3-2-1 Jobs Report: Market Counts Down to Key Data that Could Help Shape Fed Policy

The market is on tenterhooks this morning awaiting Friday’s key August jobs report. Analysts expect around 750,000 new jobs to have been created. Meanwhile, Broadcom earnings are expected later today.

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Key Takeaways

  • Trading could lack conviction today as investors prepare for jobs data

  • Chewy becomes latest “stay at home” stock to fall sharply after earnings

  • Volatility remains not far above post-pandemic lows

(Thursday Market Open) Last week, the countdown to Friday was for a speech by Fed Chairman Jerome Powell. This week, the clock is ticking on an August jobs report that might help shape Fed policy and investors’ perceptions of the economy. 

Powell’s speech last Friday appeared to get a bullish response from the market despite his hints that the Fed could get more hawkish if the economy meets certain parameters. One of those is employment, which Powell said hasn’t met the Fed’s goals. Tomorrow’s report, one that analysts expect will show 750,000 new jobs created, according to Briefing.com, could provide more ammunition for Fed hawks if it shows unemployment continuing to fall and wages continuing to rise (more on the data below). 

A private jobs report released Wednesday didn’t come close to expectations and appeared to give some investors a bit of pause. However, that report isn’t considered as comprehensive as the one we’re going to see Friday. Sometimes the private report can provide good insight into what the government’s report will say, but other times it’s been nowhere near. In fact, over the last few years the two reports have diverged more and more. In sum, there’s no reason to believe it’s a prelude to a disappointing payrolls report. 

Speaking of disappointing, Chewy (CHWY) shares are down double-digits in pre-market trading after the company’s quarterly revenue came in just shy of Wall Street’s estimates. That puts it in the company of other “stay-at-home” stocks like Peloton (PTON) and Zoom Video (ZM) that fell recently following earnings. It’s been a rough ride for those three this last week or so, and underscores how tough it can be for companies whose stocks soared amid pandemic-related demand to keep the enthusiasm going. 

Things looked better in the jewelry space, where Signet (SIG) impressed with a huge jump in same-store sales, up more than 90%. You have to take that with a grain of salt because the comparison was against a time when most stores were hit by pandemic-related lockdowns, and couples were postponing wedding plans. Still, SIG also sounded optimistic, raising its outlook. It’s just one stock, but it falls in line with what we’ve been hearing about the recent popularity of dating stocks, and suggests people want to connect with other people despite new Covid restrictions in many areas. 

More earnings are in the mix later today when chipmaker Broadcom (AVGO) is expected to report. And in data this morning, initial weekly jobless claims of 340,000 hit a new post-Covid low. 

There’s still some trepidation around Wall Street as September gets underway. People may be remembering past Septembers, especially last year’s when the market had a big correction. Gold is up a bit this morning and bond yields are down. Still, the stock market points upward and major indices continue to set new records. Despite all the worries, September is starting off pretty well. 

A Jobs Snapshot Ahead

While it’s tempting to look at the jobs report simply in terms of what the Fed might or might not do in response, that’s a pretty narrow way to view it. Instead, think of the payroll data as a snapshot of what the economy was doing in August. The last three reports have shown hiring rebounding very nicely, but August is going to include impact from the Delta variant and the newest wave of restrictions and office closures.

With that in mind, it might be a good idea to go into the report with eyes wide open for a possible shortfall due partly to the virus. We’ve seen some other data come in a little light lately and consumer confidence take a hit. Sometimes that can hint at slower hiring.

On the other hand, you can’t count out the chance for more gains. The number of jobs needing to be filled hit a new record in July, so companies seem to need new hires. Anyone who’s gone to a restaurant lately probably knows how staffing shortages are affecting that industry. Airlines are also adding employees, with Delta (DAL) saying this week it plans to hire 3,000 new flight attendants by the summer of 2022 and Southwest (LUV) and other airlines also jumping back into the hiring game, according to a CNBC report. 

News like this might be playing into the slight rebound this week in some of the so-called “reopening” stocks, which we talked about here yesterday. That trend flagged a bit Wednesday, with many airlines and hotel and casino firms seeing pressure. As we’ve been saying, the “reopening” gang has been pretty volatile all year, up one day and down the next. Also, it’s sometimes hard to determine what’s moving shares of the biggest companies. 

For instance, Disney (DIS) shares rolled up gains on Wednesday, but did that reflect optimism about people getting out to theme parks or positive feelings that Delta will keep people at home watching Disney+? There wasn’t much in the way of news to explain the move, so it’s a bit of a conundrum. 

Dollar Edges Down as Data a Mixed Bag

The same goes for the U.S. dollar index, which is off its recent highs a bit. The dollar would normally react positively to talk of jobs growth and a more hawkish Fed, but in this Covid-era the dollar has also become more of a repository for people seeking possible risk protection (not that any investment can promise that). So if the dollar is down, does that imply a more “risk-off” attitude in the market, or ideas that the Fed might be slower to take its foot off the gas pedal?

Basically, it wouldn’t be surprising to see the stock and bond market drift a bit today in seasonally-light pre-holiday trading ahead of the jobs report. It’s unclear how many people want to build big new positions one way or another with that huge data point straight ahead. 

