The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Labor revision.
Futures traded up small in the premarket and headlines were tame. The S&P opened up a handful of points and bobbed around +5 until nonfarm payroll revisions came out (-911k vs -682k est & -818k prior). Equities sold off on the release as recession worries jumped into the conversation. Yields climbed, which was counterintuitive, and stocks slowly climbed over the afternoon. Capital flow didn’t reflect anything but a typical market day, printing 101%.
Despite concerns over the labor market’s health, investors went back to their usual business after digesting the data release. The market thinks the Fed will cut rates next week either 25 or 50 bips. The probabilities are currently 90% and 10% respectively. The 50-bip possibility showed up last week and has stuck around since.
It is unclear what the market will do if the Fed cuts 50 bips. Will the market value the stimulative consequences of 50 bips of easing or fret that the economic situation is even more dire than it thought? Fed messaging will have a lot of influence on market perceptions. The Fed release, whether 25 or 50 bips, will move the markets immediately and kickstart all kinds of narratives. However, the press conference will be more significant. There’s a lot of time from now until then but what-if scenarios are bouncing around the Street.
Inflation data tomorrow and Thursday will be significant for all the usual reasons but with economic fragility being front-and-center, I expect markets to be even more sensitive to inflation surprises. Bulls will need a couple of Goldilocks PPI and CPI prints. The odds probably favor Goldilocks prints but the risk is higher than usual.
We’re in a window of macro sensitivity. The key issue is the strength of the economy. PPI and CPI tell us about prices but indirectly tell us about economic activity. That’ll be the lens through which the market sees the prints.
See you tomorrow.
-Mike
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