BAD NEWS IS GOOD NEWS

Stocks surged higher today in spite of a weak jobs report. The Dow is currently up 299 points and the SPX is up 1.1%. The best performing sectors are tech (+2%), consumer discretionary (+1.5%) and communications services (+1.4%). Financials is the lone sector in the red—bank stocks are down on lower interest rates. The VIX Index is up slightly to trade around 16. European stock markets closed up about 1% and Most of Asia was higher overnight. Commodities are mixed. WTI crude oil rebounded to $54/barrel after taking a massive beating over the last six weeks. The bond market is rejoicing this morning on falling interest rates. Treasuries are up across the board, and even junk bonds are rallying. The 10-year Treasury yield dipped to 2.09% and is now at levels last seen in September 2017.

In the twisted logic of short-term traders, today’s rally is a direct result of the jobs report encouraging traders to believe that the Federal Reserve will almost certainly be forced to cut interest rates. In the words of CNBC’s Josh Brown, “we are now rate-cut junkies.” Nevermind the fact that looser monetary policy is necessitated by slowing economic growth. So bad news is good news. Lower short-term interest rate expectations may boost stock P/E ratios, but they won’t help the fundamentals of the economy. Don’t expect the stock market to continue rallying on bad news.

Nonfarm payrolls increased only 75,000 in May compared with economists’ consensus forecast of 175,000. In addition, March & April payrolls were downwardly revised by a net 75,000 jobs. May’s shortfall was largely due to government payrolls contracting by 75,000 and private sector retail payrolls falling by 7,600. Hiring activity is slowing, even though the unemployment rate held at an incredibly low 3.6%. Wage growth unexpectedly slowed a bit to 3.1% y/y vs. 3.2% in the prior month. Bloomberg economists posit that “trade tensions are starting to extract a larger toll on the domestic economy.” In the immediate aftermath of the report, the dollar weakened and Treasury yields fell. This report isn’t alarming, but it was just bad enough to convince traders that the Fed will respond with a .25% rate cut in July, and may one or two more cuts by year-end.


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