Jobs Report Preview

I am amazed how quickly this summer has come and gone. School buses are back on the road, college football is the focus of SportCenter again, and here in Florida, residents remain on edge as we enter the height of hurricane season.

And as far as markets are concerned, we are all currently weathering a very active “global market hurricane season” which has been far from the normally sleepy market doldrums most of us are used to in the late summer.

We were reminded of that volatility again this week as stocks fell roughly 3% yesterday.

Looking back, it has been a much busier summer than normal – as there has been a lot to monitor, analyze and explain.   August was the most volatile month for the markets in years, commodities have crashed, and we are now getting very close to the first rate hike in nearly 10 years.

But whether that rate-hike happens in two weeks or not, largely depends on this Friday’s jobs report, so you need to know what to look for in the data and how to position client portfolios in order to finish the year strong.

It’s a reminder that the reality is today’s highly correlated, global markets never really close, and as a financial professional your clients expect you to be on top of the markets 24/7.

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Tomorrow’s jobs report is now the most important economic indicator to watch ahead of the September FOMC Meeting on September 17th as Fed outlook has unfortunately become even cloudier recently after policy makers failed to offer any additional clarity after the Jackson Hole symposium as we had hoped.

With that in mind, I wanted to provide our “Jobs Report Preview,” which was delivered to paid subscribers in this morning’s edition of The Sevens Report, so that you know quickly and directly what will make tomorrow’s report good or bad for the markets.

Jobs Report Preview (Sevens Report Excerpt)

This jobs report will decide whether the Fed hikes in September, or delays to October or December (or 2016). Given all of the recent stock market volatility, the bar for a hike in September is pretty high, but not unattainable.

If the jobs number is “Too Hot” look for that to initially weigh on stocks, but I don’t think it’ll be a major bearish influence, and it would actually make me more positive on growth sectors here in the US because the hike will imply a decent level of confidence in the economy from the Fed.

If the number is “Too Cold” or “Just Right,” expect an initial dovish reaction and a stock rally. That will not, however, be a catalyst for a sustained rally in stocks as Fed uncertainty will be with us for months to come. While that won’t cause stocks to trade lower by itself, it will be a headwind on markets going forward, and it will reduce the potential for a year-end rally. 

The “Too Hot” Scenario (What it Takes to Hike in September)

· > 275k Job Adds. If we see a 275k or higher jobs report, the chances of a hike in September will likely go back above 50% (although barely so) making a September rate hike basically a coin flip (which is not priced into stocks right now).

· < 5.2% Unemployment Rate, ≤ 10.5% U-6 Unemployment Rate. In the March statement the Fed lowered “NAIRU” to 5.0% and below, so it’s going to take a material drop in the unemployment rate (brininging it close to 5%) to increase the chances of two Fed rate hikes.

· > 2.4% yoy wage increase. Data on wage gains has wavered recently, so it’ll take an almost impossible jump in the yoy wage numbers to make the Fed consider two hikes.

The “Just Right” Scenario (No Hike But Oct. or Dec. Still Likely)

· 160k—270k Job Adds, 5.4%-5.6% Unemployment Rate, 2.1% – 2.3% YOY wage increase. The range for this number to be “just right” or “Goldilocks,” is pretty wide, and anything in this range likely means no hike in September, but still a high probability of a hike in October or (more likely) December.

The “Too Cold” Scenario (No Hike in 2015)

· < 150k Job Adds, ≤ 2.1% yoy wage increase. This number will be technically “dovish” but it’s not a positive for stocks or the economy, so fade any material rally on a number this weak. The Fed wants to get at least one hike in, and if the job market starts to soften and the Fed feels the economy isn’t strong enough for one hike, that’s not going to be good for risk assets.

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Tom Essaye,
Editor of The 7:00’s Report

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