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Jobs Report Preview, June 1, 2017

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For a second-straight month, the risks to tomorrow’s jobs report are balanced. A “Too Hot” number will increase the possibility of more than three rate hikes in 2017 while a “Too Cold” number will fan worries about the pace of economic growth, and the ability of economic growth to push stocks materially higher from current levels.

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“Goldilocks” Jobs Report Preview:

“Too Hot” Scenario (Potential for More than 3 Rate Hikes in 2017)

 >250k Job Adds, < 4.6% Unemployment, > 2.9% YOY wage increase.

A number this hot will guarantee a June rate hike, but more importantly it would likely reignite the debate over whether the Fed will hike more than three times this year. Likely Market Reaction: Withheld for Sevens Report subscribers—sign up for your free two-week trial to unlock.

“Just Right” Scenario (A June Rate Hike Is Guaranteed, But the Total Number of Expected Hikes for 2017 Remains at Three)

125k–250k Job Adds, > 4.7% Unemployment Rate, 2.5%-2.8% YOY wage increase.

This is the best-case scenario for stocks, as it would imply still-stable job growth, but not materially increase the chances for more than three rate hikes in 2017. Likely Market Reaction: Withheld for Sevens Report subscribers—sign up for your free two-week trial to unlock.

“Too Cold” Scenario (A June Rate Hike Becomes in Doubt)

< 125k Job Adds.

Given the recent unimpressive economic reports, a soft jobs number could cause a decent sell-off in equities. As the Washington policy outlook continues to dim, economic data needs to do more heavy lifting to support stocks. So, given the market’s focus on future growth, the bottom line is bad economic data still isn’t good for stocks. Likely Market Reaction: Withheld for Sevens Report subscribers—sign up for your free two-week trial to unlock.

Bottom Line

This jobs report isn’t important because it will materially alter the Fed’s near term outlook (it’d take a massive miss to do take a June hike off the table). Instead, it’s important because if it prints “Too Cold” it could send bonds and bank stocks through their 2017 lows. And while I respect the fact that stocks have been able to withstand that underperformance so far in 2017, I do not think the broad market can withstand material new lows in yields and bank stocks.

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Why Are Stocks Falling? Blame Auto Sales (seriously). April 4, 2017

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Below is an excerpt from today’s Sevens Report. Cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves—start your free two-week trial today. 

Economic data was the major influence on markets yesterday, and while most of the focus was on the ISM Manufacturing PMI and the Markit manufacturing PMI, (both of which were in line with expectations), the real market mover was the disappointing auto sales report.

Auto Sales Responsible Auto sales fell to 17.0M saar vs. (E) 17.2M saar, and that number joins a growing chorus of caution signs on the auto industry, including fears about used car pricing and used car debt.

Bottom line, auto sales aren’t as popular as the ISM Manufacturing PMI, but the auto industry in the US is massive and very cyclical, and if we are starting to see the beginnings of a pullback in the auto industry that’s not a good sign for the broader economy. That’s why the disappointing auto sales number hit stocks so hard yesterday, even in the face of in-line manufacturing PMIs.

Bigger picture, the “gap” between soft and hard economic data continued to widen yesterday, as the soft PMI survey data was strong while the hard March auto sales data was disappointing. That gap between sentiment/survey data and actual hard economic numbers must be closed sooner rather than later, and it’s a growing risk to stocks.

ISM Manufacturing Index

• The Index fell to 57.2 vs. (E) 57.1

Takeaway

The trend in the manufacturing sector of the economy remains healthy according to the latest release from the ISM. The March ISM Manufacturing Index did edge back for the first time since August, slipping from 57.7 to 57.2 month over month, but the headline was still narrowly ahead of estimates (57.1).

The details of the report were solid as New Orders remained notably strong at 64.5. That was a slight pullback from February’s reading of 65.1; however, it was the second-largest reading in more than three years (after February). New export orders also were at a three-year-plus high of 59.0 while Employment jumped 4.7 points to 58.0, the highest level in almost six years. Rounding out the report’s internals, Prices Paid rose to 70.5, the highest reading since May 2011, underscoring a potential uptick in inflation in the US.

Bottom line, the ISM release showed some slight moderation month over month, but the general trend remains strong which is a positive (although again, this surging survey data needs to start being confirmed by hard economic numbers).

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