š usncan Note: Stocks Rally As Jobs Miss Fuels Fed Rate Cut Bets Near 99%
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Shares of Lululemon are sharply lower following a disappointing earnings outlook. (Photo by Smith Collection/Gado/Getty Images)
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Key Takeaways
- Weak Jobs Data Strengthens Case For Federal Reserve Interest Rate Cut
- Broadcom Surges On AI Chip Sales And Multi-Billion Dollar Deal
- Tariff Pressures Drag Lululemon Earnings While Manufacturing Jobs Decline
Equities put together a modest rally on Thursday ahead of the Friday employment report. Tech led the way with the Nasdaq adding 1%. That was followed by the S&P 500 and Dow Jones Industrial Average, both of which closed higher by 0.8%. The only laggard on the day was small cap stocks, which closed the day unchanged.
The big news today and for this week is the August jobs report. According to Bloomberg, economists were expecting 75 thousand new jobs and an unemployment rate of 4.3%. The actual number was 22 thousand new jobs and an unemployment rate of 4.3%. The revisions to the June and July were also released showing a net loss of 21 thousand jobs. I think the big takeaway from this is that we continue to see a significantly weakening jobs market, which will give the Fed reason enough to cut interest rates at their next meeting on September 17th by one-quarter point. According to the CME Fed Watch Tool, the probability of a rate cut is now 99%. However, what remains to be seen is what next week’s Producer Price Index and Consumer Price Index looks like.
Ideally, both reports next week will show inflation either stagnant or down some. If the economy is weakening, it would be best to see it weakening not just in terms of jobs, but prices as well. Where the concern could potentially come in would be if we see inflation tick higher against the backdrop of a weakening employment report. That scenario would potentially cause concern of stagflation, where prices are rising but employment is falling. We’ll have to wait until the middle of next week to see those inflation numbers.
There are a couple of individual stocks making news this morning. Shares of Lululemon are down 20% in early trading. The company posted a weak quarterly earnings report and lowered its outlook. The company specifically called out difficulties as a result of tariffs, which is a theme we’re hearing more and more as the true cost of tariffs settles in for companies that are reliant on overseas manufacturing. At the other end of the spectrum, shares of Broadcom are up 7%. The chipmaker reported a 63% growth in AI sales and also signed a $10 billion deal to provide its AI chips to an unnamed customer. Shares of Broadcom are up 109% from their closing low this year and the company could be making progress in closing the gap on Nvidia’s AI chip dominance.
Looking out to the next week, aside from the inflation data, we could also begin to see some positioning for September expiration, which will take place on the 19th. This will be a quarterly expiration where equity options, futures, and futures options all expire. These “triple-witching” expirations can often bring a bit of volatility and September can be especially volatile. I would not be surprised if by the middle of next week, we begin seeing some repositioning ahead of expiration.
Quickly going back to the jobs report. One thing I want to point out that I find interesting is the juxtaposition of job creation against trade policy designed to bring manufacturing jobs back to the U.S. We’ve heard from a number of companies planning massive investment in U.S. facilities; however, manufacturing jobs were down by 12 thousand for the month and down 78 thousand for the year. To be fair, the announcements in domestic manufacturing are relatively recent, yet at the same time, I wouldn’t expect job losses in the sector. This is something worth watching moving forward because one of the main drivers of the Trump administration’s trade policy is to bring middle class manufacturing jobs back to America.
For today, I want to see if equities can hold their early morning rally and build on Thursday’s momentum. I’m also closely monitoring bonds and the metals market. Bond yields have been very volatile of late. The 30-year nearly reached 5% recently, which is a psychologically significant number, before retreating to its current level of 4.78%. I’m also keeping an eye on gold and silver. Both metals have seen significant rallies of late and could signal concerns of that stagflationary environment I mentioned above. As always, I would stick with your investing objectives and long-term goals.
