The BLS Report Bombs

Focus: OPTIONS

Don Kaufman Image Don Kaufman Founder, TheoTrade

Weak earnings growth and weak jobs growth will hurt the stock market because the Fed has taken away some of the alcohol in the punch bowl took a big hit April, asserts Don Kaufman, founder of TheoTrade.

While there were some similarities between both the ADP and BLS jobs reports, there was a wide variance between the headline numbers. It’s important for me to point out the connection because at face value, it looks like the reports are measuring two different economies. That face value assessment is mostly accurate as the ADP report was a blockbuster positive report and the BLS was a big miss as it showed the labor market weakened in March.

There might be revisions in the coming months which boost the BLS report and cut down the ADP report. The size of revisions and the inconsistency in the reports make it difficult to analyze the data. It would be easy for me to say that you shouldn’t trade off the labor data because the labor market is a late cycle indicator, but I think it is a critical factor in any assessment of the market. Labor market strength and strong consumer and small business confidence are the lynch pins of the bullish narrative since the GDP and productivity growth have been so weak. Therefore, a weak labor market can catalyze a bear market.  

This thesis that I have come up with that weak earnings growth and weak jobs growth will hurt the stock market because the Fed has taken away some of the alcohol in the punch bowl took a big hit April 7. Even with the US action in Syria pushing overnight futures lower and this weak BLS report which I will delve into in this article, stocks managed to rally off the lows of the morning to close flat. As you can see in the chart below, the ten-year bond rallied after the announcement, as yields fell below the four month range they had been in. However, along with the “risk on” trade causing stocks to increase, the ten-year bond sold off after the initial kneejerk reaction.

As the chart shows, after New York Fed President Bill Dudley spoke, the bond market sold off further. Stocks also rallied on this news. There were two main points made by Dudley. The first was that the US should pull back some of the Dodd-Frank regulations. This point doesn’t matter much because the Trump administration is already attempting to do that. It shows how Fed members can alter their tone to fit with the political momentum of the day.

chart 1

The next point was about the Fed’s balance sheet.