Jobs Numbers Are Strong: Let's Watch The Action

| About: SPDR S&P (SPY)

Summary

The jobs number was a strong number relative to expectations.

It's much stronger than the GDP number showed.

We want to watch how the market acts today and Monday to see if growth is more important or rate hikes are more important.

The non-farm payrolls number came out today at 255k versus expectations of 185k. The number was a strong number. It can mean one of two things: The market (NYSEARCA:SPY) is going higher, or there is a rate hike back on the table, which would be a huge market risk. For that reason we want to see what comes out from the Fed over the next few days and see how the market reacts.

Non Farm Payrolls Held Up

Here's the trend of non-farm payrolls.

Click to enlarge

Above is the chart, and below you can see that July is faster than the last two quarters' average.

Q4 Q1 Q2 Q3
Month 1 271 186 292 255
Month 2 280 233 24
Month 3 295 168 144
Average 282 196 153
Click to enlarge
Click to enlarge

After the last Fed meeting and Wall Street Journal article, we felt that the Fed shifted gears to more dovish. We think that was because the GDP number was weaker than expected.

Here's the GDP staying slow.

Click to enlarge

The GDP represents Q2 of 1.2%. Today's non-farm payrolls represents July and is of course the first month of Q3 so represents a different time period than the recent GDP report.

We Need To See How The Fed Responds To This Number.

The Atlanta Fed just upped their GDP target for Q3 to 3.7% up from their previous expectation of 3.6%. We think taking the jobs numbers today and their forecast for Q3 GDP, the Fed would think this number is a good number that can be used for forecasting. There likely are no one-timers in it.

We are guessing they could say a rate hike is back on the table.

The Wall Street Journal wrote that the Fed's "magic number in Friday's jobs report is 200,000."

That would tell us that a rate hike could be back on the table. If a rate hike is on the table then we'd guess that the market is capped with risk to the downside. The reason we say that is because the last rate hike crashed markets. We think a rate hike ahead of the elections is a material risk event for markets.

That said, we recently wrote that we thought a rate hike would be held until after the elections. We'll have to see how the Fed updates their recent dovish comments. If they become hawkish enough to raise rates ahead of elections, it's a market risk.

We need to see how the market responds to this number.

We're going to have to monitor what the market says and what the Fed says. We think the next couple of days of market interpretation will be key. If the market trades off against a solid number it will be a bearish sign. If the market can go up and have a good day today and tomorrow, we think we could have a follow through of upside thereafter.

We want to watch. Now that we have a clean good piece of data it's important to see how the market and Fed interpret it.

We would remind everyone that the last reaction to strong jobs numbers was a breakout to new market highs. If this report has weak follow through it could act as a market peak.

This market deserves watching to see what it wants to do. From there we will have a sense what to do.

Conclusion

We were surprised by a good non-farm payroll number today. It could imply a pickup in the economy. We are not sure if the Fed will put a rate hike back on the table. We are biased that they would not. That said, if they do it's a bearish story with material market risk.

If a rate hike is not on the table we want to watch markets over the next two days or so. If markets can continue up we'd take it as a sign for upside follow through to come.

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