The futures for the major indices were modestly lower ahead of the release of the June employment report, but they weakened further after the release.
Currently, the S&P futures are down 13 points and are trading 0.4% below fair value. The Nasdaq 100 futures are down 47 points and are trading 0.5% below fair value. The Dow Jones Industrial Average futures are down 88 points and are trading 0.3% below fair value.
By most measures, the June employment report was a good report -- good from the standpoint that it revealed broad-based job gains and a pickup in the labor force participation rate, and good from the standpoint that it had that Goldilocks vibe to it again in that it showed strong job growth and no significant wage-based inflation pressure.
The key takeaway from the report is that it greatly reduces the likelihood of the Fed cutting the target range for the fed funds rate by 50 basis points at the July 30-31 FOMC meeting... AND... it could potentially keep the Fed from cutting rates at all.
The Treasury market looks to be picking up on those policy-setting scenarios. The 2-yr note yield is up nine basis points to 1.84%, pacing a sell-off across the curve. The 10-yr note yield is up five basis points to 2.00%.
Other notable headlines from the Employment Situation Report are as follows:
- June nonfarm payrolls increased by 224,000 (Briefing.com consensus 160,000). Over the past three months, job gains have averaged 171,000 per month
- May nonfarm payrolls revised to 72,000 from 75,000
- April nonfarm payrolls revised to 216,000 from 224,000
- June private sector payrolls increased by 191,000 (Briefing.com consensus 147,000)
- May private sector payrolls revised to 83,000 from 90,000
- April private sector payrolls revised to 195,000 from 205,000
- June unemployment rate was 3.7% (Briefing.com consensus 3.6%), versus 3.6% in May
- Persons unemployed for 27 weeks or more accounted for 23.7% of the unemployed versus 22.4% in May
- The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 7.2%, versus 7.1% in May
- June average hourly earnings were up 0.2% (Briefing.com consensus +0.3%), after increasing an upwardly revised 0.3% (from 0.2%) in May
- Over the last 12 months, average hourly earnings have risen 3.1%, versus 3.2% for the 12 months ending in May
- The average workweek in June was 34.4 hours (Briefing.com consensus 34.4), unchanged from May
- Manufacturing workweek was up 0.1 hour to 40.7 hours
- Factory overtime was unchanged at 3.4 hours
- The labor force participation rate was 62.9% in June versus 62.8% in May
The weakness in the futures market is a picture of rate-cut expectations getting reined in, but it also goes to show some of the convoluted thinking of the market in recent days and weeks.
That thinking incorporated a belief that bad economic news was good news because it would mean a more aggressive rate cut from the Federal Reserve. Today's report, though, was "too good," which makes it "too bad" for a greedy market that wanted a bigger rate cut than it justifiably deserved.
The CME FedWatch Tool shows how the screws have been turned on the rate-cut outlook. Prior to the release of the jobs report, there was a 25.6% probability of a 50 basis points rate cut in July, yet that has been reduced to 11.1% in the wake of the report.
Strikingly, the market still places a 100% probability on a 25 basis points cut in July.