Market Poised for Highly Unusual Response to Mediocre Jobs Report

A court ruling on tariffs came out Friday after the close: A federal appeals court ruled against (many/some/all?) tariffs imposed using emergency law. 

Here are a few key takeaways:

• The tariffs will remain in place while the case proceeds
• It may go back to the lower court for another round, while also being pursued up to the Supreme Court. Nothing is “final” yet.
• The administration may pursue other ways to implement the tariffs
• I'm not sure what this means for trade “deals,” since most were not finalized (fully documented) so that is something to watch

This should put some downward pressure on stocks, but until we know more (which will take weeks, if not months), it is more a “back of the mind” issue than something to fret over.

Jobs data should play a big role as well.

I say “should” rather than “will” because I am not sure how the market will take any jobs data given the large revisions we got last month. Will “strong” data be believed?

My data points to a continuation of the “no hire, no fire” economy. I think that is largely in line with consensus. So, we should get a mediocre jobs report.

I, for one, think markets will actually respond more to ADP than NFP, which is highly unusual. After all of the revisions (and who knows what revisions we will get this month) ADP seemed to be more accurate on initial reporting than NFP. I think that is how investors see the data and why ADP is more important than usual. As always, I will look to the JOLTS Quit rate for an indication of how workers are feeling about their jobs (I expect it to be weak).

My expectation is the jobs data will solidify a 25 BPS cut, but won’t help stocks.

Away from that, as we return from the Labor Day weekend, bond yields are higher across the globe.

The long end of the yield curve is under pressure globally — steepening of the yield curve is happening pretty much across the globe. While it is “easy” to trace U.S. steepening to discussions about the Federal Reserve, it is curious (maybe even disturbing?) that it is occurring everywhere.

At the same time, gold is setting new records (again, somewhere between curious and disturbing behavior).

Bitcoin has bounced back from Friday’s levels, but I will be keeping an eye on this. Will it track gold or lead the way lower for risk?

This combination of long dated bond yields struggling across the globe, with gold rising, makes me more nervous than I would be otherwise about the stock market.

I wish I had a better explanation for why it was occurring, but it is the sort of behavior that does not seem supportive for adding risk here.

Expect weak jobs data. Expect bonds to stabilize on the weak data. Expect risky assets to struggle.

• Policy uncertainty remains high (starting with the future of tariffs, but what else is going to come out of the U.S., let alone the world?)
• Concerns about the negative impacts of tariffs are once again getting some attention as they start taking effect (I’m in the camp that thinks it takes months, or even quarters, for the impact to be felt, so it is very early stages here)
• A weak economy isn’t good for stocks, while they are hovering near all-time highs
• The AI story seems to have been downgraded slightly from “gangbusters” to just “very strong.” The AI/Data Center investment has been a major factor in taking stocks higher this year, and signs of this waning could be problematic. While AI will continue to be a dominant theme and will only get bigger over time, it does seem like we are paying for 2030 technology and “only” getting 2025 technology. It will “grow into” the valuations over time, but take heed of the warning signs that the current narrative may have played itself out.

Good luck, as I expect this autumn to be volatile as the administration continues to rush policies into place, so they can have the desired effects ahead of the midterm election. I also don’t think everything (like tariffs) will work out as the administration believes.