The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Too strong labor
Futures were slightly lower in the premarket but markets were calm until nonfarm payrolls (+172k vs +88k est and +179k prior revised from +115k). Interest rates jumped, as did the Dollar, while the equity futures dropped. Fed-hiking predictions showed up in the Fed Funds futures market and chatter about a tighter Fed policy to fight inflation spread. With inflation pressures on everyone’s mind thanks to crude, and a tight labor market due to an accelerating economy, investors reacted in the old school way, where good news is bad news. Equity selling momentum built over the day as most stock investors used this as the perfect excuse to take risk off the table. The S&P lost almost 2.7% by the close. Capital flow was expectably heavy at 134%.
So today was a fundamental catalyst that favored the bears. The market was overbought and sentiment was euphoric. May nonfarm payrolls was the straw to break the camel’s back. The question is whether dip-buyers will pounce on Monday or if we’re in for a bearish stretch of trading.
The sentimental pendulum changed direction today. Chart-watchers will note that there’s a lot of downside remaining until the usual moving averages suggest getting longer. The 200-day MA is 7155. The 100 and 50 are 6995 and 6858 respectively. If that’s the kind of downside ahead of us, we’re going to see sentiment get pretty negative toot sweet.
Personally, I don’t think we’re going down that far. The market got a little spooked by the hypothetical of a Fed-hiking policy path. That is quite a tall order. It’s certainly not impossible but I think it’s a longshot.
If the Fed makes noises about being patient, watching the data, anticipating lower inflation with a resolution to the US/Iran conflict, markets will return to risk-taking. The Fed makes its next decision on June 17th, not very far away. It would not surprise me if Fed Governor or two make some market-calming comments Monday. We’ll see.
One last thing, while a hot jobs market has historically influenced the Fed to be biased to hiking, we have experienced a lower unemployment rate over the past 4 years without seeing wage-driven inflation. That fear, as well as the policy response, has roots in the 70s and has been debated since then. We could be in a new economic regime where both policy-makers and investors no longer see a robust labor market as a trigger of inflation.
My point is that if the labor market is strong, both the Fed and the market could make peace with that and not think that higher rates were necessary. It will eventually come down to the CPI and PPI. The next data points for those arrive Wednesday and Thursday respectively.
Have a great weekend. See you Monday.
-Mike
Visdom Market Commentary
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