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Written by: Tim Pierotti
Just the Facts:
Non-Farm Payrolls came in at 22k vs a consensus expectation of 75k
Revisions were negative again
The Household Survey (from which the unemployment rate is derived) came in at 288K (very volatile series) jobs gained but because the participation rate ticked up, the unemployment rate ticked up to 4.3% from 4.2%
The work week contracted a bit which is another sign of softening demand for labor
Average Hourly Earnings rose at a 3.7% rate which was also slightly below expectations, but still a robust number.
Manufacturing has now shed jobs for 4 straight months
Construction has now shed jobs for 3 straight months
Market Reaction:
The most bullish market reaction is in the bond market where we are now getting to a likelihood of 3 cuts this year: Sept, Oct and Dec.
Importantly, so far there is very little curve steepening. In other words, the ten-year has rallied almost as much as the front end and the ten-year has moved all the way down to below 4.1%. It appears many market speculators were positioned for more steepening and they are scrambling to get onsides.
Our Thoughts:
Markets appear to be discounting an economy that is weak enough to allow the Fed to aggressively cut rates, but not so weak that a recession that would impact corporate earnings might be looming. So, we have an economy that has been gradually slowing for three years and now appears to be accelerating somewhat toward greater weakness. Financial conditions are already extremely loose (tight credit spreads, equities up, dollar down) on the way to getting even looser.
We don’t see an economy that is falling apart. The labor market is shrinking (aging demographics and deportations) to such a degree that economists estimate that we only need to create somewhere around 30k to 50k jobs to keep the unemployment rate steady. The big move lower in long term bond yields will pull mortgage rates below 6.5% which has been a level that increases demand for housing. We also continue to think that the Fed has been far too complacent about rising inflation. Our view remains that we will continue to be in a mildly stagflationary environment where growth hovers around flat to up slightly while inflation will continue to rise.
Related: Powell’s Dilemma: The Market’s Blind Spot on Inflation, Tariffs, and Rate Cuts