Market Reacts Positively to Poor Payrolls: Rate-Cut Hopes Rise

Market Reacts Positively to Poor Payrolls: Rate-Cut Hopes Rise

Market Rejoices as Poor Payrolls Boost Rate-Cut Hopes

The financial markets are once again finding solace in 'bad' news as a less-than-stellar increase in payrolls has heightened expectations of a rate cut. As of now, the market fully anticipates two rate cuts in 2024 and three more in 2025.

Good News for Bonds

Peter Tchir of Academy Securities suggests that this report should be very beneficial for bonds. The establishment survey reported an increase of 175k. The Household report indicated an increase of 949k full-time jobs, with a decrease of 914k part-time jobs. This is positive news, even though the overall net total was a mere 25k.

Analysis of the Data

The weaker data aligns with other reports we've been observing. If anything, the Non-Farm Payroll (NFP) still appears high compared to other employment data, most notably the JOLTS quit and hire rates, which are lower than any point in 2018 or 2019. Average hourly earnings saw a minor decline, and hours worked also decreased slightly. Both these factors are favorable for those hoping for Federal Reserve cuts.

The participation rate seems unchanged, but the overall labor force may have grown, as indicated by a small increase in the Unemployment Rate to 3.9%. While this is not a bad figure, it is moving in the right direction for those hoping for Fed cuts.

Who Stands to Gain?

Those who are still holding onto two cuts as their base case scenario (I am one of them) stand to gain. However, the market is pricing in cuts for September and December rather than June and July, which may require a change in strategy.

Expectations for the first cut have been moved up to September. Bond yields are also set to benefit, although with the 10-year yield already down to 4.47%, it might be wise to start reducing position size. Stocks may also benefit from the initial reaction, but the correlation between low yields and higher stocks is not particularly strong.

This could be a good opportunity to invest in value, small cap and banks, and perhaps some commercial real estate. It is likely that these sectors will experience a relief rally at the expense of sectors with valuation concerns. The dollar is currently on a downward trend, while gold and cryptocurrency are on the rise.

Final Thoughts

While this data might be strong enough to keep the noise about an "economic slowdown" at bay, it is likely that this noise will start to increase as NFP joins other jobs data in moving in the wrong direction.

What are your thoughts on this development? Do you agree with the market's reaction? Share your thoughts and this article with your friends. And don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.

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Some articles will contain credit or partial credit to other authors even if we do not repost the article and are only inspired by the original content.