Payrolls Disappoint, But Stocks May Go Marginally Higher

By: Anthony_Cherniawski

SPX futures are on edge, waiting for the monthly payrolls report from the BLS. Futures spiked between 6:00 am and 7:30 am, presumably to discourage the shorts before the payroll numbers. There still may be a small probe higher even if the payrolls underperform. The Cycle Top at 2839.76 appears to be the final resistance.

ZeroHedge reports, “World stocks traded mixed on Friday, with risk appetite dampened despite Apple crossing a $1 trillion market cap and boosting tech stocks around the globe, after Wilbur Ross warned there’s "more pain ahead" unless China changes its economic system adding to trade war tensions, pushing the Yuan as low as 6.91 after the lowest PBOC fixing since May 2017. And while there were no fireworks in Japanese bonds overnight for the first time in a week, this time it was Italian bonds that tumbled with 10Y BTP yields rising briefly above 3% ahead of a budget meeting between the country’s populist leaders and the finance minister. The MSCI All-Country World Index was down by 0.1% after the start of European trading, and set to break a four-week streak of gains.”

NDX futures were a bit more robust, rising to 7414.75 in the overnight.

The BLS Employment Situation Summary just came out. It reports, “Total nonfarm payroll employment rose by 157,000 in July, and the unemployment rate edged down

to 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in

professional and business services, in manufacturing, and in health care and social assistance.“

It has wiped out the overnight gains in the equity indexes. ZeroHedge reports, “As per the earlier preview, there were virtually no potential downsides to today's jobs report (with a possible adverse exception of tariffs), and as so often happens, moments ago the BLS reported that July payrolls missed "bigly", rising just 157K, missing expectations of 193K, and the lowest monthly print since March. The 157K July jobs is well below the average monthly gain of 203,000 over the prior 12 months. “

VIX futures are showing green after the monthly payrolls. While SPX and NDX may make a minor probe higher, the VIX may already be forecasting the reversal.

TNX appears to be on the downswing after an extended Master Cycle high, but no bearish pattern or signal yet.

ZeroHedge observes, “n two months we will be in fiscal 2019 for the US government, and the OMB projects +$1 trillion/year deficits until 2021. Ten year Treasuries nosed over 3% today on news of some small but unexpected issuance, so where will rates go once deficits kick into high gear? And how will stocks discount higher rates, regardless of reason? Our answers below.

If the 10 Year Treasury were 4.0% at the end of 2019, would you expect US equities to be higher or lower then? It is easy enough to tell a story either way:

Bullish for stocks. Rising inflation caused by economic growth lifts both bond yields and corporate earnings. Companies push for greater efficiency to offset labor/materials costs, limiting margin erosion and (finally) increasing workforce productivity. PE multiples contract, but earnings growth more than offsets the decline and stocks rise.
Bearish for stocks. Rising inflation caused by escalating trade frictions lifts interest rates, but has a chilling effect on the economy and corporate earnings. The Federal Reserve likely avoids going full Volcker, and simply keeps rates constant in 2019 knowing an inflation-induced recession will take inflation lower without their having to become a political pariah. Multiples contract due to higher rates, but earnings are down 10% rather than the current forecast of +10%. The combination pushes US stocks lower.”

USD futures rose to 95.19 in the overnight market, making an 84% retracement before pulling back. This may be a good short entry, but confirmation lies at the 50-day Moving Average at 94.25.

Regards,

Tony

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