The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Weaker jobs
Nonfarm payrolls (-23k vs +80k est & +20k prior revised from +57k) were surprisingly weak. Yields fell immediately and sharply. This reaction was expected. Unexpectedly, stocks rallied immediately and sharply. The S&P opened about +25 and wandered around in the green all day. Crude prices barely moved. The Dollar weakened a fair amount. Precious metals rallied well.
The easy interpretation of today’s data is that the job market is weak, and has been weakening for at while. This means the Fed cannot only focus on it’s inflation mandate but also its labor one. This means that the Fed must hold its rates or tilt towards an easing bias, depending on coming data. That coming data, if today’s labor data is an indication, will likely show easing inflation and softening economic activity.
This interpretation explains the bond market reaction very well. The bond market had been very worried about inflation and a hiking Fed. Now it backs off that view and starts to price for lower rates.
The stock market reaction is a bit of a headscratcher. A reduction in net jobs suggests significant economic weakness and a potential for a recession. That should be quite bearish for stocks yet that didn’t happen. The stock market rallied in anticipation of a dovish Fed path and lower rates across the Treasury curve.
That the stock market shrugged of a recession risk is the interesting part. Why are stocks so confident in a non-recessionary future? Corporate earnings and visibility suggests no economic weakness around the corner. Credit spreads and default rates also suggest a healthy economy. Perhaps stock investors are latching onto those datapoints more than the weak labor market data?
Personally, I think I agree with that interpretation. I do not think a recession is coming. That said, I don’t discount the possibility as negligible either. So I am a bit concerned that the stock market only saw what it wanted from today’s labor data.
As usual, we’re looking forward to the next significant datapoints to give us clarity. CPI (3.4% est vs 3.5% prior) prints on the 12th and PPI (4.9% est vs 5.5% prior) prints on the 13th.
Economic health concerns will have to wait for a bit. The inflation picture is key. If the inflation data is cooler than expected, there will be a complete repricing of the Fed’s path. Bond yields should drop again, the rates market will erase hiking expectations, and the stock market should continue to run.
Things look rosy for stocks in the short term.
See you Monday, have a great weekend.
-Mike
Visdom Market Commentary
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