Stocks rebounded without much conviction last Friday in response to the April jobs report, which came in largely as expected: Payrolls expanded by 223,000 and the unemployment rate fell to 5.4%, the lowest level since early 2008. Job gains were concentrated in white-collar and health care occupations, construction saw modest gains, and manufacturing was largely flat.
1. Stocks Rallied Because the Economic News Was Mostly Bad
On the surface, it looks like investors were celebrating a thaw for labor after a winter stall. But a look at the details suggests otherwise. Overtime, hours worked, and wage growth all disappointed; suggesting Fed officials will pull both a June and a September rate hike off the table — which is the real reason the bulls got so excited. Yeah, another bad news is good news trifecta.
2. All of the Fireworks Happened in the First half Hour
The 1.4% gain Friday in the broad market might have sounded like a lot, but all the excitement was over soon after the gap-up open, as bulls were not able to push the ball any farther the rest of the session. The advance helped all but the Nasdaq finish with a slight gain for the week.
Treasury bonds, crude oil, precious metals, and the dollar all finished up, though well off their highs. Clearly, hopes for a continuation of ultra-cheap money set off a round of panic buying and short-covering but little “real money” buying.
3. Investors Are Still Net Sellers of Stocks and Bonds
Bank of America Merrill Lynch data shows the public and institutions are still skeptical. The past week saw $20 billion in outflows from equity and high-yield bond funds — the most of 2015 to date — while U.S. equity funds saw their largest capital outflow since last year. It’s quite puzzling to many smart observers how the market can advance at all with fund flows materially negative.
4. Yellen Comments In the Rearview Mirror, June Meeting in Focus
So much for the fear and loathing generated Thursday when Federal chief Janet Yellen blurted out that “equity market valuations at this point generally are quite high” in an inappropriate public forum. As Bruce Springsteen said, it’s hard to be a saint in the city.
Back to the jobs numbers and the impact on the Fed: The futures market now puts the probability of a December rate hike at 51% (with increasing odds of an early 2016 rate hike).
Still, it’s worth remembering that stocks have been rattled recently by a surge in long global bond yields on account of rising inflation expectations. If the Fed waits too long for confirmation that the job market is really hitting on all cylinders, it risks amplifying this unwanted dynamic.
It’s not going to be an easy call when Fed policymakers gather for their next meeting in the middle of June. The data is so uneven that it backs both dovish and hawkish points of view.
5. Economists Are Worried About Wages and Inflation
Deutsche Bank chief U.S. economist Joseph LaVorgna sounded optimistic in a note to clients Friday afternoon, saying the April “labor market thaw” keeps the Fed on track for a September rate liftoff. Aneta Markowska at Societe Generale focused on the specter of a wage inflation increase later this year given the “significant uptick” in the wage and salary component of the Employment Cost Index during the first quarter.
On the other hand, Michelle Meyer at Bank of America Merrill Lynch said it “was another modestly disappointing report” while Standard Chartered economist Thomas Costerg told clients the “soft” April payroll report “sows doubt” that the economy hasn’t yet fully exited the headwinds that weighed on growth and job gains over the winter.
Philippa Dunne of the Liscio Report said that while April’s results represent a bounce back from March’s feeble performance, “there was less spring to the bounceback than one might have hoped.”
6. The Trading range Persists, For Now
For now, equity bulls have a chance to make a run to fresh record highs as the Dow closes in on its early March peak of 18,300 — potentially breaking out of the trading range near 18,000 that it’s been stuck in since November. But frankly, they have been stymied there every time by sellers sitting like snipers on the ridgeline. Not sure why this time should be any different.
Remember that ranges continue until one side capitulates in the face of new information. With no new information emerging, expect the recent sideways action to keep up its frustrating pace.