Why a ‘too hot' jobs number could spell trouble for markets

With all eyes on June’s jobs report, founder of Sevens Report Research Tom Essaye explains why he is concerned that a “too hot” number could cause some sort of pullback or volatility in stocks.

Video Transcript

ZACK GUZMAN: Backing up from just the oil market here, as we've been talking about coming back in terms of demand, and economies around the globe coming back to normal, we also got the update back here in the US when it comes to the employment front, as unemployment claims notched a new pandemic low, adding 364,000 jobless claims this week, which was better than the expected 388,000. And it paints an interesting picture, as we get ready for the all important jobs number tomorrow.

And for more on what that could mean for markets, I want to bring on Tom Essaye-- Jared's already chatting with him here in the break-- Sevens Report Research founder. And Tom, I mean, when we look at that number, you go back and forth when we talk about the Goldilocks kind of range of jobs we could see tomorrow. But it seems like you might be more worried about an upside surprise here that could show the economy running too hot.

TOM ESSAYE: Yes, absolutely. As I said in my morning report, for the first time in years, I'm actually worried about a too hot number causing some sort of volatility or a pullback in stocks. And that's because the Fed has signaled that they are looking to taper QE. And if we get a really, really strong jobs number and a hot wage number, then markets are going to start to say, gee, are they going to taper QE maybe before November? Or are they going to taper it more intensely than we thought? And in a market that's, frankly, been very calm and a little bit complacent, that can cause volatility.

AKIKO FUJITA: Tom, what kind of number are we talking about? We're showing right now the estimates, the expectation around 711,000. What's the number that you think the Fed looks at and then blinks?

TOM ESSAYE: I think if you get around a million, right? So give or take around a million or definitely above a million. I think that the Fed would look at that and say, wow, that's-- now we had sort of an aberration in the jobs numbers, you know, back in May. But boy, they're surging now. And as the jobless benefits and more economies reopen, people go back to school, you can expect hiring to further accelerate.

And we've got to keep in mind, the Fed messaging is starting to diverge a little bit. You're hearing Fed officials start to get more hawkish. So I think that really spurred the conversation in the context, again, of a market that's at all-time highs and pretty complacent.

ZACK GUZMAN: At the same time, though, as we've seen that kind of bifurcation, if you want to call it that, among Fed officials kind of debating when the right timing is to start tapering, you've got the yield on the 10-year still coming down, still below 1.48 right now, which seems like, I guess, the market-- it would seem to indicate to me that the market's getting a little bit more comfortable with the idea of tapering coming sooner than expected maybe. I mean, how do you see it playing out in terms of the comfortability that some investors might have now?

TOM ESSAYE: Yeah, I think that there will be some sort of a temper tantrum, frankly. I don't think we probably get it for another couple of months. I mean, look, we all know that we've gotten very used to, in this market, having the Fed doing historically massive QE, kind of a QE infinity, part two. So I think when that begins to get dialed back, you will see some volatility. I don't think it necessarily causes a correction.

But look, the first half of the year was propelled higher by the pandemic essentially going away mostly here in the United States and by also federal support, Federal Reserve, and the Treasury. Both of those are starting to go into decline here in the second half of the year. The pandemic is virtually over in this country. And hopefully, it stays that way. And then also the feds are going to remove support. So I just think we should all be prepared for a more typically volatile market in the second half.

ZACK GUZMAN: Yeah, and we'll be seeing if some of the volatility hits tomorrow when the jobs number comes out. But for now, Tom Essaye, appreciate you coming back on here to chat it all with Sevens Report Research founder. Thanks again for the time.