuss the latest economic data and markets, I’m joined by Chief Market Strategist Steve Sosnick and Senior Economist Jose Torres. Welcome to both of you. 

Steve Sosnick

Thank you, Andrew. Good to see you. 

Jose Torres
Good to see both of you, as always. 

Andrew Wilkinson

Jose, let’s start with your— I want to start with your take on the labor data, which showed a mixed bag last week. However, the non-farm payroll reading on Friday for May—where does the data land, and where does it leave your view? 

Jose Torres

I think the economic expansion is continuing. We’re not seeing robust hiring like we saw in 2021 or 2022, but these kinds of reports are quite strong—roughly 140,000. That’s a good clip of expansion. Now, from a sector breadth perspective, we had two segments at 135,000 jobs: that was leisure and hospitality, which is a cyclical sector, and then you also had private education and health services, a non-cyclical sector. 

Government was reduced—that was a headwind, and that’s going to maintain a headwind. We know that the current administration is looking to reduce the size of the federal workforce. 

Wage pressures were hot. Part of that story, folks, was the reduction in labor supply and the decline in the participation rate. That has to do with immigration restrictiveness from the Trump administration, as well as discouraged workers—or discouraged job seekers—leaving the labor force. So there’s… hiring is continuing. However, there are some inflationary expectations—implications, rather—within the report. 

Andrew Wilkinson

Okay, now I want to come back to that in a moment. Steve, let’s turn to you. Are stock investors enamored by the labor data, or is it something else that’s driving the market back above 6,000 and fast en route to record highs, perhaps? 

Steve Sosnick

Andrew, the labor data was good enough to not upset the market. That’s really what it came down to. My read of it was: good enough. 

There—I think, to Jose’s points—there’s some erosion in there. Also, we beat—the estimate got taken down from 130 to 126 after the ADP number. And ADP—I think you agree, Jose—is at best an imperfect predictor of the Friday numbers. And we actually really didn’t come in very far from consensus. And the three-month revision was down 97,000. 

Beating by about 13,000 jobs and then taking away 97—you don’t have to be much of a math whiz to figure that there is some erosion in there, but not enough to really upset. It’s not enough to move the Fed. 

As Jose mentioned, monthly labor costs went up by more than expected. The unemployment rate—regardless of the fact that the denominator was helped by the labor force participation rate—still, 4.2 is not the number that screams, “Hey, we gotta do something here.” 

So I think basically the market was encouraged enough. And basically, any news that’s not horrible is good news for the market in its psychological state right now. 

Andrew Wilkinson 

Jose, let’s turn back to that ADP report. You told our friends at Yahoo Finance last week—straight after the much softer report—that you agreed with a Truth Social post from the President that demanded of the Fed an immediate 1% cut in interest rates. So, on reflection, how do you feel now? 

Jose Torres

I feel… I agree with a 25 basis point reduction, not a full 100 basis points—just 25. I thought that, you have some inflationary risk going forward, with immigration restrictiveness—which I thought two months ago was going to be a lot better than expected. But with the administration, it tends to be volatile. It tends to go on and off. 

And right now, it appears as though the administration is on in terms of deportations. Now in terms of tariffs—that we’ve got to wait and see. We know today’s Monday the 9th. We know that folks—Beijing and Washington leaders—are meeting in London, so we’ve got to wait to hear what went on there. 

But overall, unfortunately, the base effects of inflation going forward are actually negative. So the core PCE and the PCE—because of the year-on-year comps and just where May and June land—they’re going to start ticking up higher. 

So I was in favor of sneaking in a 25 basis point reduction, maybe in June or July, because the headline PCE was down at 2.1%. Now that’s probably going to start ticking higher, like I said. So the path to a cut here is becoming increasingly narrow. 

Andrew Wilkinson

Gotcha. Steve, Jose just mentioned there the London negotiations between the U.S. and China. Do you think there’s more good news to come out of those trade talks for investors? 

Steve Sosnick

Again, it doesn’t matter—as long as it’s not bad. 

Andrew Wilkinson

That’s right.

Steve Sosnick

This is really what’s going on. The two of them can agree on what they’re going to eat for lunch, and that’ll be perceived as a positive development. And so the markets will like that. 

And as Jose mentioned, we’re taping this on June 9th. July 9th is the expiration date of the 10% sort of reprieve. And there are zillions of deals—there’s a lot of deals that have to get negotiated. 

So again, but it doesn’t… the market mindset is so positive right now, it doesn’t really matter—as long as we don’t get reports that they left the room screaming at each other and both sides are not talking. 

Remember what happened in the first administration? Pretty much every night, the pattern was actually quite similar—because markets would do whatever they were going to do overnight, and then somehow you’d get some unsourced story that trade negotiations between the U.S. and China went well—even if they weren’t necessarily said to be talking—and then we’d get a rally and off we’d go. 

