This (the strong jobs report) changes everything!
EDITOR'S NOTE
I don't care what all the experts are saying. How can the Fed cut rates at the end of the month now?!
The June jobs report came out this morning and was incredibly strong. The U.S. added 224,000 jobs last month! That was waaaaaay above expectations of a 165,000 job gain.
And frankly, markets were expecting a downside miss. As one trader pointed out, the bond market's "whisper number" was more around 135,000. Meantime, most early morning notes were centered around how low the number would need to be to lock in a half-point rate cut at the Fed's July 30-31 meeting.
Let's recall, ADP's private sector report on Wednesday showed only a 102,000 gain for June. And we've already had two soft patches this year in terms of job gains, with both February and May showing less than 100,000 added. Plus, the ISM surveys, for manufacturing especially, have slowed in recent months amid all the tariff hikes.
So the real question has been whether all that was pointing to a broad economic slowdown/downturn, or not. Today's report certainly says not--or at least, not right now.
Okay sure, wage growth was slightly lower than expected. The job gains on average have moderated this year relative to last year--in the household survey, especially. The report was not super strong across the board, but it was definitely strong enough to dispel the slowdown narrative--and J.P. Morgan's Michael Feroli put it best in his reaction: "Well this is awkward."
Most awkward for the Fed. Feroli, like most, still expects a quarter-point rate cut at month end. "Asked why we might say something about 'insurance' and 'risk management' but the most compelling reason is simply that their signaling has been so strong," he wrote.
In other words, Feroli is saying the Fed will cut rates now just because it's basically already said it would. That's why there wasn't a bigger market reaction to the strong numbers this morning. The 10-year yield edged over 2% to around 2.05%. Fed funds futures have barely budged: they're still pricing in a 77% chance of a rate cut this month, versus 80% at the start of the week.
"If we are wrong in our expectation, then Powell will need to shift the narrative at next week's Congressional testimony," Feroli added.
Now, you could still make the case for lower rates based on one simple fact: the strong job growth over the last couple years has not led to a pickup in inflation. But, as I keep saying, this is not the case the Fed has been making.
Quite simply, they have talked about doing rate cuts "as needed to support the economy." They always frame it as "insurance" against a slowdown. It would be far more compelling and consistent of them to say the strong economy has not caused inflation, and doesn't need higher interest rates. But they don't seem to want to make that case, because it flouts convention.
So if we take the Fed at their word, that a rate cut would only be done "as needed" to support the economy, then that need has lessened dramatically today. Either the market has to change its pricing to reflect that, or the Fed has to change its justification for cutting rates.
See you at 1 p.m.!!
Kelly
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