The global interest rate cutting cycle began in earnest this week with quarter point cuts from both the ECB and Bank of Canada. Both were expected and signal that at least some central banks feel that inflation is under control enough to start the process of rate normalization. The Fed clearly isn’t there yet. It’s a long shot that the Bank of England will cut in June and will likely wait until September, so there’s not yet a consensus on inflation easing worldwide. Equity investors, however, keep acting like there is and are still pushing the S&P 500 towards record highs. On the flip side, Treasuries (up until Friday’s jobs report) were signaling caution. Gold is still not yielding (no pun intended) its position of strength. The strongest signal might be getting sent by small-caps. It can’t be understated how weak they’ve continued to perform relative to large-caps throughout this cycle. Even as long-dated Treasury yields were plunging, small-caps failed to make up any ground, even though this should be the group that benefits the most. The signals are, at best, still mixed here.
The May jobs report is one of those things where the headline number is great on the surface, but confusing underneath. Non-farm payrolls added 272,000 jobs compared to expectations of 185,000, but it’s the other numbers that raise questions. April’s number was revised downward by 10,000, something that’s been a consistent feature of the BLS numbers. The labor force participation rate dropped from 67.7% to 67.5%. The unemployment rate ticked up to 4% for the first time since January 2022. The number of employed persons dropped from 161.5 million to 161.1 million. How does every other number from Friday’s job report suggest labor market weakening, yet the headline jobs added number beats expectations by nearly 100,000? Something seems off here. I’m not sure what to believe and what not to, but the confluence of data as well as anecdotal evidence suggests that the labor market is still weakening here.
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