Every month I say the same thing which is that I find it bizarre that the financial world obsesses over such a poor set of data, but it is what it is. With that, the data:

• Non-Farm Payrolls came in at 353k jobs versus an expectation of less than 200k and previous months were revised sharply higher.

• The Household survey, from which the unemployment rate is derived came in negative at (31k) jobs – just a 384k difference in two measures of the same thing,  no big deal. The unemployment rate remained flat at 3.7%

• Here is where it gets even more incoherent: Average Hourly Earnings grew a huge 4.5% while hours worked fell and participation remained flat amid a downward trend. One explanation is that full-time employment is falling while part-time is surging.

• Temp jobs, which tend to lead the employment data, grew slightly after more than a year of falling. In contrast to that, Robert Half (RHI)and Manpower (MAN), which are the two largest staffing companies in the world just printed weak results and tepid guidance.

The immediate market reaction to the data was a hard move higher across the Treasury curve and, not surprisingly, a surge in the front end as the odds of a March rate cut has fallen from around 80% a couple weeks ago to around 20% post this data. The odds of a cut in May are falling slightly as well.

To be perfectly honest, I don’t know what to think. Corporate profits are under pressure. Despite what we saw from Amazon, which continues to make Walmart look like a Mom & Pop relatively speaking, earnings from Q4 are double-digit negative across the IWM (small caps and mid-caps) as well as the non-megacap part of the S&P. Econ 101 tells us that when companies are seeing margin pressure, they begin to cut jobs, but that doesn’t appear to be happening. 

Sentiment across the economy is strengthening. This unprecedented wage growth is a two-edged sword. Stronger wages are inflationary, but it also means that people have more money to spend and they are clearly spending it. So where does that leave us? Confused firstly. Our best guess is that we have an economy that will remain around full employment. Wage growth will remain strong, and we reiterate our view that the Fed will cut three times or less this year versus the recent market expectation of as many as seven cuts. We also think the trend of negative earnings revisions will remain in place. Does that mean lower equities? That would be the intuitive assumption, but the trends I just described have been in place for a long time now and equities continue to march higher so I will refrain from any stock market prognostication other than to say: Don’t fight the tape, but the risk/reward doesn’t look great to me. 

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