That bad-good numbers that goosed the markets

Stocks surged on Friday after a debt ceiling package sailed through the Senate. The labor market is strong according to the latest figures, but investors are unsure if that is a good thing or a bad thing.

Pick your poison. Friday was supposed to be a key inflection point for markets. There was quite a bit of tension built up leading up to the monthly labor report from the Government. Odds of another rate hike were all over the place last week leaving things virtually up in the air. The one certainty last week was that the US would avoid a debt default as lawmakers pressed a debt ceiling package through both chambers. WHILE YOU CHILLED OVER THE WEEKEND, the President signed the bill, which was expected. Based on all the rhetoric which escaped the mouths of FOMC members leading up to the press blackout left most traders making the odds of a fresh hike similar to a coin toss. However, for traders hoping for a hard Fed pivot, at least they got some dovish-sounding talk from some of the known Fed doves, and even some, let’s call it, less harsh talk from one known Fed hawk. Still up in the air, though.

On Friday we were to receive the last big economic number before the FOMC meeting begins next week. The official Fed line is that rising labor costs are the last great wall to scale before it can consider bringing rates back into non-restrictive territory. Rising labor costs are the result of many companies competing for too few available laborers. Workers sensing this tend to hold out from accepting higher jobs, hoping for higher wages. Higher wages paid by companies increase their costs, which ultimately forces them to keep prices high… you know, inflation. That is why the Fed has been quite vocal about wanting the unemployment rate to bounce off its nearly-60-year low to some 4.5% before it could even consider pivoting. Earlier last week, the labor market upped the stakes by coming in with a much higher-than-expected job vacancies number, illustrating companies’ desperation for workers. Leading up to Friday’s number, the narrative was that a strong labor number would cement the potential for a rate hike either next week or next month. That would, in turn, throw the recently burgeoning equity markets into a tailspin. The recent rise in markets, led by tech, is attributed to not just recent AI hype, but also the rising hope that the Fed is close to an interest rate pivot. So, out came those numbers, and the new payrolls number was not just hotter than expected, but rather WAY hotter than expected. To the surprise of almost all, the equity markets rallied BIG bringing the S&P within eyeshot of a bull market. That’s right, “BULL” market. How can this be given the strong print?

Though most investors focused on the new Nonfarm Payrolls numbers, there were other subtleties that changed the first-impression quality of the release, the most notable being the Unemployment Rate, which came in higher than expected and +0.3 higher than last month at 3.7%. Though that number is still not at the 4.5% rate that the Fed is hoping for, it is closer than expected. You may recall that, in Friday’s note, I briefly spoke about a less popular item on the release which warranted some focus. Average Hourly Earnings is not as popular in media, but it is in fact THE WHOLE REASON THAT THE FED IS FOCUSED ON THE LABOR MARKET. You know, rising wages. That number came in less than expected. There is yet another dimension to this complex release. Most investors focus on the Nonfarm Payrolls and Unemployment Rate numbers, which is understandable. Those numbers are calculated by surveying businesses and employment records. However, there is another part of the release that you are not likely to have come across. That is the Household Survey in which similar numbers are calculated by surveying households, as its name implies. That survey showed that only 154k new jobs were created last month, a stark contrast to the headline 339k that was circulated in the mainstream media on Friday. The good news is that, ultimately, once analysts looked more closely at the numbers, they began to refer to it as a Goldilocks print. New jobs are being created (economy remains healthy), the unemployment rate is going up (Fed is happy), wages are rising less than expected (inflation fighters rejoice), and from a different perspective, new hires were not so hot (eases the blow to Fed hawks). There is a lot riding on what the Fed does next as equities continue to climb and higher interest rates begin to have broader economic impacts. Stay well hydrated, it is going to be a hot summer on Wall Street.

FRIDAY’S MARKETS

Stocks soared on Friday after a debt ceiling deal was sent to the Oval Office and the monthly jobs figure showed signs of a strong economy. The S&P500 rose by +1.45%, the Dow Jones Industrial Average jumped by +2.12%, the Nasdaq Composite Index traded higher by +1.07%, and the Russell 2000 Index popped by +3.56%. Bonds slipped and 10-Year Treasury Note yields gained +9 basis points to 3.69%. Cryptos climbed by +1.87% and Bitcoin advanced by +1.17%. The S&P500 ESG Index added +1.43%.

NEXT UP

• Factory Orders (April) are expected to come in with a +0.8% rise after climbing by a revised +0.4% in March.
• Durable Goods Orders (April) are expected to have risen by +1.1% in line with prior estimates.
• ISM Services Index (May) may have risen to 52.4 from 51.9.
• The week ahead: MBA Mortgage Applications, Trade Balance, Consumer Credit, weekly jobs numbers, and Wholesale Trade. Please refer to the attached economic release calendar for times and details.