Rather than run with the quick trip to the insane realm of make-believe that stock and bond markets have made a lot of round-trips to over the past year, I suggested earlier this week that we hold both of the market-ecstasy job reports from earlier this week at bay until we see if today’s report confirmed them or showed them to be just one more headfake. Then I’d parse out what all these reports really mean in the weekend Deeper Dive.
I don’t know if that final analysis will even be necessary because today’s hiring report came in so blistering hot by contrast to the others as to convince both stock and bond markets on their own that they had started repositioning in the wrong direction, which caused them to solidly dial back any rate-cut hopes for the upcoming Fed meeting and July meeting and bet on September as being the first cut. That is still, of course, ridiculously optimistic; but it, at least, kicks this week’s earlier fever back out of the markets … for now until they find a new reason to bet on Fed actions that are not going to happen.
It is interesting to read some of the summary statements about today’s job numbers that came in way above all expectations and about how wrong market enthusiasm earlier this week was in thinking the Fed would soon have to cut rates to save labor:
US job growth surged in May and wages accelerated, prompting traders to push back the expected timing of Federal Reserve interest-rate cuts.
No surprise here that this badly broken labor market keeps playing tricks on anyone who thinks labor is tight because the economy is strong and that labor should be delighted. If I do go into labor in my Deeper Dive, I’ll dig into why labor is far from happy. For now, I’m going to focus on the markets’ delirious swing back and forth this week.
First, the basic data we are talking about from what is commonly called “the establishment” report: (Understanding it always contains the Biden government’s most gloriously cooked numbers … or any other administration’s best look, but they seem to be a lot rosier in the last few years than all other reports.)
Nonfarm payrolls advanced 272,000 last month, a Bureau of Labor Statistics report showed Friday, beating all projections in a Bloomberg survey of economists. Average hourly earnings climbed 0.4% from April and 4.1% from a year ago, both picking up from the prior report.
Clearly, from the Fed’s standpoint and the way markets that are dependent on being fed by the Fed will look at these numbers, the climb in hourly earnings doesn’t look good for a rate cut. It looks like wage inflation.
On the other hand,
… the unemployment rate — which is derived from a separate survey — increased to 4% from 3.9%, rising to that level for the first time in over two years.
That looks good for a rate cut because 4% is the Maginot line I’ve been talking about at which a recession would likely begin immediately based on the history of how much unemployment rises above its cyclical low before we zoom into a recession. However, a recession will mean a hard landing, but the shortsighted market is choosing to believe that won’t happen.
Referring to those higher wages and the above-expectations boost in added payrolls, the Yahoo! Finance article states …
strength risks keeping inflationary pressures stubborn, which will likely reinforce the Fed’s cautious stance on monetary policy as officials debate just how restrictive rates are….
This is one of the last major reports Fed officials will see before next week’s meeting, when they’re widely forecast to keep borrowing costs at a two-decade high. A closely watched inflation report will be released on the morning of their Wednesday decision.
As for the markets’ response …
The S&P 500 opened [and ended] lower, Treasuries sold off and the dollar strengthened after the release. Traders trimmed bets on how much the Fed will cut rates this year, dialing back expectations from earlier in the week as recent data on manufacturing and job openings came in softer than anticipated.
And here’s an interesting little statement about how the Fed leans harder on this report—the most manipulated of labor metrics—than others and how that will, as I’ve been saying for a couple of years, leave Powell surprised in a bad way down the road:
The Fed, which appears to have underplayed the measurement issues plaguing the establishment survey, likely will be more influenced by the strength in nonfarm payrolls [in this report]. That increases the risk that, down the line, Fed Chair Jerome Powell will be confronted with the sort of “unexpected” labor-market weakness that he said could precipitate rate cuts.
In other words, these flawed reports will keep him tightening too long into the deepening recession so that, by the time he figures it out, he will be surprised to find out how weak labor really is.
The report smashed through the consensus view that today’s numbers would come in around 190,000 new hires and blew past April’s reported 160,000.
And with all of that, the bond market got its head knocked back in the right place and shot the 10YR Treasury yield 15 basis points back up, which is a big jump in the slow bond market for a single day.
I’ll close with this comment because its the first one I’ve read in the mainstream media that puts someone squarely in my camp about all this nonsense:
“I’ve been a little flummoxed at the parlor game of when will the Fed start cutting,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “I’ve been more in the camp that neither of the components of the Fed’s dual mandate are pointing to the need to start cutting, and higher-for-longer means nothing could happen this year.”
You and me both, Liz. Nice to have company.