The Big Picture
Briefing.com Summary:
*Market euphoria was reined in, as soft payroll data silenced the risk-party vibe.
*May and June saw some unnerving downward revisions.
*The Fed is looking flat-footed with its policy—and the market ran with that belief.
The month of July saw some scorching temperatures across the country, but apparently there was a cold front that hit the labor market. That was the message of the Employment Situation Report, which suggested the market has a "situation" on its hands. That would be weak job growth.
It's in the Details
First, here are some key details:
- Nonfarm payrolls rose by just 73,000 in July, while private nonfarm payrolls increased by a modest 83,000.
- Revisions showed employment in May and June combined was 285,000 lower than previously reported.
- The three-month average for total nonfarm payrolls is a scant 35,000.
- Persons unemployed for 27 weeks or more accounted for 24.9% of the unemployed versus 23.3% in June.
- The U-6 unemployment rate, which accounts for underemployed workers, increased to 7.9% from 7.7% in June.
None of that is uplifting from an employment standpoint. One important offset is that wage growth did not deteriorate in conjunction with the growth in payrolls. Average hourly earnings increased 0.3% month-over-month and were up 3.9% year-over-year versus 3.8% in June.
The latter is a victory for U.S. workers, but no one was running any victory laps following the July employment report. The stock market wasn't, the Treasury market wasn't, and the U.S. dollar wasn't. For good measure, the Fed certainly wasn't either, nor should it have been.
The lackluster payrolls data rightfully stoked concerns that the Fed is behind the curve with its policy stance. The market picked up on that notion right away. Treasury yields screamed lower after the report, while the probability of a rate cut at the September and October FOMC meetings raced higher.
- The 2-yr note yield, which is more sensitive to changes in the fed funds rate, was down 25 basis points for the day to 3.70%. The 10-yr note yield was down 14 basis points to 4.22%.
- The probability of a 25 basis point cut to 4.00-4.25% at the September FOMC meeting increased to 80.8% from 37.7% a day ago.
- The probability of a 25 basis point cut to 3.75-4.00% at the October FOMC meeting increased to 58.7% from 13.7% a day ago.
Lower Treasury yields are typically supportive for stocks, but that wasn't the case after the employment report. Why? Because the soft payroll data for July, coupled with downward revisions to May and June that showed nominal growth in nonfarm payrolls, created doubts about whether the economic and earnings growth outlook is as bright as envisaged when the stock market wasn't seeing anything in the hard data to blur its vision.
Briefing.com Insight
The employment report, which falls into the category of hard data, was not blinding, but it was a speck in the market's eye. Accordingly, it reined in some of the stock market's risk appetite, which has been voracious.
That was a practical response, given how stretched valuations had gotten on some speculative assumptions in many cases that it will be smooth sailing ahead, notwithstanding the tariff actions.
It begs the question, though, as to whether the stock market would have struggled even if the report had a more uplifting tone to it. The market is facing a seasonality hurdle, and the price action had already started to look a bit shaky. To wit: the market retreated after Microsoft (MSFT) and Meta Platforms (META) posted some terrific results and Figma (FIG) had a smashing debut, soaring as much as 278% above its IPO price on its first day of trading.
Few can argue with the contention that the market was primed for a pullback after the run it has had off the April lows. Such a run can be viewed as "exhausted" when stocks sell off on good news.
The earnings reports from Microsoft and Meta were undeniably good news. The payroll data was not.
The stock market should have sold off on the employment report. It challenged the richly valued market's growth assumptions; it made the Fed look bad for sticking with its higher policy rate; and it rattled consumer sentiment, which is wrapped up in the labor market outlook.
In hindsight, that outlook has dimmed.
