JOBS REPORT CHEERS STOCK MARKET

US stocks opened higher again today (Dow +104 pts; SPX +.45%; Nasdaq +.5%) marking a seven-day rally to fresh highs. Gains are concentrated in technology and consumer-related sectors this morning. The VIX fear gauge fell back to 14.5, the lowest level since the Covid Crisis hit in early 2020. Any lingering Covid fear has vanished. The bond market is also catching a bid, with long-term Treasuries up .3% and junk corporates up about .1%.

When bond prices rise, yields fall. So the 10-year Treasury Note yield fell back to 1.44% this morning in the wake of a very positive jobs report (see below). That’s odd because good economic news typically causes the bond market to sell off. What gives? In the current environment it’s not whether we get good or bad news, but how that news will affect Federal Reserve stimulus. Yes, the Fed is that important. Stimulus has kept interest rates low and propped up asset (i.e. real estate, stocks, bonds) prices. But at some point, the economic recovery will be strong enough, and inflation high enough, to encourage the Fed to reduce that stimulus. Many investors believe the Fed will begin “tapering” late this year and expect interest rates to head higher. But with the 10-year yield at a mere 1.44%, it seems clear that the bond market doesn’t believe the Fed will take the punch bowl away any time soon.

June’s Employment Situation Report looks broadly positive. Non-farm payrolls surged by 850,000 in the month compared with economists’ consensus estimate of about 700,000. So after losing roughly 22 million jobs during the early stages of the Covid Crisis, the economy has now recovered 15 million jobs. And there are now more than enough open job positions to account for the rest. The headline unemployment rate unexpectedly ticked up to 5.9%, but the under-employment rate—including discouraged job-seekers and those working part-time because they can’t find full-time work—sank below 10% for the first time since March 2020. Wages are picking up as well, posting 3.6% y/y growth. That’s about equal with the 2019 pre-Covid rate of wage growth. There is still some weirdery in the numbers due to Covid’s disruption of normal season trends, and stimulus. So one has to take this report with a grain of salt. But the bottom line, according to JP Morgan’s David Kelly, is this: “tremendous demand for labor out there, and it’s hard to hire workers.” In the next couple of months most states will allow enhanced unemployment benefits to expire, and that should bring more people into the workforce.