Some things about current market conditions still seem strange, no matter how many times they have happened before. This morning, for example, the Bureau of Labor Statistics (BLS) released a great jobs report for June, and stocks tumbled. An understandable reaction in the circumstances, but still disconcerting to anyone who has followed markets for a while and expects them to reflect economic conditions.
The economy added 224,000 jobs last month, way above the 165,000 expected by traders, and that wasn’t the only good news. Wages grew by 3.1% year on year, just below expectations. That is right in the sweet spot for wages, which seem to be rising at a decent, sustainable rate but are far from being a really dangerous driver to inflation.
The only possibly bad news was that the headline unemployment rate rose to 3.7%, but that was down to good conditions bringing more people into the work force and that number is still right around a 50-year low.
And yet, nobody who has been paying attention were surprised to see stock futures immediately move lower on the news. The Dow opened around 100 points below yesterday’s close, with all the other major indices also posting early losses, and headed lower from there.
Most people, I’m sure, are familiar with the rationale here; a strong jobs report makes a rate cut from the Fed less likely, which is bad for stocks.
In fact, though, if you look at Fed funds futures, the market is still pricing in the virtual certainty of a rate cut at this month’s meeting. What has changed is that the chances of that being fifty basis points rather than twenty-five have gone down, but was a half percent cut ever really warranted or likely?
This jobs report is of course just one data point, and Fed Chair Jerome Powell has, just like his predecessors, frequently warned against reading too much into one set of numbers. Still, it is yet another indication that any cut that does come is more about the Fed appeasing the market and the President than it is about conditions demanding it.
There are legitimate concerns about the longer-term effects of the trade war and Brexit, and even before tariffs were put in place, slowing Chinese growth was casting doubts on the rate of expansion around the world.
In other words, there are worries about the future, but then, there always are. So far, worries or not, the U.S. economy remains relatively strong. In those circumstances, small, incremental adjustments to short-term rates can be made in either direction without much risk, but bigger, sudden changes are a different matter.
The push for fifty basis points this month and or multiple cuts this year is still there though, even if such a move increases the long-term risk, so why is that the case?
The obvious answer is that those advocating for drastic action are doing so for their own short-term interests. The President and his supporters know that there is political advantage to a soaring stock market, and Wall Street wants the market higher too. What should be worrying though is that they feel that can only be achieved by Fed action, suggesting a belief that without that, stocks will plateau at these levels at best.
The biggest takeaway from this jobs report and the market's reaction is that neither of them matter that much. Q2 earnings will start hitting the wire soon, and they are what will decide the future, not this jobs report.
If these upcoming earnings are weaker than expected, we could be in for a rough couple of weeks, but if they remain strong, the push for more cuts will fade and stocks will power higher in a much more sustainable way. Either way, we will move back to a market moved by more logical factors, and that is a welcome development.