Wall Street had a wild ride on Friday amid heightened tensions surrounding the release of the September nonfarm payroll report. Investors were on edge given the impact the report will have on a possible Federal Reserve rate hike this year.
Initially, it looked like bad news. The Dow Jones Industrial Average dropped as much as 259 points after word hit that just 142,000 jobs were created last month — below the lowest analyst estimate and well under the consensus expectation of 203,000, corroborating the recent weakness in regional Fed activity surveys.
The labor participation rate fell as well, dropping to levels not seen since 1977, which indicates a shrinking labor market. In response, the futures market places odds for an October or December rate hike dropped hard.
But then as if someone flipped a switch, stocks turned and moved relentlessly higher, as heavily shorted stocks led the way higher. The reason: It looks like investors are starting to hope that more cheap money stimulus, not the first interest rate hike since 2006, could be the Fed’s next move.
In the end, the Dow Jones Industrial Average gained 1.2%, the S&P 500 went up 1.4%, the Nasdaq Composite climbed 1.7% and the Russell 2000 saw a 1.5% increase.
As for sectors, energy led the way with a 4% gain, while financials were the laggards of the day, down 10 basis points. Sprint (NYSE:S) gained 4.9% after the Wall Street Journal reported the company will cut an unspecified number of jobs and cut upwards of $2.5 billion from its expense line in the next six months.
The U.S. dollar weakened while gold moved 2.1% higher on stimulus excitement. Crude oil gained 2.2% to close at $45.70. Treasury bonds strengthened, pushing down yields, as the iShares Barclays 20+ Treasury Bond (NYSEARCA:TLT) returned to late August levels. This boosted the October $122 TLT calls recommended to Edge Pro subscribers to a gain of more than 65% since first recommended on Sept. 22.
Adding to the bad news on the jobs report was a downward revision to August’s total — down to 136,000 from 173,000 previously.
No wonder then that futures odds puts expectations for a Fed rate hike sometime around March 2016.
But assuming the Fed is going to back down from its long teased 2015 rate hike could be a battle that will end in tears for optimistic investors.
After the report, St. Louis Fed President James Bullard downplayed the result and reiterated that now was the time to start the policy normalization process. He added that the mix of employment and inflation is as good as it’s ever been, emphasizing the trend in job creation, rather than a single soft report.
Fed vice-chairman Stanley Fischer chimed in with a focus on the fact there are “obvious” bubbles in the economy, and that the Fed could go after them with higher interest rates at certain times.
Bank of America Merrill Lynch economist Michelle Meyer doesn’t think a December rate hike is off the table yet; but is dependent upon an improvement in the data over the next two months.
Societe Generale’s Aneta Markowska told clients that it’s difficult to reconcile the weak payroll report and other data (including trade figures) against very strong initial jobless claims and job openings data. As a result, she thinks the jobs slowdown is transitory, but ascribes just a 40% chance to a December Fed hike. March only gets a 55% change, with her probability of a hike, on or before June 2016, at 70%.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to Investorplace readers.
