Stock Markets and Shock Jobs Numbers: Not Good Enough?

Key Concepts

• Non-Farm Payrolls (NFP): A key indicator of U.S. labor market health, measuring the net change in the number of jobs added or lost in the economy excluding farm employment.
• BLS Revisions: Periodic adjustments made by the Bureau of Labor Statistics (BLS) to previously released employment data, reflecting more complete information.
• Powell Haircut: A method of adjusting NFP data by subtracting an estimated overcounting factor (around 60K) as indicated by Fed Chair Powell.
• Trade Policy Uncertainty Index: A measure of global trade policy uncertainty, reflecting the volatility and unpredictability of trade relations.
• Basis Points (bps): A unit of measurement used for interest rates, where 100 bps equals 1%.
• FOMC: Federal Open Market Committee, the body within the Federal Reserve System that sets monetary policy.
• Idiosyncratic Stories: Events or trends specific to individual assets (like Yen or Bitcoin) and not necessarily tied to broader macroeconomic factors.
• 50% Retracement Level: A technical analysis concept where a price retraces 50% of a previous move, often acting as a support or resistance level.

Macro Money: Jobs Report Analysis & Market Implications

I. Market Reaction to the Jobs Report

Following the release of the jobs report, markets exhibited a mixed reaction. The S&P 500 showed minimal movement, ending nominally up, while the NASDAQ saw a slight increase of 0.23%. Notably, interest rates rose across the board, with increases observed in both the 10-year and 2-year Treasury yields, suggesting a hawkish interpretation of the data. However, the lack of a significant sell-off in stocks indicated the market wasn’t entirely convinced of a hawkish shift. The Yen continued to weaken, driven by Japan’s fiscal expansion and potential BOJ policy adjustments, while Bitcoin experienced further declines. The dollar remained relatively stable, with a slight increase against the Euro. Crude oil saw nominal gains but remained in a consolidation phase, and gold edged up 1.7%, consolidating around the 50% retracement level of its previous sell-off.

II. Jobs Report Data & Initial Interpretation

The jobs report indicated the addition of 130,000 non-farm payrolls, nearly double the expected 70,000. The unemployment rate decreased from 4.4% to 4.3%, also exceeding expectations. Applying the “Powell haircut” (subtracting 60,000 to account for BLS overcounting), the adjusted figure was 70,000, still above the average figures cited by Fed Chair Powell during previous rate cut considerations (around 20,000). This initially suggested the data didn’t support further rate cuts, aligning with the rise in yields. However, the resilience of the stock market, despite diminishing rate cut potential, raised questions about its underlying strength.

III. The Significance of BLS Revisions

A critical aspect of the report was the substantial downward revisions to previously reported job growth figures. The 2024 estimate was revised down from 2 million to 1.5 million jobs added, and the 2025 estimate was slashed from 584,000 to just 181,000. This level of revision is typically associated with recessionary periods, as highlighted by comparisons to data during the COVID-19 pandemic and the 2008-2009 financial crisis. I Spivac noted that the Fed appeared to have anticipated these revisions, proactively initiating rate cuts before the revised data was officially released, demonstrating accurate forecasting.

IV. Data Quality Concerns & Labor Market Composition

The speaker highlighted concerns about the quality of the data, attributing some of the revisions to staffing shortages at the BLS and increased reliance on imputed data rather than actual observations. The 12-month average of downside revisions is approaching levels seen during recessions. Furthermore, the job gains were heavily concentrated in the healthcare sector, while other sectors, particularly financial services, experienced job losses. This skewed composition raised doubts about the overall health of the labor market.

V. Market Expectations & Fed Policy Divergence

Despite the seemingly positive headline number, the market’s initial reaction and subsequent stabilization suggest skepticism about the data’s accuracy and underlying strength. Markets still anticipate approximately 51 basis points of rate cuts in 2024 and 5 basis points in cuts for 2025, a more dovish outlook than the Fed’s current projection of only one rate cut for the year. This divergence is reflected in the S&P 500’s inability to break through resistance levels around 5,000, a pattern observed after Fed Chair Powell cautioned against extrapolating rate cuts in October.

VI. The Role of Policy Uncertainty & AI-Driven Growth

The speaker argued that the market’s desire for rate cuts is primarily driven by a need for a “backstop” against heightened policy uncertainty, as measured by the World Trade Policy Uncertainty Index. This index shows a level of volatility not seen in the past decade, even exceeding levels during the Trump administration’s trade disputes and the COVID-19 lockdowns. The decline in global trade volumes in 2023, the first since the pandemic, underscores the impact of this uncertainty. The current market rally is largely fueled by the AI sector, which is heavily reliant on global supply chains and seamless trade, making it particularly vulnerable to policy disruptions. A quarter of AI activity is in Europe, more than a quarter in Asia, and the rest in the US.

VII. Trading Strategy & Positioning

I Spivac outlined his current trading positions, including short dollar exposure, a short position in the Australian dollar (AUD), a long position in Brazilian assets, short out-of-the-money puts in gold (GLD) for long exposure, a short position in Bitcoin, and long positions in MSOS (marijuana stocks) anticipating potential positive news in the midterm elections. He also mentioned reducing bond positions due to a lack of immediate upward momentum in yields, but remaining open to re-entering if yields rise further. He favors a short bias heading into the upcoming CPI data release, citing a favorable risk-reward ratio.

Notable Quote:

“If you're wrong [on the short side], you're wrong fast. And if you're right, you have an asymmetric possibility for a trade.” – I Spivac, regarding his trading strategy.

Conclusion:

The jobs report presented a complex picture, with a seemingly positive headline number masking significant underlying weaknesses and data quality concerns. The market’s reaction suggests skepticism about the data’s accuracy and a continued desire for rate cuts as insurance against heightened policy uncertainty and the vulnerabilities of the AI-driven economy. The speaker’s analysis highlights the importance of looking beyond headline figures and considering the broader macroeconomic context when interpreting economic data and formulating trading strategies. The upcoming CPI data release is identified as a key inflection point that could further clarify the economic outlook and market direction.