Good morning contrarians! It is Thursday, April 6.
Yesterday saw a softer-than-anticipated reading of ADP payrolls. Bonds rallied as risk assets, primarily tech stocks, sold off. The Nasdaq (QQQ 0.00%↑) dropped 1%. Not sure how much it has to go to drop back out of bull market territory?
Today’s briefing is free. Skip to the bottom line and set-up at the bottom of this page, and vote in the poll.
State of Play
As of 0625, all is pretty quiet:
Stock futures are mixed, with the Russell 2000 that tracks small caps pointing to modest gains of 0.4%. The Nasdaq is down 0.4%. S&P 500 (SPY 0.00%↑) and Dow are unchanged;
Cryptos are dropping a bit, with Bitcoin down 2%. Insert joke about cryptos being a reliable currency of exchange and store of value;
Bonds are unchanged. The 2-year yield is 3.75%. The 10-year is 3.30%. These are significantly lower than they were at the start of the week and the yield curve is narrowing again;
Commodities aren’t moving much. WTI crude oil is trading ~$80.50/barrel. Copper is up <1%.
Economic Data Releases
It’s Thursday so we’ll get initial jobless claims at 0830. These weekly reports have increased in importance with the latest soft readings from labor markets. Yesterday ADP payrolls, the day prior the JOLTS report.
Economists still expect the same 200,000 jobless claims they’ve been expecting (roughly) for some time now. Last week it was 198,000. At some point, with the way things are going, this figure will produce a negative surprise and markets will react, perhaps violently. We don’t know when that day will come, except that it will be on a Thursday. It could be today.
Earnings
Before the open at 0930 we’ll hear from Lamb Weston (LW 0.00%↑), Constellation Brands (STZ 0.00%↑), and Levi Strauss (LEVI 0.00%↑), among others.
Highlights after the close include WD-40 (WDFC 0.00%↑).
Non-Farm Payrolls
This isn’t until tomorrow but seeing how there won’t be a briefing tomorrow due to the market holiday, we might as well cover this now. Right now the expectation is for 240,000 payrolls, noticeably less than the 311,000 seen last month, which would keep the unemployment rate at 3.6%. Average hourly earnings are expected to drop too, to 4.3% from 4.6%.
Markets are closed tomorrow so not sure where this will be felt. Bond markets are closed as well, in fact they close early today (at 1400). Foreign exchange markets will trade as those never close. So watch the US dollar. Anything that leads to a conclusion that the Fed will raise rates (or not cut them) will be bullish for the USD. If there is a soft report you can expect the dollar to sell off versus other major currencies.
The Bottom Line
Just be careful what you wish for when it comes to labor market slack. Yes, if this trend gathers pace then it will certainly make it easier for the Fed to eventually cut rates. But unemployment brings all kinds of ills, both economic and social. At some point it becomes a self-perpetuating cycle as economic growth falls off a cliff. We aren’t there yet. We may not get there for some time. When we do, we can be sure the Fed will ride in and cut rates — assuming inflation is under control, that is.
That’s a pretty important caveat the bond market may be underestimating. The Fed still has egg on their face from the whole 'transitory inflation’ thing. They’ve been doing everything they can to support price stability and bring down inflation over the past year or so. But they still need to be able to declare victory. Inflation data, at least consumer inflation data, is a lagging indicator and if it doesn’t get to 2% then maybe the Fed won’t cut rates as quickly as people suspect. It certainly wouldn’t be the first time the Fed is guilty of fighting the last war.
The Set-Up
If you think we’re on a direct course for the elusive Fed pivot, then you will certainly want to increase your exposure to bonds, especially at the short end of the curve. Even after this rally there should be ample upside in such a scenario;
This would also require faith in the coming arrival of an economic downturn, which would make cyclical sectors a bad place to be;
If you’re of the belief that there is still juice in this economic cycle, that the labor market slack is just a temporary blip, and that there is no more drama outstanding from the nation’s (or the world’s) banking sector, then you will want to get long things like tech stocks and other risk assets. Regional banks still probably have plenty of upside in this scenario.
There may be (and probably are) other variables to consider as investment decisions are never quite this simple. Do your own research. Make your own decisions.
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