June Jobs Report: the good, the bad and the ugly

June is traditionally the season for brides in the U.S. -- who doesn’t want to be a June Bride, say many social arbiters, but while modern brides are marrying, when they choose to, almost any time and nearly anyplace, June was the month for a rebound in the American jobs market, and defying, cautious estimates from economists, and bankers, predicting between 165-170,000 jobs, rose to a whopping 224,000, giving the market, some economists, and of course, President Trump, a surge, and a big sigh of relief after a moribund May, that sent hopes reeling, and the Federal Reserve Board looking anxious.

What we didn’t see in Friday’s report, from the Labor Department,  and may not see, is substantial wage increase, where the now average hourly rate for employers is $27.90 an hour, showed a modest increase of 6 cents, but as many a Southern grandma, has said, “Ain’t no matter!”

That is what many of those whose business to watch the economy said. In fact, they said a lot, and some of it was optimistic, but some was tempered with caution.

The venerable New York Times said, “Friday’s figures were the latest evidence that the economy is gradually cooling, not headed for a deep freeze. Separate data from the Institute for Supply Management this week showed that both the manufacturing and services sectors grew in June by a variety of measures, though more slowly than in May. The housing market has shown signs of weakness, but that hasn’t yet discouraged consumers from spending money, perhaps because layoffs are near record lows.”

Let’s lead with this: “The rebound in construction and manufacturing has been particularly encouraging considering the hit that those industries have taken from the tariffs and trade war.” said Thomas Simons, Jefferies LLC.

Northern Trust’s Carl Tannenbaum said the jobs report would be “seen as a relief” — adding it’s “probably not enough to change the Fed’s tracking to a 25 [basis-point] cut” at its July 30-31 meeting, quoted MarketWatch.

“The strong June jobs numbers start the summer off on a strong footing for the American worker, and a big disappointment for the markets that are hoping for substantial interest rate cuts from the Fed. The 224,000 jobs added were broad based, with good gains in everything from manufacturing to construction to business services. The one weak category is retailing, as that industry moves from brick-and-mortar to online.” was the view of Robert Frick, Navy Federal Credit Union.

If there is a pattern to be seen, it is the role of the Federal Reserve, who said last month that it was going to hold off on any rate increases till the end of July, but now most have said that there would be only a modest change, and that might be true.

On the opposing side, is that “Despite the strong jobs data, some European investors still expect a series of rate cuts in the U.S., which could narrow the gap between the rates in the U.S. and Europe over the coming months.”

“Dickie Hodges, head of unconstrained fixed income at Nomura, has been buying up debt issued by governments in the periphery of the eurozone this year, expecting rates in the U.S. to drop as much as 100 basis points over the next 12 months, “ said the Wall Street Journal.

“The Federal Reserve will be readjusting and this, in my opinion, is regardless of any stability in U.S. economic growth and regardless of the fact that the unemployment numbers show the U.S. has added 224,000 new jobs in June, which is above people's expectations,” Hodges added.

Adding to the mix, is this opinion: "The data are unlikely to stop the Fed from easing at this month’s meeting; the well-signaled easing reflects officials’ worries about the potential drag on growth from trade-related 'uncertainties,' along with sub-2% inflation. However, the report adds to the likelihood that the easing will be of 25 rather than 50 basis points," Jim O’Sullivan, chief U.S. economist at economic and research consulting firm HFE says in a note, to the WSJ.

Also, of note, is that the report comes after the change of heart for Mexican tariffs to Mexico, but with the Chinese tariffs still in question, but with some signs of hope, with pending negotiations, some are feeling that this might indeed be a sign of confidence, not only in the market, but with the Feds.

Adding a bit of spice, or maybe even vinegar is this, “I am “less confident than before that a trade deal will be done since, unlike earlier this year, the interminable U.S. presidential election season has now begun,” wrote Christopher Wood, global head of equity strategy at Jeffries, in a Thursday note to clients, “ and quoted by MarketWatch.

“This means Trump will have to defend any deal with Beijing against [Democratic] criticism. It also remains the case that the Fed, via its dovish language of late, has enabled Trump’s hard-line on trade,” he added.

"This is really a mixed bag of news," said Mike Loewengart, vice president of investment strategy at E*Trade, in emailed comments [to MarketWatch]. The good: the strength of Friday's non-farm payrolls figure helped ease fears sparked by a soft ADP reading earlier in the week and a more lackluster report last month. But the unemployment rate ticked higher and wage growth has retreated from a recent peak hit in the spring.

