Goldilocks Jobs Outweighing Ego Battle

Yesterday afternoon’s fireworks were quite engrossing, but they proved to be only an entertaining sideshow ahead of today’s main event.  With the verbal fisticuffs between Elon Musk and President Trump fading into the background, the May jobs report took center stage this morning.  Although the numbers put a damper on the bond market, stock and currency traders found enough to like in today’s report.

The headline Nonfarms Payrolls report, showing a gain of 139,000, beat the consensus estimate of 126k (it was 130k before Wednesday’s ADP report), and the Unemployment Rate remained steady at 4.2%, matching estimates.  Both stocks and bond yields zoomed after the data was released.  But some inconvenient facts lurked behind those rosy statistics.

For starters, April’s data was revised lower by 30k, and March’s was apparently lowered by an additional 65k, making a two-month net revision of 95k.  You don’t need to be a mathematician to realize that a -95k revision is far larger than a 13k beat.  The Labor Force Participation Rate dipped to 62.4% from 62.6%, which helps bolster the Unemployment Rate, since that only counts people actively in the labor force.  Also, Average Hourly Earnings rose by 0.4%, above last month’s 0.2% and the 0.3% consensus. 

It’s tempting to think of today’s release as a “Goldilocks” jobs report, not too hot, not too cold.  That said, I’d reverse the order of the temperatures.  The three-month rise in payrolls was not too cold, the rise in labor costs was not too hot, and the unemployment rate was just right. 

Taken as a whole, this gives no reason for the Federal Reserve to move anytime soon.  The labor economy is showing us that while it is not in robust health at the moment, it does not require immediate intervention – not with a 4.2% unemployment rate and rising wages.  We’ve long contended that stock traders should prefer a solid economy over on weak enough to require rate cuts.  This is playing out in markets this morning.  Earlier this week, Fed Funds futures were pricing in a full rate cut by the September FOMC meeting.  According to CME FedWatch, that probability is now down to 54%.  The IBKR ForecastTrader agrees, with a 54% probability that rates will not be above 4.125% by then. 

That said, the President doesn’t agree.  He stated that he would like to see the Fed cut rates by 1%.  It’s hard to imagine Chair Powell will acquiesce to that suggestion, especially since he must realize that he is almost certain not to be reappointed after his term ends no matter what. 

But for most investors, they’d much rather see the President focused on the economy rather than an unproductive fight with his biggest financial supporter during his campaign.  The repercussions of that tit-for-tat spat moved far beyond the confines of Tesla (TSLA) stock.  That stock understandably fell -14%, but it put a damper on a wide range of speculative assets.  For example, Coreweave (CRWV), which had been on a huge tear, fell -17%. Bitcoin, of which TSLA is a substantial holder, flirted with the $100,000 level overnight.  Futures had already begun to recover in the pre-market once it became clear that cooler heads were prevailing – at least for now.  .  It’s good that markets can focus on the economy rather than a highly entertaining but thoroughly unproductive spat.