Well, good morning — and what a way to end the week!
Stocks pushed higher again on Friday, sending the S&P to yet another record high as ‘the players’ (investors, traders and the algo’s) digested a surprisingly weak July jobs report and immediately concluded that Kevy and the FOMC may have one less reason to raise rates in September.
Translation: Bad news is Good news for the markets. (But hold that thought).
As the bell rang to close out the week – The Dow had gained 151 pts, the S&P up 48 – closing at another new record high, the Nasdaq added 345 pts, the Russell up 33 pts, the Transports added 81pts, the Equal Weight S&P gained 62 pts while the Mag 7 added 260 pts.
And for the week? Well, let’s just say it was ‘fairly’ impressive too. The S&P gained 3.6%, the Dow added 3%, the Nasdaq surged 5.2% and the Russell gained 3.5%.
At 8:30 am – we got the much-anticipated July NFP report…. And this is where it gets interesting. July Non-Farm Payrolls came in at NEGATIVE 23,000 jobs versus the expectation for PLUS 80,000. – Yeah, that’s not a typo…Negative 23,000. And if that wasn’t a kick in the pants – They revised May and June DOWN by another 103,000 jobs combined.
May was revised from +129k to +63k, while June was revised from +57k to just +20k. So, over the last three months — May, June and July — the economy has created an average of just 20,000 jobs per month.
Now while THAT got everyone’s attention, it wasn’t over…. The unemployment rate FELL to 4.1% from 4.2%. And so, you ask – How does that happen? Simple – people left the labor force.
The labor-force participation rate fell to 61.4% from 61.5%.
So don’t look at the drop in the unemployment rate as positive. The labor market is cooling. And the algo’s went all in.
Why? Because suddenly the odds of a rate hike in September aren’t so grand anymore…. Before Friday’s mornings report, the market had been pricing in a 58.7% chance of a September rate hike, after the report, those odds fell to 42.9%. Just to put it in perspective — two weeks ago, those market-implied odds were closer to 70%.
But here’s something else that should make you smile. The prediction markets — Kalshi and Polymarket — were already ahead of Friday’s NFP report. They had the odds of a September rate hike sitting in the low-40% range BEFORE the jobs number hit. Now? They’re down to about a 34% chance of a hike.
And notice what NO ONE is pricing in — a rate cut. Something I have been saying for weeks.
Recall what we discussed last week: the bond market is already doing some of the Fed’s work for it. Long-end rates have moved higher, financial conditions have tightened and the Fed hasn’t had to do a damn thing — other than jawbone.
And that sent bonds higher and yields lower. The TLT and TLH rose by 0.3% and 0.2% respectively. The 2-yr treasury ended Friday yielding about 4.19%, down from 4.25% on Thursday. The 10-yr ended at 4.65%, down from 4.69% while the 30-yr ended at 5.19%, down from 5.22%.
Even after Friday’s rally, a 10-year yielding 4.65% and a 30-year yielding 5.19% are NOT necessarily what you would consider ‘accommodative’. 30 yr Mortgage rates are at 6.7%, for a fico score of 740 or better – higher if you score is lower, commercial real estate loans, corporate borrowing costs, auto loans — all of those remain elevated.
But let’s not get carried away…Because there is another side to this story. On Friday investors interpreted weaker economic data as GOOD news, because weaker data means less pressure on the Fed.
But there is a line and at some point, bad news stops being good news and becomes…well…BAD NEWS.
Right now, investors believe the economy is slowing — NOT collapsing – that’s the good news…. That’s the sweet spot.
Slower growth + strong corporate earnings + less Fed pressure = higher stock prices.
But if the next NFP report continues to deteriorate, then investors will stop asking ‘When is Kevy is going to raise rates?’ and start asking ‘When will he cut rates?’ (think weakening economy). And if that happens, then investors will ask whether corporate earnings estimates are too high.
That is when BAD NEWS becomes BAD NEWS.
We aren’t there yet, but this is not the time to take a nap!
Now let’s talk about GOLD — because THAT just got even more interesting. Gold exploded higher on Friday – up 2.4% or $102/oz – to end the day at $4,340.
And yes — the weak jobs report helped. Lower Treasury yields helped. Lowered expectations for another Fed hike helped never mind the ongoing geopolitical uncertainty that also provides some support (think the safety trade).
Now while all that helped…. I still think Friday’s move was much more TECHNICAL and MOMENTUM driven than anything else – something we discussed on Friday morning.
Recall how gold spent roughly 7 weeks trapped in that $4,000/$4,200 trading range. Then last week it pierced trendline resistance around $4,160 and broke up and through the upper end of the range at $4,200 and BOOM!
