This morning will set the tone for the market heading into the September FOMC meeting. The Jobs report, if it comes out at either extreme will drive perception of whether or not the Fed will hike rates. Expect volatility at the opening, until this settles out.
This is probably one of the most important Labor Reports since the start of the QE programs and ZIRP, as it MAY measure whether the Fed will reverse course of their Easy monetary policy of seven years.
Expectations were for 220,000 jobs. I posted after the ADP report my expectations for market short-term trend reaction and rate hike perception:
ADP came in at 190,000 for August and revised lower July to 177,000. Here is my simple chart of what I think will be both market reaction and rate hike expectation
>275,000 jobs = rate hike expectation and market sell-off
190,000 to 240,000 jobs = uncertainty in rate hike and volatile market
<150,000 jobs = NO rate hike expectation and market rallies
There is some serious slop in there, mainly because there will be some argument over the “seasonal adjustments” that Zandi correctly brought up. However at the extremes, it washes out the argument and drives perception strongly in one direction or another.
As I type, the Labor Report releases their monthly jobs report, which came out at 173,000 jobs. It is certainly weaker than expected. However, there were some good news in the report, the previous month was revised higher, U-3 rate dropped to 5.1%, and average hourly wages were up.
Good or Bad?
Like Zandi had previously said, there could be “seasonal factors” that could lower the headline number. Since there are some morsels of good in a bad headline, there is certainly some cherry picking.
As I previously posted, because it fell into that slop range (not the extremes) the debate is already raging this morning. The majority of CNBC panel thought it was a STRONG report and more than half thought the Fed should raise rates, only Santali thought it was weak. Interesting, even though the maturity thought it was a strong report, a few didn’t think the Fed should raise rates. Confused, I am!
It was the U-3 Rate, which offered the counter punch to the weak job creation number that is giving those that believe in the strong report some justification. Of course the 173,000 jobs created was the worse headline number in 19 months, which is giving those that believe it is a weak report justification.
Fact is there was something in here for everyone.
My take is that there are far more consideration of optics to give both the administration to wave the victory flag (U3 falling to 5.1%) and the Fed hesitation to raise rates (headline coming in far weaker than expected at 173,000).
Do the Math
Let’s look at the data more closely.
Courtesy of the bls.gov
Job Creation: 173,000
Based on the Household data, of the 173,000 jobs created, 69,000 were part-time jobs.
Based on the Establishment Data, 140,000 jobs were private sector job creation – far weaker than the ADP number.
Courtesy of the bls.gov
Unemployment: U3 5.1%
Based on the Household data:
Civilian Labor Force (those counted as people that can work) decreased 41,000 to 157,065,000
Employed increased 196,000 to 149,036,000
Unemployed decreased 237,000 to 8,029,000
Courtesy of the bls.gov
U3 is calculated by dividing the 8,029,000 unemployed by the 157,065,000 Labor Force = 5.1%
Looking at the above changes it seems like great news. Only 41,000 left the labor force, jobs increased, and unemployment decreased. However we have to add in the LAST LINE from their data, NOT IN LABOR FORCE, which increased 261,000 to 94,031,000.
So if we add the 41,000 that LEFT the Labor Force and also added in the 261,000 which was added into the NOT in the Labor Force. That is a net increase of 302,000 people no longer counted for one reason or another. This 302,000 people are .3% of the U3 calculation. If we didn’t make this adjustment, the U3 rate would have been 5.3% (unchanged).
The more accurate measure of unemployment (yet with its own problems) is the U6 rate. The U6 came in at 10.3%. The U6 includes “discouraged workers”, “marginally attached”, and “part-time for economic reasons”. The total unemployment for the U6 is 16,948,000.
The problem with the U6 is the change in the definition of the “discouraged workers”.
One thing that has drastically changed was HOW we counted the “discouraged worker”. According to the BLS definition a “discouraged worker” prior to 1990 was:
Discouraged workers are a subset of persons marginally attached to the labor force. The marginally attached are those persons not in the labor force who want and are available for work, but were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.
This was changed to include a TIME LIMIT. The definition reads today:
Discouraged workers are a subset of persons marginally attached to the labor force. The marginally attached are those persons not in the labor force who want and are available for work, and who have looked for a job sometime in the prior 12 months, but were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.
So what happens after 12 months? These long-term “discouraged workers” are no longer counted at all. They disappear, gone, vanish, as if they no longer exist.
If we run on the original definition, the U6 rate running over 20%. Even if we just add in the adjustments this month of the 302,000 people removed, like we did the U3, it would increase the U6 to 10.8%.
Courtesy of Shadowstats
After we peer into the numbers, they were NOT that great. Headline was down, the Labor Force dropped, and over 260,000 people are no longer counted. That is MORE than the amount of jobs created, which also help contribute to a drop in the U3 rate.
The Fed, unlike the media and political spin doctors, look beyond the headline data. Just like I did above very quickly, they look at the data that is publicly posted on the BLS website and with some elementary math it is not hard to figure out that the numbers are not nearly as great as the headlines would suggest.
The one thing I did NOT include, which I had in the past, was the U3 rate and how that would impact the market as well.
While I just showed why the numbers are NOT that great, I had to actually DO the math to show the why. This morning the media and economic reporters (Liesman) were pointing to the U3 rate dropping to 5.1%, the rise in wages, and shrugged off the job creation because of some “seasonal adjustments” – arguing that the numbers were strong.
This is creating a general perception that the Fed is going to raise rates in September, even though it might only be 10bps or a “one and done” scenario.
As I typed, the Dow Jones futures were down 140 points and all the financial futures were down across the board. When the media pundits and economic reporters started talking how “strong” the report was the futures started taking a nose dive as it interpreted the Fed is now going to raise rates.
Dow Jones futures are now down below 200 points before the market opens. However, I think this might just be a knee jerk reaction. The market wants to believe the Fed will raise rates and the media is fueling that fire.
So expect some volatility and we could see, slightly after the opening a bouncing rally.
As time moves forward, I think the debate will remain heated between those that think they will and won’t and this Job’s report offered something for the “rate hikers” and the “no rate hikers”.
Support & Resistance
I think that 16,000 would be an area in which we will see support again. I would look at a narrower band heading into the close between 16,100 to 16,300.
The tech heavy index has room for some big volatility potential. I would look at short term support at 4100, with 4200 as the straddle strike.
Like the Dow Jones this is getting into a wedging or “flagging” formation as we consolidate towards the 1940 area. Look at 1920 – 1940 as the range for today. Wedging formation means expect a volatility explosion in the future (up or down)
Unlike the other indices the broad based Russell is not looking strong. However, it could be building a base in the 1120 – 1160 range heading into the FOMC meeting. No Rate hikes could bring a flood of order flow into the market and send this index higher. If we get a hike and a perception of tightening going forward, this index will break lower. I think this index is consolidating in this area as all the panic sellers are out for now and no one is willing to put more money into the market yet. They are all waiting on the FOMC meeting.
Nothing solid either way, so heading into the close for the holiday weekend I don’t think we will see a strong or weak close. We could be in for a choppy volatile day and close somewhere above supports and below short-term resistance areas.
The Labor Report is only fueling the debate. The White House will wave the victory flag with the U3 falling to 5.1% and the others will look at the weak top-line job creation.
It has only created MORE Fed ambiguity. I am still in the camp they will not raise rates and the only pressure on them to do so is coming from the populist view. Much like politicians who will do and say things to take a populist stance, I can’t help but wonder if the Fed will be pressured into some “one and done” small rate hike to quite the debate?