What changed? That's always the first question following a jobs report. You can dig through my old RM columns to read my rants on the uselessness of the non-farm payrolls data from a purely scientific perspective owing to the decidedly unscientific methodology of the Bureau of Labor Statistics' surveys. The market believes the jobs report matters, so it matters.
So, the reaction is more important than the hard news, and that brings me back to what changed. As of this writing, just after the U.S. equity markets opened on a down note, the Fed Funds futures markets have delivered a very clear verdict on the results of the June's jobs number: 25 basis points.
Yesterday the Fed Funds futures were pricing in a 29.2% chance of a 50 basis point rate cut at the conclusion of the next FOMC meeting on July 31st. This morning's strong headline figure has reduced that probability to 8.0%, certainly a major change in one day. Of course, the chances for a 25-basis point cut have hewed to the numerator of that equation, and now sit at 92.0% versus 70.8%.
The market is still pricing in a 0.0% chance of no Fed rate cut on July 31st. One month ago that "no action" probability stood at 29.8%. That said, 25 versus 50 basis points is a significant difference, and a further deep dive into the CME's FedWatch data shows why.
The current Fed Funds target rate is 225-250 basis points. The range of probabilities for the conclusion of the January 29th, 2020 FOMC meeting is truly fascinating. Here it is:
Who are the clowns who believe the Fed will cut 150 basis points in the space of eight months? Granted it is a minimal percentage, but the fact that the market is pricing in a 20.3% chance of the Fed cutting by more than a full percentage point over the next five meetings is really a speculative bet.
What if it doesn't happen? In the past week two influential economists have noted that the Fed should not cut rates at its July meeting. One was the Cleveland Fed's president Loretta Mester, whose opinion was immediately swatted away by perma-bulls owing to her status as non-voting member of the FOMC in 2019. The other economist has never voted on the FOMC and surely never will: me.
My opinion is not particularly relevant in the grand scheme, but my trading book at Excelsior Capital Partners is swelling and the damn, dirty paperwork is nearly complete. Next week I will be shorting stocks. A lot of them. I cannot wait.
This morning CNBC showed consensus figures of 3.6% for S&P 500 revenue growth and 0.2% for S&P 500 earnings growth for the second quarter of 2019. Yes, we all know that the earnings growth figure is invariably low as companies revise guidance (CNBC counted 113 S&P companies that have thus far issued 2Q2019 guidance with 77% on the negative side,) but what if that doesn't happen?
There are some very, very troubling macroeconomic data points emanating from the rest of the world. The bond market's minor selloff today does not materially change the large proportion of the world's sovereign debt that is trading with negative interest rates.
So, either the U.S. equity market is wrong or the global sovereign debt markets are wrong. I am betting that - just as was the case in 2008 and 2000 - the bond markets actually get it right and stocks pull back significantly. I will delineate those specific bets in my RM columns next week.