US Jobs Report: Will It Hurt the Stock Market?

Macro Money - Economic Data Analysis (February 2, 2024)

Key Concepts:

• Federal Reserve (Fed) Interest Rate Policy: The primary driver of market sentiment, with focus on potential rate cuts.
• Retail Sales: Indicator of consumer spending, showing a recent slowdown, particularly in motor vehicles and gasoline.
• Payroll Employment (Jobs Report): Key economic data point, expected to show a 70k rise, with unemployment at 4.0%.
• ADP Employment Change: Private sector employment estimate, significantly below expectations at 22k.
• Job Cuts: Increased in January, reaching levels not seen since 2009, signaling potential labor market weakness.
• Consumer Price Index (CPI): Upcoming data release expected to provide further clarity on inflation and Fed policy.
• ISM Figures: Indicate a buoyant service sector contributing to US economic growth.
• World Trade Policy Index: Measures uncertainty surrounding global trade, currently at elevated and volatile levels.
• Basis Points: Unit of measurement for interest rates (100 basis points = 1%).
• Overcounting (Powell's claim): Fed Chair Powell suggests the jobs numbers are inflated by approximately 60k on average.

I. Recent Economic Data & Market Reaction

The analysis begins with a focus on recent economic data releases and their impact on market speculation regarding Federal Reserve interest rate policy. The primary concern is whether the S&P 500 will experience significant movement. Overnight news included the retail sales report, which proved to be a disappointment, registering a flat result (-0.02%) compared to expectations of a 0.4% rise (following a 0.6% rise in November). This weakness was largely attributed to a 20% month-on-month slowdown in motor vehicle sales, alongside a deceleration in gasoline station sales after a surge in November (1.74%). Despite a strong January consumer confidence report from the University of Michigan, retail sales haven’t yet reflected this positive sentiment. The Robin Hood earnings report was deemed insignificant, mirroring the performance of Bitcoin and other firms in the crypto space.

II. The Jobs Report – A Closer Look

The delayed jobs report (due to the government shutdown) is expected to show a 70k increase in payrolls, slightly above the previous month’s 50k gain, with the unemployment rate remaining stable at 4.0%. While this appears to be a continuation of the recent trend, the impact of the record-setting government shutdown last year needs consideration. Chair Powell previously indicated the shutdown necessitated 75 basis points of easing, suggesting a need for labor market support. However, Powell also believes the jobs numbers are overcounted by approximately 60k on average. Applying this adjustment, the expected 70k rise translates to a more modest 10k gain, which, while not robust, is better than the 20k monthly loss Powell cited as a trigger for rate cuts last year. The average for the past 12 months is a 5k monthly loss. Therefore, the data, while not strong, doesn’t necessarily compel the Fed to cut rates aggressively.

III. Weakening Labor Market Indicators

Leading up to the jobs report, several indicators pointed to a softening labor market. The ADP employment change came in at 22k, significantly below the expected 40k – the weakest reading in three months. Job cuts in January also increased substantially, reaching levels not seen since 2009, according to Challenger, Gray & Christmas Inc. This surge in job cuts is considered unusual for January, suggesting companies finalized layoff plans in December. Furthermore, jobless claims increased in the final week of January, indicating that layoffs are beginning to impact unemployment figures. These factors collectively fueled expectations for Fed rate cuts, pushing the market to price in 58 basis points of cuts for the year, with two cuts firmly anticipated in June and September.

IV. Market Expectations vs. Fed Projections

Despite the weakening labor market data, the Fed’s December projections still indicate only one rate cut for the year. This divergence stems from stronger US economic growth indicators, particularly the buoyant service sector as measured by ISM figures. City Group data also shows US economic data consistently exceeding expectations since the beginning of the year. This creates a “paralyzing status quo” where the Fed and the market are at odds, lacking a clear catalyst to advance their respective positions. The S&P 500 has remained range-bound since October, when Chair Powell cautioned against overextrapolating rate cut expectations.

V. The Role of Trade Policy Uncertainty

The analysis highlights the significant role of trade policy uncertainty in driving market behavior. The World Trade Policy Index, reflecting President’s use of tariffs, demonstrates a higher degree of volatility compared to the Trump administration’s first term and the relatively stable trade environment during the COVID-19 lockdowns. This uncertainty has contributed to a decline in global trade volumes, marking the largest year-on-year drop since the 2008 financial crisis. The market’s desire for rate cuts isn’t solely about supporting the labor market or the economy, but rather about creating a “backstop” against the risks posed by this trade-related uncertainty, particularly given the globalized supply chains crucial for the AI buildout.

VI. Trading Positioning & Outlook

Ilia Spivac’s current trading positions reflect a cautious outlook:

• Short Dollar: Against the Pound and Euro, with positions maintained despite a recent pullback.
• Long Gold: Position maintained despite a recent pullback, structure continues to work.
• Short IBIT ETF: Short position on the iShares Bitcoin Trust ETF.
• Long Oil: Exposure maintained, favoring the long side.
• Short Equities: Short positions in S&P 500 and NASDAQ via puts, with longer duration on NASDAQ.

The outlook suggests a wait-and-see approach, anticipating that the upcoming CPI report will be the decisive factor in breaking the current market stalemate. A disappointing jobs number could lead to a reset lower within the existing range, anticipating the CPI data.

Notable Quote:

“What the markets want is not necessarily a backstop of the labor market as such or a backstop of an economy which frankly seems to be growing relatively strongly even though it's not minting jobs. What we have is a desire for this not to happen.” – Ilia Spivac, regarding the impact of trade policy uncertainty.

Conclusion:

The analysis paints a picture of a market caught between conflicting signals. While weakening labor market data fuels expectations for Fed rate cuts, stronger economic growth and a cautious Fed stance create a stalemate. The underlying driver of market anxiety appears to be uncertainty surrounding global trade policy, prompting a desire for cheap money as a safety net. The upcoming CPI report is expected to be the key catalyst for resolving this tension and determining the direction of the S&P 500. The current trading positions reflect a cautious approach, positioning for potential downside risk while acknowledging the possibility of a shift in sentiment.