This is Actually a Good Day, Considering…

It’s a rare day when a jobs number is not the key news item.  Yes, those numbers stunk, with a drop in Nonfarm Payrolls and a rise in Unemployment, but it’s a huge “tell” that bond yields are slightly higher after a very brief downtick.  This tells us that oil-driven inflation is more of a concern than a poor labor market, which is quite understandable when crude oil futures are trading 10% higher.  Considering that we got a dose of bad news on top of even worse news, an S&P 500 (SPX) drop of “only” 1% should be considered a decent result and a testament to traders’ relentlessly positive psychology.

Yes, I said “positive psychology.”  Once again, SPX bounced exactly where the charts indicated – the 6715 level that provided support earlier this week and in late December.  And once again, once that support held, opportunistic traders chased the rally to erase about half the index’s initial losses. We’re now well below the 100-day moving average that initially provided support, but we are hardly witnessing a freefall.   A significant break below 6700 would put the 200-day moving average into play (around 6580), but we haven’t seen investors willing to force a move to the downside.

SPX, 3-Months, Daily Candles with 50-day (grey), 100-day (purple), 200-day (blue) Moving Averages with Horizontal line at 6717.17

Source: Interactive Brokers – Past performance is not indicative of future results.

On a normal day, we would be fixated on the February employment report, which is quite difficult to sugarcoat.  Nonfarm Payrolls showed a loss of 92,000 jobs — far, far below the +55K consensus estimate.  January was revised down by a mere 4K to +126K, but the two-month revision was another -69K.  Combining February’s 147K shortfall with the -69K revision, we end up with 216,000 fewer Nonfarm Payrolls on the books than we thought after the December report.  That’s not a huge number when compared to a total labor force of about 170 million, but relatively small changes can yield relatively large adjustments in policy.

Furthermore, the Unemployment Rate rose to 4.4%, above last month’s 4.3%, which was also the consensus estimate.  This occurred even as the Labor Force Participation Rate fell to 62% from 62.5%.  Considering that the latter number acts as the denominator of the Unemployment Rate, it implies that the number of job seekers rose faster.  Average Hourly Earnings rose by 0.4% on a monthly basis, matching last month’s rise and above the 0.3% consensus. That’s good news for those who received raises or worked more hours, but not a welcome sign for those who are concerned about stagflation.

But a modest rise in wages is just a drop in the bucket when it comes to stagflationary fears.  A 10% jump in crude oil prices just today is inflation writ large.  (Wait, it’s now an 11.5% jump.)  April WTI futures (CL) are up $23 this week, or 34%.  Yet SPX is down only 1.8% over the course of the week so far.  And the Nasdaq 100 (NDX) is only down 0.6%.

Let those week-to-date numbers sink in for a second: Oil +34%, SPX -1.8%, NDX -0.6%. 

Maybe we’re not climbing a wall of worry, but we’re certainly hanging onto it by our fingernails.

From whence does this positive psychology emerge?  For starters, dip buying remains as ingrained as ever.  We saw this when stocks bounced off their lows — each day, buyers stepped in.  Note that every day so far this week, SPX closed well above its intraday lows.  Today’s bounce is neither as large, nor is today’s trading finished yet, but the pattern fits.

SPX, 1-Week, 5-Minute Candles with Horizontal line at 6717.17

Source: Interactive Brokers – Past performance is not indicative of future results.

Implicit in the relatively blasé view is the expectation that the Iran conflict will be short-term in nature.  The administration has offered multiple objectives for measuring success in the military campaign.  Presumably, accomplishing any one of them could constitute an exit ramp.  There are others who have suggested that either a “Trump Put” or a “Taco Trade” might limit the damage.  Indeed, the President has focused on lower mortgage rates, lower gasoline prices, and higher stock markets as metrics for the success of his economic policies.  The modest decline in stocks is hardly reason for a change in policy – bear in mind that the strike price on the  “Trump Put” that was exercised after “Liberation Day” was about 20% below the prior stock market level – and the 10-year Treasury yields that influence mortgage rates have risen only about 10 basis points this week, though.  Might higher gasoline prices cause a change in mindset, or might protestations from Gulf allies who have been bombed and unable to move crude out of now-bloated stockpiles?  Perhaps.  But that is the bet that stock buyers are placing.