Why a Strong June Jobs Report Has Investors Worried

Usually, a strong jobs report is something to feel positive about. It boosts consumer confidence, means there is money coming into the economy from lots of employed people, and can revive foundering national and local economies. Particularly in the wake of this past May’s weak jobs report, you might have expected June’s strong numbers to leave investors breathing a sigh of relief. Those 224,000 jobs added to payrolls last month did do that among many investing populations, but not necessarily all of them. Some investors are concerned the stronger jobs market will ease pressure on the Federal Reserve to cut interest rates, and that could be bad for portfolios heavily reliant on Wall Street performance since stock prices tend to rise in the wake of rate cuts. Some real estate investors would be pleased to see interest rates fall as well, since lower rates mean easier financing for homebuyers. However, with interest rates still historically low even without the cut, many real estate investors are less concerned about the jobs report than they might otherwise be.

Is a Good Jobs Report Really a Bad Thing?

If you were counting on the Fed to cut rates in July, then the June jobs report is probably not the good news you would have liked to hear. A weaker June employment report could have solidified Fed commitment to a rate cut in July or possibly led the Fed to cut rates by half a point instead of a quarter. “Quite a lot has changed in the economic outlook since early May,” Federal Reserve Chairman Jerome Powell observed last week. However, he added, the U.S. economy is on “firm footing” but may be experiencing the threat of “growing risks.”

Investors apparently felt the Fed might not be concerned enough about those risks in light of the June jobs numbers, however. In fact, the markets fell in the wake of the report. The Dow Jones Industrial Average fell 43.88 points, and the S&P 500 fell 0.2 percent. U.S. Treasury notes rose to just over 2 percent, however.

A Rate Cut Could Still be Coming

Although most analysts agree the rate cut will likely be smaller than it might have been if June jobs creation had been weak, they largely remain expectant that a cut of some magnitude will materialize. According to Wall Street Journal reporter Nick Timiraos, “Investors in interest-rate future markets anticipate one quarter-percentage-point rate cut at this month’s meeting.” He also noted Powell has not “pushed back against those expectations” in recent public appearances.

According to Morgan Stanley analysts, that looming cut means investors in global equities need to get ready to sell. Morgan Stanley analysts recently announced they were “putting our money where our mouth is” and downgrading global equities to underweight (from equal-weight). Strategist Andrew Sheets explained bluntly, “The most straightforward reason for the shift is simple – we project poor returns.” Sheets added in the warning, “There comes a point for every analyst where you need to change your forecast or change your view. We’re doing the latter.”

Sheets has been consistent in his warnings that “bad data should be feared rather than cheered” as many market investors and analysts have greeted indications of a weakening jobs market with optimism that it might lead to a rate cut. He wrote, “We think the market is too optimistic on 2019 earnings and is underestimating the pressure from inventories, labor costs, and trade uncertainty.” He concluded, “The positives of easier policy will be offset by the negatives of weaker growth,” and said his brokerage’s favorite asset class is presently emerging market fixed income.

Tell us what you think:

  • Do you think the Fed should cut rates?
  • Is our central bank too directly involved in our economy’s performance?
  • Are you concerned about interest rates today?

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https://www.cnbc.com/2019/07/08/morgan-stanley-downgrades-global-equities-on-fears-of-slowing-growth.html

https://www.marketwatch.com/story/weaker-growth-will-offset-a-fed-rate-cutso-sell-stocks-warns-morgan-stanley-2019-07-08?mod=mw_theo_homepage

https://www.investopedia.com/investing/how-interest-rates-affect-stock-market/

https://www.wsj.com/articles/u-s-job-creation-bounced-back-in-june-11562330095

https://www.wsj.com/articles/analysis-june-jobs-report-weakens-case-for-larger-fed-rate-cut-this-month-11562343047

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

https://www.marketwatch.com/story/weaker-growth-will-offset-a-fed-rate-cutso-sell-stocks-warns-morgan-stanley-2019-07-08

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