Investors were supposed to quickly look quickly beyond this nonfarm payroll report. The playbook for the next couple of months was to look for more robust employment reports and try to figure out what is the right balance of pricing pressures that will force Fed Chair Powell and company to begin talking about tapering. This is not happening just yet.
Wall Street was stunned by a strong nonfarm payroll report. April saw 266,000 jobs created, a huge miss of the consensus estimate of 1,000,000. Most leading indicators supported a strong reading, so volatility following the big employment miss was extreme.
The debate on whether entitlement spending is hurting hiring will grow, but in the end this big miss should give Biden more ammunition to push through his next stimulus/infrastructure package. Hiring has been rapidly increasing across the country after an impressive vaccine rollout that has the country poised to reach 50% of the US population to be vaccinated by this month. This is only one report, but this is changing many traders thinking on how this recovery is unfolding.
The April unemployment Rate rose to 6.1% from 6.0%, a big surprise that justifies the Fed’s cautious stance. In March, the Fed upgraded their end of year unemployment target to 4.5%, which now might seem so easy to reach.
Average Hourly Earnings on a monthly basis increased 0.7%, better than expected flat reading. This wage increase is temporary, over the next few months wage pressure will struggle to rise as lower paying jobs return and drag down the average.
US stocks rallied after the disappointing nonfarm payroll report allowed financial markets to unwind mounting taper tantrum bets that were calling for a Fed pivot. This NFP report was a gamechanger for macro traders that have been both overly confident in the labor market recovery and were leaning towards believing the Fed was possibly making a policy mistake on holding off taper talks. This employment disappointment triggered a nosedive with Treasury yields, which also sent the dollar sharply lower. The 10-year Treasury yield collapsed to 1.48% before rebounding towards 1.55%.
The Nasdaq got excited with the knee-jerk plunge in yields and will likely lead the charge higher.
Today’s number is disappointing, but the US recovery still remains intact and Wall Street should still expect growth exceptionalism over the coming months, which in the end should lead to much higher Treasury yields.
The Fed’s semi-annual financial stability report provided a vote of confidence for banks but pointed out that asset prices are vulnerable to significant declines if investor sentiment shifts. COVID remains a major financial risk, while hedge fund leverage is somewhat above historical averages. Leverage at broker-dealers is low and banks remain well capitalized. The Fed’s report didn’t drop anything really new, with Wall Street already prepared to expect that hedge-funds will have to disclose a lot more, and probably more often.
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