Some Quick Thoughts After Goldilocks’ Jobs

Although I have a major commitment outside the office today, I couldn’t let the markets’ reaction to today’s jobs report go without comment.  Thus, today’s article will be brief and somewhat off-the-cuff.

• Yesterday we wrote that we needed a “Goldilocks” report, somewhere around consensus.  On balance that’s what we got.  The headline Payrolls number was in the ballpark (142k vs 165k), though 2-month revisions were quite large (-86k).  Balancing that out, we had the Unemployment Rate fall to 4.2% as expected, and Average Hourly Earnings rose more than expected at 0.4% (vs 0.3% exp).   My read is that the pace of hiring has clearly slowed, but we’re not firing either.  From a dual mandate point of view, they can certainly assert that we remain closer to maximum employment than not.

• That’s why Fed Funds futures show basically a coin flip for a 50bp cut in the FOMC meeting that occurs in a week and a half.  There’s nothing sufficient in today’s report to push us in either direction.  It’s also why after 2-year yields plunged by 9 basis points after the number, the gain is down to about 1bp now

• We will need to listen carefully to the Fed talking heads next week before the quiet period.  The market tends to ignore the ensemble cast in favor of the leading man (Powell), but since this is a Fed that prefers consensus and dislikes surprising investors, we need as many clues as we can get.  Put it this way: if the odds for a cut are split 50/50 between 25 and 50bp, then by definition, half the market will be surprised.  Maybe next week’s CPI and PPI reports will add clarity

• Someone asked me this morning if the soft-landing narrative is in peril.  I’m not sure why (especially given the paucity of precedents for them).  The AtlantaFed GDPNow model projects 2.1% GDP growth.  That is indeed consistent with a soft landing.  An unemployment rate of 4.2% is something historically enviable, though it is indeed above its lows.  And if we should doubt a soft landing, how can we expect double-digit earnings growth for the S&P 500 next year? 

US Unemployment Rate Since 1948

Source: St. Louis Federal Reserve

• As for the “monetary policy is too restrictive” argument, my retort is “based upon what?”  A stock market that is in spitting distance of all-time highs?  A corporate bond market that absorbed $80bn in new issuance in three days this week without blinking?  We’ve all become liquidity addicts, hoping desperately for a fresh dose whether we really need it or not.

• Re VIX – The Cboe Volatility Index (VIX) remains relatively firm after a dip this morning.  The dip in VIX made sense – remember, VIX is constructed to reflect the market’s best estimate for volatility over the coming 30 days (not as a fear gauge).  Thus, when we put a potential volatility-causing event in the rear-view mirror, it’s normal to see VIX dip.  But with the Fed meeting a toss-up, traders began placing additional focus on the “in-play” FOMC meeting in a week-and-a-half.  The firm VIX tells me that institutional investors are still seeking volatility protection ahead of that event, though not aggressively.