Morning Notes — Equity Market Reaction to Strong Jobs Report

Reaction: It’s hard to reconcile today’s strong jobs report with the recent rise in jobless claims and long list of anecdotal corporate hiring freeze announcements.  Bond and FX markets react as one would expect with higher Treasury yields, stronger dollar and terminal Fed expectations rising 20bp to 3.59%. Higher bond yields are weighing on bond proxies and long-cycle growth stocks (mega-cap Tech), but the broad market reaction has been relatively muted.  This is likely due to: 1) the well-known lag in the BLS data; 2) a perceived ability for the economy to withstand higher rates/yields and; 3) an understanding that Wednesday’s CPI print is the more important inflation report to watch.

Market signal: The collective intelligence of markets has earned its place as the most important forward-looking indicator. The low from June 16 was preceded by two days of momentum divergence on a daily and weekly basis.  Daily momentum divergence in oversold markets is a reversal indicator that often produces mid-teens reflex rallies, even during prolonged bear markets.  Weekly momentum divergence under the same circumstances preceded the end of bear markets in 2009 and 2020.  The signal also preceded major inflection points in 2011 and 2015. Technical resistance for the S&P 500 remains in the 4150-4200 range and we expect consolidation (not material downside) until terminal Fed rate expectations inflect lower.