It won’t be the first big data point to hit this week. Wednesday’s monthly Institute for Supply Management (ISM) manufacturing report showed a little bump in the headline number to 59.9% from the previous month’s 59.5%. The reading was also above the average Wall Street estimate, and it was good to see the prices paid component fall pretty sharply amid all these inflation worries. New orders and inventories rose. 

On the less positive side of things, the employment reading of ISM fell back into contraction territory, and  the ISM cited more problems with supply shortages, worker absenteeism, record raw material lead times, parts shortages, and difficulty filling positions. When you balance this negative stuff with the positive headline figure, the report can basically be seen as a wash. 

The ISM data appeared to provide a bit of support to the major indices early Wednesday, but then the market faded into the close. At the end of the day, it was the “mega-cap” Tech stocks that basically kept major indices above water, and so-called “defensive” sectors led.

If data start looking better, perhaps that could give the dollar a bit more fuel. A stronger dollar would conceivably make imported goods—including crude and other commodities—a bit cheaper for U.S. consumers, which in turn could possibly work its way into lower inflation readings. 

In the meantime, keep an eye on volatility for possible clues into sentiment ahead of jobs data. The Cboe Volatility Index (VIX) continues to flag, falling to near 16 this morning. That’s not far above post-Covid lows. But with the long weekend coming on the heels of the employment data release, pricing future volatility—essentially what the VIX measures—can be tricky business.  

treasury yields bounce off support

CHART OF THE DAY: MIND THE GAP. That narrowing gap we talked about last week between the dollar index ($DXY—candlestick) and gold (/GC—purple line) has gotten even more narrow the last few days as the dollar slumps from recent highs and gold gains ground. This could indicate fears of a slowing U.S. and global economy, along with less concern about the Fed getting more hawkish. Data Sources: CME Group, ICE.  Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Stuck in the Middle: ​​The critical 10-year Treasury yield sits right in the middle of its recent range between roughly 1.2% and 1.4%. It seems to have found a spot here where it’s not too far from recent highs and lows, maybe reflecting a lack of conviction about where the economy might go next. Perhaps tomorrow’s jobs report could provide clues, but for now the 1.3% yield is basically where it was back at the end of last week, so it’s possible Powell’s words pretty much had no impact on the bond market. 

From a technical standpoint, things look really range-bound for the 10-year yield. It’s twice bottomed near 1.12% since mid-July, so that looks like a possible support level, while 1.4% appears to be firm resistance. The yield hasn’t gone above that in about six weeks. Many analysts have said recently that if the Fed does start tapering, they think a yield of 1.5% or slightly above may occur, but the Fed’s statement last week that tapering isn’t necessarily a preview of rate hikes might continue keeping pressure off the bond market. Earlier this year, rising yields weighed on so-called “growth” stocks, mainly in the Tech sector. 

Pay Up: Everyone likes getting a raise, and higher salaries are generally a good thing for the economy. It often means businesses are out there hiring and people are out there spending. More importantly, it means employees are rewarded for their hard work. The downside of higher wages, as Fed Chairman Jerome Powell spelled out last week, can be when inflation expectations start to take off and people ask for higher wages because they anticipate having to pay more for goods. Businesses may give employees the raises they want, but then have to raise prices to afford it. In the 1970’s, this kind of cycle led to what Powell called a “wage-price spiral” that helped send inflation into double-digits and the economy into deep recession. 

Inflation is up sharply from last year, but a wage-price spiral seems unlikely after decades of slow price growth. Still, keep an eye on the wages component of tomorrow’s August jobs report for a price check. Analysts expect hourly wages to have risen just 0.3% in August, down from 0.4% in July when they were up about 4% year over year, according to Briefing.com. A 0.3% rise, if it happens, is close to a “Goldilocks” number that can put more money in peoples’ pockets without necessarily forcing businesses to choose between raising prices or dealing with tighter margins. The thing that’s worrisome is how recent surveys of consumers by the University of Michigan show rising expectations of higher inflation over the next year. That’s something the Fed is probably watching closely, judging from Powell’s recent comments. The next sentiment report is Sept. 17. 

Flowing Along: As many analysts expected, the Organization of the Petroleum Exporting Countries (OPEC) and its allies pushed back on the Biden administration’s request for more crude production. OPEC stuck to its plan to add 400,000 more barrels a day each month. That sounds like a lot, but it’s less than 1% growth. OPEC, probably to few peoples’ surprise, cited the Delta variant as a reason they want to keep production growth small for now. The current crude price of around $68 a barrel is basically right where OPEC might want it, high enough to provide decent revenue for producers but not so high that it might cripple the countries that need it. When they get near $70, crude prices often become a handicap for a lot of transport companies like airlines.

Good Trading, 

JJ

@TDAJJKinahan

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This week’s economic calendar. Source: Briefing.com
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Key Takeaways

  • Trading could lack conviction today as investors prepare for jobs data

  • Chewy becomes latest “stay at home” stock to fall sharply after earnings

  • Volatility remains not far above post-pandemic lows

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