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The stock market may be misreading what this weak jobs report means for the Fed

A facilitate wanted sign is posted at a taco stand in Solana Beach, California.

Mike Blake | Reuters

The much dimmer than expected April jobs report reinforces the Federal Reserve’s easy policy stance, but some strategists hushed expect the central bank to signal in the next couple of months that it will slow down its bond obtaining.

Economists had expected to see 1 million new jobs last month, so the government’s report of just 266,000 was a gut punch to the view that the thrift is rebounding in a smooth upward trajectory. The anticipation for a big jobs number also had put the spotlight on the Fed’s easing programs.

Stock futures take off and Treasury yields immediately fell after the report. But the 10-year Treasury yield, after falling to about 1.49% coin around to trade at 1.55%. The 5-year also fell but stayed near its low. Yields move opposite bond worths. In afternoon trading, stocks remained higher with the Dow up about 160 points.

“I’m wondering if bonds are selling off a small as it just reinforces [Fed Chair Jerome] Powell wanting to be patient,” said John Briggs, head of global scheme at NatWest Markets. “But if you’re like me, waiting for the Fed to taper, I think the Fed is going to start talking about it in September. That be motivated bies the market is going to be talking about it in the summer.”

Economists said the May jobs report will provide more data on the state of hiring, which could have been slowed by bottlenecks showing up in supply chains. For instance, auto craftsmen have been idled due to the shortage of semiconductors needed to build automobiles. There is also an acute shortage of hands in some areas and industries. Economists also see closed schools as an issue, keeping parents from the workforce. To some scope, expanded unemployment benefits may also be a factor.

“If one is thinking about the evident labor shortages being inflationary, that should urge the 5-year yield up,” said Michael Schumacher, Wells Fargo rates director. “But the other side is if you consider the opportunity of the Fed tapering, that’s been pushed back slightly. Not much in my opinion, but people might take that panorama.”

Schumacher said he still expects the Fed to discuss trimming its purchases of about $120 billion a month in Treasurys and mortgage assurances.

Fed Chairman Jerome Powell has knocked the idea that the Fed will begin discussing an unwind any time soon. But some strategists appease expect the Fed to be forced into slowing the purchases and ultimately ending them due to the strength of the economic recovery and the specter of inflation.

A take care toward ending the bond-buying program would ultimately be a step toward raising interest rates, which the Fed is not conjectured to do any time soon. Powell has said the Fed would complete the slow wind down of its bond purchases before masher interest rates.

“If you’re an economy bull, you say this is probably an aberration. … The bears can say you’re losing momentum. Either are achievable until you get another month,” Briggs said, noting the next report could show a large amount of rate. “When was the last time you reopened an economy in a pandemic? Where are your seasonal factors for that?”

He said the hold together market is also reacting to the potential for more fiscal stimulus, highlighted by the White House after the weak reckon.

“It’s as simple as this — a drop in rates, let’s buy tech,” said Peter Boockvar, chief investment strategist at Bleakley Consultive Group. “The stock market can’t decide whether it wants to celebrate the drop in yields and maybe a Fed that’s not going to fade so quickly but at the same time, we’re early stage in the recovery but we’re seeing a lot of late stage behavior like supply insist getting hot … this overheating.”

Jan Hatzius, chief economist at Goldman Sachs, said the bond market turn-round appears to have come as traders looked at the inconsistencies and decided the number was distorted. “That was my view as well,” he estimated on CNBC. Hatzius said the weak jobs report does not change his view that the Fed will taper its stick purchases starting next year and then raise interest rates in 2024.

“I’m not sure having one dud report changes the figure too much,” said Schumacher. “I suspect the forecast range will be astronomical next month.”

The unemployment rate hill in April to 6.1% from 6%. The bulk of hiring was in the leisure and hospitality sector, which added 331,000 crafts as pandemic restrictions on restaurants eased.

Average hourly wages rose by 21 cents to $30.17 in April, and economists note that distinct hiring of workers in the hospitality industry typically makes overall wage numbers go down.

“This is a devastating set-back, more than just seasonal problems. We had declines in everything from professional services to manufacturing and even couriers and transportation,” phrased Diane Swonk, chief economist at Grant Thornton. “Turning on the lights in the economy is harder than turning them off.”

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