"It's not the kind of clean read that will help bolster the Fed's position in either direction," Mr. Loewengart said to the Journal.

Taking a further step is this opines: “I don’t see the Fed changing what they’ll do based on one jobs report,” JJ Kinahan, chief market strategist at TD Ameritrade, told MarketWatch. “The market says the probabilities of a rate cut are 100%. The Fed has been backed into a corner because expectations are so high.”

Kinahan added, however, that the overall strength of the jobs market, as evidenced again by Friday’s report, could cause the Fed to just cut rates once, and then delay the timing of the next cut to get a better sense of the pace of the U.S. economic slowdown.”

“I don’t think it is large enough to steer them away from an interest-rate cut,” said  Tannenbaum.

“We’re on track for a quarter-point cut at the end of the month.”

Tannenbaum said the Fed can package a rate cut as “insurance” rather than necessity. It can then wait and see if more is needed. The strong data removes the sense that the Fed is behind the curve or in panic mode, he added,”: which seems to support Hodge’s belief.

Wages still concern us, and the paltry 6 cents rise should give any diehard macro economists concern for a true rebound, and retail continues to plunge, and “from January through mid-June, U.S. companies announced plans to close some 7,000 brick-and-mortar stores, more closures than in all of 2018,” and in an industry where half of all employees are women, this becomes a cloud on the sunny skies of this report, noted The Washington Post in June.

Just ahead of Friday’s report, there were “Expectations are for a deceleration in job growth. Job growth is decelerating quite sharply from 2018. The real issue for the Fed is what’s wage growth, and it’s not been promising of late,” said Diane Swonk, chief economist at Grant Thornton. “We’ve seen 3.1% after hitting a peak of 3.4%. If we stay in that 3% range, that’s enough for the doves at the Fed to go. The question is can they bring the hawks along with them. They’re really going to be looking at the wage number.”

An area not helped by the Trump Tariffs, is retail, that can “stress the already-thin profit margins” raising prices on everything from cell phones to toys and shoes, they said, along with one important facet: “They source much of their inventory from China and can't reroute their supply chains easily, cheaply, or quickly.”

Adding further concern, and giving a less optimistic opine than that of the Times, is Challenger, Gray & Christmas,Inc,” who in an earlier press release, said that “U.S.-based employers announced plans to cut 140,577 jobs from their payrolls in the second quarter of this year, down 26% from the 190,410 cuts announced in the first quarter. Despite the drop, Q2 cuts are 34% higher than the 104,800 cuts announced in the same quarter last year, according to the latest report on job cuts released Wednesday.”

Market reaction showed a downturn and “Stocks fell from all-time highs on Friday after the release of stronger jobs data dampened hope for easier Federal Reserve monetary policy.

The Dow Jones Industrial Average pulled back 43.88 points to 26,922.12, snapping a four-day winning streak. The S&P 500 slipped 0.2% to 2,990.41 and ended a five-day winning streak. The Nasdaq Composite fell for the first time in seven sessions, slipping 0.1% to 8,161.79. Earlier in the session, the Dow dropped as much as 232.67 points, while the S&P 500 and Nasdaq slid nearly 1% each.

Despite Friday’s losses, the major indexes posted solid weekly gains. The Dow and S&P 500 rose more than 1% each this week while the Nasdaq gained nearly 2%. Stocks also posted all-time highs on Wednesday.”

“The jobs number was solid,” said Gregory Faranello, head of U.S. rates at Amerivet Securities. “The real theme now will be shifting very quickly to what the number means in the context of what we’re pricing in for the Fed in July.”

While the banner rate grabs all of the heads over the cubes, and in the coffee shops, a better indicator of how the jobs market is trending is the U-6 rate which gives a more accurate picture and includes those that are either stuck in part-time jobs, or have been job searching for more than 20 weeks. And, that has improved.

“The number of persons working part time for economic reasons decreased in June to 4.347 million from 4.355 million in May. The number of persons working part time for economic reasons has been generally trending down. These workers are included in the alternate measure of labor underutilization (U-6) that increased to 7.2% in June,” noted Calculatedrisk.blog.

Some final good news: “The labor force participation rate increased one-tenth to 62.9%, its best since March, pushing up the headline and “real” unemployment rates. The total labor force increased by 335,000 to just under 163 million while those counted as not in the labor force fell by 158,000 to 96.1 million;” good but not great, but shows some promise.

All of this aside, It seems that all heads, cooler, or not, are pointing to Fed Chair Jerome Powell and his team, this July to see what will happen.