Regardless of how things ultimately turn out on Friday, the knee-jerk reaction across markets to the June jobs report was telling.
The impressive headline number – which exceeded even the highest estimate – suggests the US economy remains on solid footing even as the global outlook continues to deteriorate, and that, in turn, argues against preemptive easing from the Fed.
With markets now extremely “doved-up” and with positioning in rates crowded, there’s no shortage of dry kindling scattered about just waiting on someone to drop a match. 2-year yields surged the most since January in the wake of the June jobs data.
That’s a rather poignant reminder of just how vulnerable markets are to a sudden reassessment of the “imminent Fed cut” narrative. 10-year yields jumped sharply too, as did the dollar.
Naturally, that prompted a pretty steep slide in US equities futures, as stocks are forced to reassess to the likelihood of even a 25bp July cut, let alone a 50bp move. “I see no chance of 50bp”, Bleakley Advisory Group CIO Peter Boockvar wrote, in a note.
To be sure, this doesn’t mean the Fed won’t cut later this month. Disappointing markets is a risky proposition when expectations are as lopsided as they are. An overtly hawkish turn could lead to a sharp tightening of financial conditions. “We tend to think July cuts are still more likely than not”, Renaissance Macro said Friday.
Equity investors better hope so, because it’s pretty clear what’s been driving the rally since Trump threatened to slap Mexico with across-the-board tariffs.
“This spike to record highs in stocks has been all about the hopes for easing, easing, easing”, Bleakley’s Boockvar went on to say. “While jobs data is a lagging indicator and should not be taken as an all-clear signal at all, it might certainly hold off and push out the easing, easing, easing”.