Global Macro: Back to Fundamentals

TheStreet.com

NEW YORK (TheStreet) -- The U.S. nonfarm payrolls data released Friday showed investors that the economy is on its way toward sustainability.

The jobs report also brought a change in how markets react to news involving monetary policy. A strong employment reading led many to believe that tapering was most likely to be announced at September's Federal Reserve meeting.

That sent yields spiraling higher and equities followed suit. That was contradictory to previous weeks when the markets were still under the curtain of Fed stimulus, which led to equity selloffs on good news on fear the Fed would cut its lifeline sooner than investors hoped.

For weeks now, markets have expected that central bank stimulus is finite. That has led traders to focus more on fundamentals than on artificial inflation created by the Fed. Positive news for the labor market indicates a stronger economy, which is bullish for risk assets.

The first chart below is of iShares Barclays 1-3 Year Treasury Bond over iShares Barclays 20+ Year Treasury Bond. This pair represents the Treasury yield curve. When the pair rises, it represents long-term yields rising faster than short-term yields, thus a steepening of the curve.

The pair shows a steady uptrend starting in mid-May, around the time Fed Chairman Ben Bernanke hinted at an end to quantitative easing.

On Friday, the pair spiked considerably higher as employment data all but confirmed to investors that the Fed will begin to slow down its bond purchases in September. As predictions become more concrete, the curve will continue to steepen toward multiyear highs.

The next chart is of Guggenheim S&P 500 Equal Weight over SPDR S&P 500. This pair represents market breadth.

As the pair moves higher, it indicates that a majority of the stocks in the index are participating in the move as well. Moves higher are bullish for risk assets. The pair recently broke upward as economic data confirmed an improving environment.

The final charts show the U.S. unemployment rate on top and civilian labor force participation rate on bottom. The charts begin in January 2000 and continue to the present.

The unemployment rate has slowly fallen since the peak of the financial crisis in early 2009. Many point to people leaving the labor force. While some people are retiring, many are just discouraged. Many workers have given up looking for a job because of the lack of prospects.

The participation rate resides near decade lows, and a considerable improvement is a must. More workers in the job market will cause the unemployment rate to increase, but the real statistic to look at is job growth and an improving employment picture.

As more jobs are created, consumers will bring back growth to the tepid economy.

At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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