This morning, ahead of a live broadcast timed with the release of the jobs report, I had a discussion with an economist about the possible outcomes from today’s number. We decided that a “good” report, showing solid labor growth would be a positive for stocks, since a solid economy should be received well. We also decided that a “bad” report, showing weakness in the labor force, would be greeted warmly by traders who relish the prospect of rate cuts. The former proved to be the case, even if the better-than-expected headlines may have obscured some issues under the surface.
By now, I’ll assume you’ve seen the basics. Nonfarm Payrolls far exceeded estimates with a jump of 144k. The published consensus was 106k, down from 110k just yesterday, so that was clearly a beat. Meanwhile, the Unemployment Rate fell to 4.1%, below both the 4.3% consensus and last month’s 4.2%. Taken at face value, this was a blockbuster. Rate cut expectations understandably plummeted. The CME FedWatch now shows a roughly 5% chance for a cut in July and 75% for September. The former was anticipated at roughly 25% yesterday and the latter was considered a certainty by that metric. We see something similar on IBKR Forecast Trader, with 89% “YES” for a July rate target above 4.125% and 75% “YES” for above 3.875%. Accordingly, Treasury yields fell, with 2-Year yields falling as much as 10 basis points, and the dollar rose against a basket of currencies.
But here are the inconvenient facts that investors will eventually need to reckon with. Notably, the rise in the headline Nonfarm Payrolls was despite a drop in Private Payrolls to 74k, well below both last month’s 137k and the 100k consensus. This has two implications: first, that most of the hiring gains were by state and local governments, and thus less likely to be sustained than if companies were doing the hiring; and second, since ADP tends to service large corporations (like mine), it means that the drop in payrolls they reported yesterday was not as inaccurate as it might appear. Also notable, the dip in Unemployment was partly the result of a drop in the labor force participation rate. That is the denominator in the unemployment calculation, so it helps the key metric, but it is not promising for the economic outlook overall.
All that said, it’s a half-day ahead of a long weekend. We noted yesterday that the options market was pricing in a rally today, and thus it delivered. It’s a bit easier for a MOMO and FOMO driven market to rally when we have many market participants looking forward to fireworks, barbecues, and vacations rather than their usual concerns. Combine that with the early expiry of weekly options, and the stage was set for an advance.
We can quibble about the nuances of the employment report next week. We can also question whether there might be a “sell the news” reaction to the budget bill that might be on its way to passage by the time you read this. And we can wonder about how the market might react to earnings season when it arrives in a bit over a week. For now, it’s about traders getting enough reason to continue the rally for another hour or so. And then I think my wife is sending me out to buy food for a cookout…
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Complacency. The day of reckoning is coming. The erosion of institutions, rule of law, economy will cost everything that made the country exceptional. Dollar fall is just the beginning.
Is that you? How are your shorts doing?