Payrolls Post-Mortem: Rearview Data At Its Worst

Authored by Peter Tchir via AcademySecurities.com,

The NFP data is usually quite a big deal for the market. I’m not horribly excited about this report for the following reasons:

• We continue to believe that seasonal issues distort the initial reads early in the year. That the data, marginal as it is, will likely be revised down as the year goes on. Not as much as last year, but by a non-trivial amount.

• The data is from February. Back when “tariffs were a negotiating point” and the “Trump Put” still had a following.

I’m not convinced they tell us much going forward, but we will do our best to pull out the most interesting nuggets from this data. But first, a reminder that the S&P 500 has dropped almost 7% since February 19th (the Nasdaq 100 almost 10%).

The only data point that jumps out at me is the Underemployment Rate. 

Usually something I glance at, but it jumped from 7.5% to 8% even as the labor participation rate fell. That is the highest it has been since October 2021 (when we were still in the aftermath of COVID). Pre COVID, the data doesn’t look as bad, though you need to go back to 2017 to find worse prints (8.1% was the high print in 2018 and 2019). While anything based on the Household part of the survey has a margin of error that can make it almost as useful as a random number, this still strikes me as concerning. I expect the JOLTs Quit rate next week to confirm  that the labor market was already shaky BEFORE the start of the tariff wars and shift in behavior towards the EU.

I’m normally all excited to dig through the data, and look for outliers, but I just don’t care enough – that is how irrelevant I think this data is (asides from the fact that on a cursory glance it probably lets the Fed cut as soon as the May meeting – which is my base case).

Bottom Line

Now is as good as time as any to read last weekend’s T-Report Skate to Where the Puck is Going, as it leads nicely into the following takes.

The tariff policy continues to pose a risk for the economy. One that both the President and Treasury Secretary recognize. It is far too early to tell if their policies will result in the desired outcome or not, but expect more downside to equities in the near term, unless some major positive headlines develop.

• The handling of tariffs on Mexico and Canada is creating some doubt as to how well thought out the tariff strategy is. If the goal was to get countries to come begging for better deals (which is certainly one part of the policy), having to first retract tariffs on autos and then retract tariffs on all USMCA compliant products is a step in the wrong direction. Shouldn’t the administration have seen how carefully companies have crafted supply chains around the USMCA act? A mere hiccup, but markets and the economy are a “confidence game” and if people start losing fair in the “Art of the Deal” it might make it far more difficult for the policies to be successful in the end. See last weekend’

On Europe, Russia, Ukraine and NATO, there are only two observations I feel obligated to make, because I think both are important to the markets.

• The onus is now somewhat on the President to deliver Russia’s side of the peace agreement. Mistakes, too many mistakes to count, have been made by the Ukrainians and even Europe, but if the deal is “capitulate everything” so Russia can then sell minerals from conquered land, it will not be taken well by the rest of the world. Which in turn may change their response to tariffs. What the President can deliver as Russia’s take on peace will be watched closely!

• Led by Germany spending for military equipment in Europe is rising – focused on European defense manufacturer’s products. Presumably there will still be a lot of spending by Europe on U.S. made equipment, but this is something to keep an eye on, especially in light of the upcoming “reciprocal tariffs”.

On the market front the AI story is evolving rapidly as well:

• It used to be all about the hyperscalers and the companies most closely associated with that.

• As we see rapid development of more and better AI systems (including from China, which I will not log into from a cyber concern standpoint), the shift may be turning to who benefits?

• The gains have heavily accrued to the providers of AI, but maybe we will finally see a shift to those companies who benefit from the efficiencies of AI? The providers will continue to be crucial and immensely profitable, but it is and always is about valuation and sentiment.

I’d care less about the previous section except so much of the market is “passive” and outflows from any mega cap impact the indices, and in turn trading behavior, potentially adding to the downside risk. (I use quotations because I don’t think “passive” is really “passive” any longer, at least not in the sense that it was 2 decades ago).

Despite the large move to the downside in equities, there is far more evidence pointing to dip buying than capitulation.

• Hovering around levels where any dip buyer in the past few months (who didn’t sell) is now facing losses, is dangerous.

• So many investors have bet on the 200 day moving average for support (right around current levels) that if that level doesn’t hold we will see technical traders dump, and then investors who wandered into the technical realm, realize that they too have to sell as the next levels of obvious technical support are far below us.

Look for the rest of the world to outperform the U.S. 

Look for equal weight to outperform market weight indices.

The Crypto Reserve. 

The good news is that the executive order from last night looks quite tame in terms of buying crypto. Crypto already held, largely through seizures will be allowed to be in the reserve. Budget neutral purchases can be made. It really seems to depend on how aggressive the Crypto Czar wants to be with “budget neutral”. If the summit later today comes out sounding like an “all in” for crypto – I’d sell treasuries quickly. It has a banana republic sort of feel.

All of the above, I guess I could have started with Are We Exchanging Trade for Capital Flows? That was one of many topics that came up on Bloomberg TV Wednesday morning (we are in the first segment, so just hit play).

Is the focus on reducing trade deficits working to reduce capital surpluses? 

To the extent that is occurring, which seems somewhat logical, and is backed by academia,  risk assets could be in for a bumpier ride than previously thought.

Finally, watch credit. If credit spreads widen (which I think they will) then that will feed into further risk-off fears for risk assets.

I wish I had a lot more good things to say, but I don’t, other than it is almost time to be thinking about March Madness! Of the basketball variety, not markets!