The same psychology applies here. So it doesn’t really… again, as long as we don’t hear about a food fight or people storming out of meetings… as long as the end result is they agree to keep talking, the market will be fine. The stock market will be fine with that. 

Andrew Wilkinson 

What are your thoughts on bonds and the dollar right now? Of course, yields backed up again on Friday after the payroll number, and the dollar seems to be weakening at the margins. What are your thoughts? 

Steve Sosnick

The bond market really, to me, is holding the keys to going forward for the stock market, because the momentum trade is very much in place. And as I’ve written numerous times, if you’re enamored strictly with momentum, you’re basically saying, “I don’t—fundamentals can take a back seat. I don’t care. It’s all about price action.” But fundamentals always do reassert themselves. 

And one of those fundamentals—you get the sense bond prices are falling and bond yields are rising—is that there’s not a lot of demand, particularly from international investors, for our auctions. That will present a problem. We’re not there yet. Quite frankly, we’re always one bad auction away from that, but we’re not there yet. 

Okay, you want to know if the trade talks went badly? You see no Chinese participation in a Treasury auction—one auction—and off we go. That’s why I’m very closely watching the shape of the yield curve, how steep we get, because that tells you the relative ability for people to want to put money in the U.S. long term again. 

Kind of insane, because the U.S. can always pay back. But the question is: how much is that money going to be worth in real terms? And so, how much of a premium is going to be put on there? 

What I don’t want to see going forward are days where we see yields higher and the dollar lower, because that tells me money is flowing out of the dollar. All things being equal, a currency with a higher yield should be worth more than its peers. And particularly the yield spread between U.S. short-term paper—and particularly the ECB, now having just done another cut—is quite substantial. But yet, the dollar is not making up any ground against the euro. 

We did see a stronger dollar on Friday when yields backed up dramatically. That was actually, in my mind, okay. Because that was just telling you the market was reassessing its probabilities about short-term rate cuts in the near future. That’s all right. That was normal. 

It’s the days where we get the opposite—where rates go up and the dollar goes down—those are the ones that create a little bit of a nuisance, in my mind. And I’m very happy to hear Jose’s points on this. 

Jose Torres

I’m going to shift gears a little bit—still related to the bond market—but the recent conflict between Tesla CEO Elon Musk and the Commander in Chief actually opens up more upside for the equity market, albeit downside for the fixed income market. 

Because austerity measures—so, government spending reductions—tend to be really bad for risk assets over time, if you look at it from a 100-year time period across different geographies. And those significant austerity measures that folks are scared about are not happening. We’re going to have fiscal stimulus. 

I told CNBC on New Year’s Day, January 1st, that Trump was not a fiscal hawk. And that’s what we’re seeing, and that’s part of the reason why the market is rallying so hard. The pairing back of that fiscal stimulus is a headwind. 

Now, shifting back to your point, Steve—that could push yields higher, particularly the 10-year to 5%. That’s a big number that can scare equity traders. But I think we could be talking about QE in the next six to eighteen months if yields at the long end start to climb up significantly. 

We’ve been doing— we did QT for about two years, and now the Fed is pausing; it’s trimming the asset program. So we’ll see what happens going forward. But for equity investors, you have fiscal stimulus, you have a lot of those supply-side benefits that the Republicans are trying to push—like milder regulations, lighter taxation, lower energy costs—which have helped so much this year on the inflationary front, countering the goods inflation. 

And then a risky gamble of onshoring manufacturing production—we don’t know if those measures are going to result in significant employment in the U.S. and significant economic buoyancy. We hope so, but that’s a question mark. 

Andrew Wilkinson

Jose, I should ask you a very final question here. With the somewhat softening in the labor market, what is the forecast contract market telling us for this week’s initial claims—any movement at the edges? 

Jose Torres

Yeah, the initial claims—we’ve been starting to see the 260,000 threshold. That’s been starting to… the nose has been creeping down into the 80s from the 90s. So our forecast trader participants—they’re looking for higher claims. 210 for a while was going in the 80s, and now that’s way out of the money. That’s like a 97%, 98% on the “Yes.” The 220s are still in play. 

I’ve been recommending the 220–260 short strangle that we do in the Forecast Trader market, which is pairing a “Yes” under your expectation and a “No” above your expectation. So that’s what I’ve been doing—the 220–260s. 

The reason why I moved up the lower threshold from 210 to 220 is because the 210 just became way too expensive. So maybe soon we’ll start moving up to 230–270. We’ll see. 

Andrew Wilkinson

Very good. So, that channel in the labor market drifting a little bit higher—indicating some potential softness going ahead. Don’t forget to have a look at the Interactive Brokers website for the forecast event contract, and to subscribe to this channel wherever you download your podcasts from. Thanks for joining me, gentlemen. 

Steve Sosnick

Thank you so much. Great to talk to you guys. 

Jose Torres

Thank you. Great to see you.