Was this "miss" really a surprise? No.
This month's print follows those of 84,000 in December and 288,000 in June. Moving between extremes like these is nothing new: it has been a pattern during every bull market. Since 2004, every NFP print near or over 300,000 has been followed by one near or under 100,000 (circles).
We should also note that a "miss" of 80,000 jobs is equal to 0.05% of the US workforce. Assuming greater forecasting precision is folly.
Annual growth in employment in August was 1.8%. As you can see in the chart below, the monthly prints shown above have been noise within a growth trend below 2% since the start of 2012. It wasn't much different in the 2003-07 bull market either. Given this history, investors should be careful assuming a faster rate of growth in employment.
Despite expectations that wages are set to accelerate, growth remains subdued. In August, wages grew 2.1% yoy. That too is in the middle of the past 5 year's range.
There's nothing bearish in the latest data - in fact, it fits the recent pattern perfectly - but it should moderate expectations that economic growth is accelerating and that inflation will imminently turn higher. CPI and PCE are both below 2%. For some reason, many mistrust these data sources. For those, MIT publishes an independent price index (called the billion prices index). It tracks both CPI and PCE very closely and also shows little pressure on prices.
There's also an unfounded belief that the current growth in employment, wages and demand is surprisingly weak. True, all of these are slower than during recent post-recession recoveries. But 2008-09 was not a conventional recession led by a wage-price spiral. It was caused by the biggest financial crisis since the 1930s. Wealth equal to a year's worth of GDP was lost. Compared to other post-financial crises, the current recovery in the US is much better than average. It might seem slow, but this was entirely expected.
For a more complete summary of the latest macro data, please click here.
The Week Ahead
SPY opened at 201.0 on Tuesday and closed at just 201.1 on Friday. Trading has been in a very tight range.
From the August low, SPY rose nearly 5% in two weeks. In the following two weeks, it has risen less than 1%. But what is remarkable is this: since Friday August 22, more than 100% of the gain in SPY has come from overnight trading. SPY is up by $1.90 in these past two weeks, but overnight gaps account for net gains of $2.10. Daytime cash hours account for a loss of $0.20.
This is a pattern reminiscent of late March before April spilled lower.
Tick is similar. Ticks over 1000 are outnumbered by ticks under -1000 by a ratio of more than 1:10 in the past two weeks. Buying moves slowly higher, in measured moves, but selling has been on offer. This is usually not constructive.
Still, the number of exchanges making new highs this week is impressive. SPX, NDX, DJIA, FTSE, Shanghai, Hong Kong, Australia and EEM all made new 2014 highs. Nikkei made a 7 month high. France made a two month high and Germany a one month high.
So, what happens next?
The most importantly technical feature for SPY is that it closed above its 5-dma for 18 days in row. In the past 5 years, that has only happened once before (June 2013). That type of strength, as we have said, rarely marks the end of an uptrend. Momentum should carry SPY higher.
Friday's low was also the first touch of its 13-ema since the August low. In the past, there has been at least some follow through higher (green arrows).
The upside may not be great. Note the areas shaded in yellow above. Price chopped for a week or more and resolved higher but several didn't make much additional gains. Note RSI (top panel); it is diverging, most resembling late July 2013 before a test of the 50-dma in August.
Also note the top trend line (dashed blue) that SPY is up against and that has impeded upside since July. There is room up to 202 next week, equal to weekly R1.
On the downside, SPY has tested support at 199.5 several times, including on Friday. A quick return to that level likely breaks to 199 and fills an open gap. Just below is 198.5, a multiple top in July and also next week's S2. That should hold any significant weakness.
The weakest index is still RUT, and it remains a useful tell for overall market health. We continue to focus on the 1160 level as the key to trend. So long as this holds, the bias should remain higher. This was successfully tested on Friday. Here, like SPY, note the divergence in RSI.
The big news this week is the ECB cut rates and announced a stimulus program of upwards of $1 trillion. This sent the Euro down and the dollar higher. What other impact will this have?
We have detailed a trade in the CRB (post). A higher dollar (top panel) is clearly bearish for commodities (bottom panel; chart from Stock Charts).
Remarkably, the CRB did not make a lower low this week and remains above a larger support level. It looks bad, but its not dead yet.
A higher dollar is probably not bearish for US treasuries. In the past, with one main exception (red arrows), dollar buying has led to inflows into treasuries, and vice versa (green arrows).
To the extent US yields have been driven lower by competing yields overseas, the ECBs actions should also keep US yields low (provided European yields do not rise, of course). While the rise in yields this week seems large, the trend hasn't yet changed.
Seasonality turns mostly negative for the next several weeks.
Our weekly summary table follows:
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