The algo’s got fired up, the Momo guys piled on, shorts were forced to cover and chased it higher. So, Friday’s jobs report didn’t CREATE the gold breakout, it validated it and that’s an important distinction.
The weak jobs number gave an already bullish technical setup the catalyst it needed to accelerate. That’s why I would say the move was 70% technical/momentum and 30% fundamental.
We’re in the $4,160/$4,500 trading range. On any pullback, watch $4,160 ish level – if gold holds it, then the breakout remains intact. Now if we pierce $4,500 with conviction? Then we will have another conversation. This morning gold is trading unchanged.
Now oil remains a problem. WTI closed Friday at $77.08 and this morning it is back on the move, up about $1.20 or 1.3% as traders digest the latest headlines out of Iran – that have raised the ante….
Over the weekend, Iran laid out a ‘new’ list of demands that it says must be met before the Strait of Hormuz fully reopens. So, the idea that Scotty thinks we ‘have a deal’ – well, think again.
They want the US to:
End military threats and insults against its national and religious values.
Permanently halt attacks against Iran and its regional allies in Lebanon, Palestine, Yemen and Iraq. All places that harbor their terrorist proxies.
Lift the U.S. naval blockade and withdraw U.S. naval and air forces from around Iran.
Pay financial compensation and war reparations.
Lift U.S. economic sanctions.
Unconditionally release frozen Iranian financial assets.
OK – what this tells me is that we are not even close to being over.
And that is exactly why oil remains a problem for the markets. Because as long as the Strait remains closed, oil is going to carry a geopolitical risk premium. The see/saw back and forth – One headline suggesting progress, the next suggesting a stalemate will continue to cause market angst. Trendline resistance is at $81.40, if we break up and thru – then I suspect we could see $90 oil again fairly quickly. Should we get a deal, then yes, oil will decline, but that seems more unlikely right now.
Remember – Higher oil feeds directly into the inflation conversation, inflation feeds into the bond market and the bond market feeds directly into equity valuations. So, if crude starts making another run, then the conversation about easing financial conditions becomes more complicated.
Now, Tehran is clearly playing for leverage. They know Americans are tired of a conflict that has dragged on far longer than anyone originally expected, and they know the midterm elections are now less than three months away. So, they have every incentive to test Trump’s willingness to stay the course.
Because until we get a real agreement, the geopolitical premium isn’t going away – and neither is the volatility in crude.
There is not eco data today – but we will get the July CPI and PPI on Wednesday and Thursday – both are expected to lower. Friday will give us the latest Retail Sales numbers along with the U of Mich sentiment surveys.
While earnings season has slowed, there are several reports worth paying attention to this week – particularly around Quantum Computing – QUBT, AI infrastructure – CRWV, networking – CSCO, Semi Equipment – AMAT and fintech – NU.
European markets are flat.
US futures are mixed as the week begins. Dow futures are down 15 pts, S&P’s up 12, Nasdaq up 135 pts while the Russell is down 5 pts.
The S&P 500 closed at 7,757 – up 47 pts. This morning – European market action and US futures action suggests the mkt will churn. We are now in the middle of August and are truly in the Dog Days of summer…Much of Europe is on vacation, and in the US – many families are also on vacation. Volumes are lower and so moves can be exaggerated (in both directions).
Technically – trendline support is way down at 7500. Resistance is somewhere between 7,900/ 8,000.
Orzo salad
This is a great summer dish just to have in the fridge. It is simple to make – no longer than 12 mins max.
For this you need: 1 lb. of Orzo pasta, garlic, olive oil, fresh chopped spinach, Ricotta Salata Cheese and s&p.
Bring a pot of salted water to a boil and add in the Orzo. Let it cook until aldente – maybe 6 mins.
While this is cooking – heat some olive oil in a pan and sauté the sliced garlic…. allowing the oil to take on the garlic flavor – do not burn the garlic…. Now remove from heat and set aside. Cut the Ricotta Salata into small bite size cubes – set aside.
When the Orzo is cooked – strain – always keeping a mug of pasta water.
Now return the Orzo to the pot and add back a bit of the water – mix to re-moisten – do not let it puddle – let it absorb…. Err on the side of less- b/c you can always add more…..…. now toss in the fresh spinach leaves, and the oil and garlic – mix well to coat. (You want just enough oil to coat the pasta – you do not want the pasta bathing in the oil).
Now add in the Ricotta Salata and mix again. Put it in a bowl and refrigerate.
Done. It is a perfect side dish to any summer BBQ meal or is even good to just eat right from the bowl.
