Fed’s Employment Blunder Forces Scramble to Fix Its Policy Mistakes
Here's what to expect now ahead of key inflation numbers and the central bank meeting next week.
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Although the action was mixed, investors did a nice job Tuesday of shrugging off a historically large downward revision to the jobs numbers. It now appears that there were close to 1.5 million fewer jobs than originally reported.
It is no secret to the average person that there have been economic struggles for the last couple of years, but this very misleading jobs data was relied on by the Federal Reserve and pushed them to maintain the narrative that employment was strong and the economy was solid, and therefore it was not necessary to cut interest rates.
They can blame the bad data for their decision, but the reality is the Fed made a very significant policy mistake by not cutting rates, and now they are forced to be aggressive in fixing the mistake before the negative consequences multiply.
It is a near certainty that the Fed will cut rates by a quarter-point next week, and the market is already pricing in at least a couple more cuts in the following months. Some folks are even pushing for a half-point cut next week, which may be possible depending on the inflation data that are released on Wednesday and Thursday.
PPI will be reported Wednesday morning, and CPI Thursday. Nothing unusual is anticipated, and if the numbers are close to expectations, it will have little impact on the Fed’s dovishness. If there is a surprisingly strong number, it may raise some concerns about inflation, but that is likely more than offset by the weakness in jobs. A soft number will give the Fed cover to be even more aggressive with cuts and will be a market positive.
Meanwhile, stunningly strong demand for AI Cloud services from Oracle ORCL is driving the stock up 30% and creating renewed optimism about the AI sector. Nvidia NVDA is jumping 2% as the Oracle report signals continued demand for AI infrastructure. This should also keep the data center sector, which I detailed here, running hot after a big day Tuesday.
Technically, the indexes have been choppy, but there are significant pockets of strength and good underlying support. While the bears are unable to gain a foothold, some momentum has cooled, and there is risk of a sell-the-news reaction to some of the economic news flow.
The biggest market positive continues to be strong stock-picking, primarily due to rotational action. The indexes may be seeing a slowdown in their uptrends, but there are plenty of individual stocks that are acting well if you are selective.
My game plan is to continue to focus on the pockets of strength in individual stocks and hit some stops if significant support levels do not hold.
At the time of publication, Rev Shark was long NVDA.
