Reality Bites

OK, now what? The much better-than-expected June jobs report has the money and bond markets—and probably the Federal Reserve (Fed) as well—in a dither. Some quick thoughts to bring you back to a post-July 4, reality:

• Total nonfarm payrolls came in at +224,000, much stronger than the consensus forecast of +160,000 and essentially canceling out last month’s disappointment

• This gain was not an aberration, either, as solid performances were noted across the board, with manufacturing (+17,000) and construction (+21,000) particularly noteworthy

• Unemployment rate rose a tick to 3.7%, which was basically due to a surge in the civilian labor force, typically a positive economic sign

• Wages are stuck in the mud: +3.1% year-over-year and unchanged from the prior month

• After a move to 1.94% pre-jobs report, the UST 10-Year yield reversed course sharply and rose at one point to 2.07%; for those keeping score, the UST 2-Year yield backed up 14 basis points (bps) to 1.88%

• What’s a central banker to do? As I write this, Fed Funds Futures still stand a 95.5% chance of a quarter-point rate cut in July, but 50 bps has essentially been taken off the table…

• Also, the January 2020 Fed Funds Futures contract is now showing only two rate cuts this year vs. three pre-jobs report; the change in pricing since June 24 (pre-FOMC) has been rather noticeable, reinforcing my belief that this tool’s track record leaves a lot to be desired

• Many readers know I’ve been doing this a long time and it has to be one of the tougher reads on what the Fed is going to do…they’ve seemingly backed themselves into a corner by letting the markets dictate their decision-making process , but Friday’s jobs report reinforces the view that the data do not warrant a rate cut, not even an insurance cut!

• Fed Chair Powell is slated to give the semiannual Monetary Policy Report to the House at 10:00 a.m. tomorrow and to the Senate on Thursday, so he can shape market expectations accordingly.

Will he disappoint? Stay tuned…