Odd Jobs

Odd jobs.  Stocks rallied last Friday on strong employment numbers. Traders are unsure how the Fed will react to the positives and negatives of Friday’s numbers.

N O T E W O R T H Y

Who’s counting?  Ok, it’s Monday… no, it’s Tuesday morning, after a long holiday weekend and I am reviewing last Friday’s employment numbers for the umteenth time to see if I can find anything good or bad that might spur investors to something out of character.  I have written about that inflection point in which traders are unsure if good is bad or good is good, so with this latest employment number let’s recheck our tally.  First, as a reminder, let me explain the “bad is good” theory.  When economic releases miss their mark, investors are more hopeful that the Fed will remain accommodative.  Many Fed governors, including the Chairman, have said that weak employment is the last pandemic side effect that needs eradication before monetary policy can return to normal, and continued weakness in those numbers, can be viewed as a positive for those investors who would like to see the economy run hot.  Bad is good.  Conversely, good can be bad if, by applying the same Fed missives, investors perceive stronger-than-expected numbers to cause the Fed to speed up its normalization (a fancy Fed word that means tighten monetary policy, used because it sounds less ominous).  In a normal world, good economic numbers should be good for markets, right?  Well, kind of / sort of.  Let me explain a bit further.  Solid economic numbers mean that the economy is doing well today, but it is important to remember that stocks and bonds factor in the future… beyond today.  So, similar to how stocks rallied in the midst of the pandemic, factoring in the at-the-time recovery, stock investors today are attempting to factor in a world beyond the recovery.  That world, where the economy is fully recovered with employment back to pre-pandemic levels, is likely to include higher rates and yields with little or no Fed bond buying. Investors, who believe a non-accommodative Fed is bad, are likely to view positive economic numbers as being negative for stocks.  Last Friday’s monthly employment number was one of those numbers that is watched very closely not only by the Fed, but also investors who are attempting to tease out what the Fed’s next move will be.  Non Farm Payrolls came in at 850k, beating expectations, and significantly higher than last month’s additions.  That could be “good is bad,” but wait, let’s read further down the report.  The Unemployment Rate came in at 5.9%, worse than expectations of 5.6% AND last month’s 5.8%. That could be “bad is good” ,balancing out the strong payrolls number.  Let’s look for a tie breaker.  Average Hourly Earnings actually grew at a slower pace than the prior month (+0.3% versus +0.4%), indicating that wage pressure, a driver of that feared inflation, may be easing.  If inflation fears are easing, the Fed may not have to rush in and ease accommodations so quickly. It is getting a bit confusing, I know, but think that is a “good is good” driver.  In fact, I know it is, because the stock market said so, with the S&P500 elevating itself to a 7th straight new all-time high. Tomorrow we may get some more clues about the future beyond the recovery when the Fed releases the minutes from its last FOMC meeting.  Investors are hoping to get some more specifics on just how quickly the Bank will seek to curtail its bond purchases and when rate liftoff may occur.  For now, however, good is good… and, I suppose that is a good thing.

THE MARKETS

Stocks rose in Friday’s session cheered on by strong employment data.  The S&P500 climbed by +0.75% to yet another fresh high, the Dow Jones Industrial Average advanced by +0.44%, the Nasdaq Composite Index traded up by +0.81%, and the Russell 2000 Index fell by -1.01%.  Bonds rose and 10-year treasury yields gave up -3 basis points to 1.42%.  Cryptos slipped by -0.8% on continued technical weakness by Bitcoin and Ethereum.

NXT UP

– Market Services PMI (June) is expected to be 63.5 in line with flash estimates.

– ISM Services Index (June) may have pulled back slightly to 63.5 from 64.0.

– It will be a slow release week with some minor earnings trickling in before earnings season kicks in next week.  We will also get JOLTS Job Openings, Consumer Credit, and the FOMC Meeting Minutes  in the days ahead.  Please refer to the attached economic calendar for details.