After a tepid performance at the start of the year, the economy is revving back up as job gains accelerate again.
Payrolls jumped by 280,000 in May versus the 220,000 analysts were expecting, up from the 119,000 gain in March and the 221,000 gain in April and returning to the pace of job creation seen at the end of 2014.
The unemployment rate bumped up to 5.5 percent as more confident job seekers entered the workforce.
All of this has increased the odds the Federal Reserve will raise interest rates this year, possibly as soon as June 18 but more likely to happen sometime later in the year — which explains the muted reaction from stocks.
In the end, the Dow Jones Industrial Average lost 0.3% to push further below the 18,000 level, the S&P 500 lost 0.1%, the Nasdaq Composite gained 0.2% and the Russell 2000 gained 0.8%.
Energy stocks led the way high after an uneventful OPEC decision — holding production steady at current levels — removed the fear that production would be increased outright. OPEC’s current stated output ceiling is 30 million barrels per day but actually produced about 1.5 million barrels above that. Energy stocks gained 0.7% as a result.
I think the bounce will prove short-lived as a number of factors are set to push oil prices lower in the weeks to come.
Long story short: While energy prices have held near the $60-a-barrel level thanks to a slight inventory drawdown associated with the start of the U.S. summer driving season, a combination of deepening oversupply, still-high inventories, extended bullish positioning and the regular demand slowdown at the end of the summer suggests prices should start sliding again soon. Storage tank capacity could be tested as soon as September.
As a result, I’ve been recommending bets against both crude oil and energy stocks, including the Jun $87 puts against Exxon Mobil (XOM) that are carrying a gain of more than 80% for Edge Pro subscribers.
Back to the reaction to the jobs numbers.
Earlier this week, the International Monetary Fund pleaded for rate hikes to be delayed until 2016 after marking down its U.S. GDP growth forecasts. In the wake of Friday’s jobs numbers, the futures market increasingly believes Fed chairman Janet Yellen won’t be able to wait that long and are bringing forward their rate hikes estimates as a result. Current pricing suggests a rate hike in September or October followed by another hike early next year.
While GDP growth and other measures of economic activity have been tepid lately, the job market is actually performing better than it should be — suggesting structural frictions as businesses have a harder time finding qualified workers. Consider that the jobless rate among those age 25 or older with a four-year college degree or more stands at just 2.7%.
The next phase in all this should see an upward acceleration in wage inflation, the long-delayed deliverance that working-class Americans have been waiting for in this economic recovery. The specter of higher interest rates and the potential for disorderly losses in the long-term bond market has weighed on stocks this week, with the NYSE Composite falling down and out of multi-month uptrend support.
That suggests risky assets could come under increasing pressure in the weeks to come as we get closer to the end of the zero interest rate policy the Fed started in late 2008.
Thursday’s retail sales report will be the next big catalyst on this front. Deutsche Bank economists are looking for a strong number given this week’s impressive auto sales result (highest pace of sales since the summer of 2005). We will also get another read on the jobs market courtesy of Tuesday’s Job Openings and Labor Turnover Survey (JOLTS), one of Yellen’s favorite indicators of labor market health.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
