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Why Friday's jobs numbers might not be as great as you think: trader

By Stephen Guilfoyle, Chief Market Economist at Stuart Frankel & Co.

Good Afternoon,

It’s “Jobs Day.” Not much else needs to be said. Outside of an FOMC policy announcement, this is probably the biggest economics day that we have in terms of market impact. This is certainly the largest amount of data that you’ll see wrapped up in one bundle.

There really are three distinct items that will impact future interest rate direction: employment, wage growth, and consumer-level inflation. This release from the Bureau of Labor Statistics (BLS) covers the first two, and the first two should greatly affect the third. Keep in mind that a healthy economy with normalized interest rates is far more preferable to easy money in an economy that struggles to grow.

Now, the numbers please

Today’s headline payroll number of 255,000 was the second upside surprise in as many months. The unemployment rate held steady at 4.9%, labor participation rate inched up a tenth of a percent to 62.8%, and average hourly earnings rose by 8 cents (0.3%). By that last metric, wage growth is increasing.

Underneath the hood, there may be cause for concern looking at the non-seasonally adjusted numbers, which show a payrolls drop of 1,030,000 in July. To be fair, there is a fairly regular seasonal drop twice a year: from June to July, and from December to January.

To normalize the non-seasonally adjusted data, a year-over-year comparison for July payrolls shows an increase of 1.70%. But this annual growth figure has been in a downtrend since February 2015, having peaked at 2.3%. The bottom line is that trend growth in payrolls has been declining for the last year and a half.

Nevertheless, financials (XLF) are leading the pack on an increased expectation of a future Fed rate hike, with both consumer staples (XLP) and consumer discretionary (XLY) on its heels. Utilities (XLU) are the only major sector in the red — exactly what you’d expect for this bullish economic news.

Moving on to Europe

German Factory Orders for June missed badly this morning. This will knock German Q2 GDP down a peg. We’ll see that number in a week. Looking around Europe, we also see that UK Home Prices, and Italian Industrial Production badly missed their marks as well. Regardless, European equities are all mildly into the green today, still basking in yesterday’s moves from the BOE. The ECB (FYI) will not meet again until late September. The US jobs report allowed the European bourses to close higher today.

And finally, the Olympics

I know that you’ve probably already seen a soccer game or two, but for all intents and purposes, the Summer Olympic games begin today. While I personally find the games very entertaining, and it does my heart good to see that baseball will be added back into the mix in 2020, this is really a geo-political risk story for money managers.

Simply put, this is a high-profile, global event in a country that from the outside appears somewhat unprepared for the size and scope of the mission. Protection is the name of this game. Hard assets are for long-term protection. Trading-wise, one could hedge with the VIX, utilities, some staples, and —though it may sound crazy — maybe even some small caps (as they usually have little to no international exposure). That’s if you’re just renting protection for a couple of weeks.