June Jobs Report: The Art of Reading Between the Headlines

Stocks fell Thursday morning on news that in June, the private sector jobs report blew out expectations. When we say it was a blow out, we mean a blow out. Think, 1940’s Chicago Bears beating the Redskins 73-0. 

That kind of blow out.

Specifically, private sector jobs rose by 497,000 in June. Compare that to the estimate of 220,000, or even the May numbers of 267,000. That’s right — the market expected less jobs than they got in May, and this number more than doubled that expectation.

232,000 of those jobs were in leisure and hospitality. Another 97,000 were in construction, and another 90,000 were in trade, transportation, and utilities. 

When you read this initial section, I want you to separate yourself from where we are in history. Only think about the facts: surging jobs, above expectation growth, industries that usually do well during periods where consumers have money to spend. 

On its face, contrary to the rallying cries of bears everywhere, this is decidedly bullish. It means the dwindling chance that the U.S. slips into even a minor recession is becoming further and further from what is possible. 

As a reminder, a recession was the ultimate stock market boogeyman. The worry was that the Fed would raise rates so much that it would sink the economy, killing growth, and guaranteeing a recession, which would hurt the stock market and drag down earnings. Here’s the problem: In a recession, you don’t see consistently strong jobs reports that more than double analyst expectations. 

Two words the bears will use to attempt to build their recessionary argument: The Fed. “This definitely means the Fed is going to hike again in July, and maybe at other meetings too!” 

Here’s the thing: That’s already priced in. 

Source: CME FedWatch

Those who tell you it isn’t priced-in aren’t paying close enough attention. Above, the CME FedWatch tool (the preeminent rate outlook tool of the market) identifies the possibility of a 25 basis point July rate hike as a near certainty. This jobs report wasn’t really consequential to that — Yesterday, the CME FedWatch was still pricing in an 88.7% chance of the same hike. The jobs report has only shifted expectations by 6.2%, in the direction of what was already likely going to happen.

Rate hikes are even priced into later meetings. In November of 2023, the lowest likelihoods are that rates remain at and below 500-525. While the highest likelihood continues to be a single hike between now and then, the odds of at least one more additional hike are nearly a match, at 47.1% (7.8% expect two additional hikes, three total including July — 39.3% expect at least one more hike following July). 

So where does that leave us? Let’s review the facts.

• The June Jobs Report showed robust gains in the labor market, more than doubling expectations.
• At the most recent FOMC, Fed Chair Jerome Powell conceded that stifling labor market growth is not the main goal of the Fed, and that it’s more likely that inflation is rooted in high shelter costs (housing, rents) than in wages.
• In the beginning of 2023 and throughout 2022, the number one worry of market participants was that the US economy would fall into a deep recession.
• With jobs surging, and the Fed admittedly at the tail end of its hiking cycle, the Fed is not going to trigger that recession. 
• Whether the Fed hikes one, two, or even three more times, it’ll still be at a decelerated pace, and a fraction of the hikes it has already put on the table. And while rates do work with a lag effect, the market has priced in the impact of these rate hikes, and is now looking forward to what will likely be another cycle of robust economic expansion.

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When we read through the headlines of what’s dragging down the market today, we see the foundation of something that will likely boost the market in the medium-term. Markets likely fell today as a knee-jerk reaction — the type of reactions we’re used to. Where good news is actually bad news because the Fed might punish us. However, when the market remembers that the Fed is slowing its pace regardless of the jobs report, and that economic growth means preventing the outcome that would actually hurt the most (recession), the perception will likely shift. 

In other words: Soon, “good news” will actually be “good news.”