Summer Slowdown Was A Headfake

Stocks opened higher this morning in reaction to a better than expected jobs report. Currently, the Dow is up 160 points and the S&P 500 is up .5%. Gold is trading modestly lower. WTI crude, which has been a downtrend for much of the year, climbed above $74/barrel. Bonds are selling off across the board, pushing yields higher.

The Employment Situation Report confirmed reaccelerating job growth in September. Payrolls jumped 254,000 last month compared with about 150,000 expected. Not only that, but previously reported July/August payrolls were upwardly revised by 72,000. The unemployment rate fell back to 4.1% and the under-employment rate ticked down to 7.7%. Average hourly earnings growth, which had been in a gradual downtrend, reaccelerated to an annual rate of 4.0%. The report’s details were nearly uniformly positive.

On one hand, this is great news because as Bloomberg News puts it, we can now “shed our paranoia about the US labor market and concede that the economy is looking fabulous.” Other data released this week corroborate that view. Research firm ISM’s services business index improved from what I’ll call lethargy to decent growth last month. And as Hightower’s Stephanie Link pointed out this morning, more jobs and better business activity will surely contribute to stronger corporate earnings.

On the other hand, this unexpected strength may end up lighting a fire under inflation again. And that could block further interest rate cuts by the Federal Reserve. Famed economist Mohamed El-Erian says this report proves inflation isn’t beaten, and the Fed has been “overly aggressive” with its recent rate cut. So we got yet another mini correction in the bond market to reset expectations for future Fed rate cuts.

Investors are really hoping to see some middle ground between growth & inflation. In a CNBC interview this morning, Bank of America’s Savita Subramanian said she believes we are enjoying a “Goldilocks” moment. Broadly speaking, that view is probably correct. But certainly on a day-to-day or week-to-week basis it may not feel that way. Markets have been very reactive this year, focused on trees rather than the forest. And so traders—especially on the bond side—are getting whip-sawed by individual economic reports. Rather than obsessing about the size and timing of the Fed’s next rate cut, we think it’s far more productive to take a broad view based on longer-term trends. And those trends are mainly positive.