GOOD NEWS IS BAD NEWS

The major stock market averages opened lower this morning after a stronger than expected jobs report. The Dow is currently down 106 pts and the SPX is down .55%. The financials sectors is up about .25% but all other sectors are lower in early trading. European stock markets closed down by about .6% today. In the wake of the jobs report the dollar strengthened and commodities fell. Gold is down 1.5%, copper is down about 1% and WTI crude oil fell back to $57.28/barrel. In addition, the bond market reacted by selling off. The 10-year Treasury yield climbed to 2.05% from 1.95% in the prior trading session. Whether municipals or corporates of Treasuries, the bond market is down sharply today. The iShares 20+ Year Treasury Bond ETF (TLT) fell 1.6%.

The Labor Department’s Employment Situation Report riled markets today. The economy generated 224,000 new jobs in June, far in excess of economists’ expectations. That’s the best monthly tally since January and proves that the job market is still very strong. What’s more, the rebound in job growth was broad-based across manufacturing, professional services, construction, healthcare and transportation. The unemployment rate climbed back to 3.7% as more people entered the workforce. But that’s still considered very low. Average hourly earnings, which have been gently accelerating over the past two years, held steady at 3.1% y/y growth—not too hot and not too cold.

So why, if we’ve just received some good news about the resilience of the US economy in the face of a trade war and slowing global economic growth, is the stock market selling off? It’s because better economic data throws cold water on the idea that the Federal Reserve needs to stimulate via interest rate cuts. Fed officials have sounded more amenable to rate cuts lately because of the uncertainty generated by the Trump Administration’s trade war with China. But it’s going to be difficult for the Fed to justify monetary stimulus when the economy is holding its own. I should point out that a good part of the stock market’s recent move to new highs is directly attributable to the expectation for two or three Fed rate cuts before the end of the year. So if we can now price in only one cut, traders will sell stock in the short run. And remember, it’s not investors but short-term traders who are driving the stock market day-to-day.

Speaking of the trade war, China’s Ministry of Commerce says no trade deal can be struck unless the US is willing to completely remove trade tariffs on goods it imports from China. “China’s attitude on that is clear and consistent.” The trouble is, the recent partial truce at the G-20 Summit did not stipulate the goal of removing all tariffs. President Trump said he wouldn’t impose any new tariffs pending resumption of formal trade negotiations.


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