Those who read these morning notes regularly know how surprising I was to see such strong and much better-than-expected NFP reports month after month at a time when mass layoffs, deportations and tariff-driven uncertainty were supposed to weaken the US jobs market. Well, it appears that I was right to be surprised, and that the numbers were not all that accurate.
The BLS announced yesterday that the payrolls report could be revised down by 911K jobs for the 12 months through March – about 76K fewer jobs per month. That would mark a record-high revision. In simpler words, it means that the US jobs market is in much worse shape than we thought. But it’s not the BLS’s fault. The BLS releases the jobs figures just days after the end of each month by extrapolating from a sample of data. In normal times, this works well and gives investors and economists an early and fairly accurate picture of the underlying jobs market. But in times of heavy disturbance – like we’ve had since the beginning of this year – the extrapolation works much less well, and the numbers now clearly show that the US economy is bearing the brunt of Donald Trump’s policies.
That means the Fed may indeed have fallen behind the curve – at least on the jobs front – while trying to anticipate tariff-led inflation. The latter could mean bigger and faster rate cuts in the coming months, depending on inflation. Today, the US will publish its latest PPI update for August. After last month’s circa one-percentage-point jump, headline PPI is expected to have steadied near 3.3%, and core PPI may have eased from 3.7% to 3.5% YoY. The real question is how much of the rising input costs will flow into the consumer price index – due tomorrow. The stronger the inflation figures, the slower the Federal Reserve (Fed) will lower interest rates – and that could demoralize investors who are currently happy to see the jobs market weaken in exchange for larger rate cuts.
As such, yesterday’s BLS revision didn’t boost appetite in US 2-year bonds, which best capture Fed expectations. The US 2-year yield rebounded to 3.55%, while the US dollar recovered – probably also on some safe-haven flows amid rising geopolitical tensions in the Middle East following Israel’s latest strikes in the region. Fed funds futures now give a 100% probability for at least a 25bp cut at next week’s FOMC meeting, and about an 8% chance for a 50bp cut. Stronger-than-expected inflation numbers this week could cement the case for a 25bp cut – which could lead to an upside correction in US short-term yields and the dollar, and weigh on equities. A softer set of figures would give more weight to the possibility of a 50bp cut, sending US short-term yields and the dollar lower, and equities higher.
The S&P 500 consolidated gains at ATH yesterday, as did the Nasdaq. Tech stocks were in demand, except for Apple – where the unveiling of its thinnest iPhone yet, but with no major AI news, sent the share price down 1.5% after the product reveal. A neocloud company called Nebius, on the other hand, jumped 50% after Microsoft announced a five-year agreement with the company, initially valued at $17.4 billion, with the option to scale up to around $19.4 billion depending on its compute needs. Jackpot! Another Microsoft neocloud provider, the Nvidia-backed CoreWeave, rose 7% as the deal confirmed how strong the demand for AI computing capacity is. Nvidia recovered 1.5%, while Broadcom – which has rallied on news of its cooperation with OpenAI to produce an AI chip to rival Nvidia – gave back 2.6%. Then, Oracle rocketed 28% in after-hours trading – yes, 28% – following its own massive deal with OpenAI and a jump in quarterly bookings. In summary, AI doesn’t know crisis.
Speaking of crisis: if you’re wondering how French markets behaved after another change in prime minister – the fifth in just two years – you’d be surprised to hear that the CAC 40 still eked out a 0.19% gain, despite a rebound in French 10-year yields. The DAX, in contrast, eased 0.37%. Yet, the spread between French and German 10-year yields spiked above 80bp, while the spread against the Italian 10-year collapsed to zero – for the first time since the early 2000s. Fitch is scheduled to deliver its review of France’s sovereign credit rating on Thursday. The current rating is AA- with a negative outlook. A confirmation with a negative outlook would signal caution, reinforcing market concerns, while a downgrade – due to prolonged political uncertainty – would be material, possibly triggering forced selling by institutional investors who must adhere to minimum credit thresholds. For the euro, the French political turmoil implies limited upside potential, and possibly a reversal of gains before reaching the 1.20 level. Also on Thursday, the European Central Bank (ECB) is expected to leave rates unchanged and repeat that its policy remains data-dependent.
In commodities, gold refreshed records – this time on safe-haven demand following escalating Middle East tensions – while crude oil remains bid on both the geopolitical backdrop and waning hopes in Ukraine. Nat gas futures also rebounded from a key Fibonacci support and could extend gains on fresh geopolitical concerns. The UK’s energy- and miner-heavy FTSE 100 continues to be supported by strong commodity demand. Yesterday’s mega-deal, in which Anglo American agreed to buy Canada’s Teck Resources for its copper mines, added to the momentum. It’s all about real and tangible assets, now that confidence in the most popular sovereign debt papers is crumbling.