The labor market has been the last bastion of defense against the various threats to the current economic expansion. Inflation may be intractable. Global growth may be a concern. But don’t try to tell me a recession or even a contraction is in the cards with the average NFP number hanging out around 200k and an unemployment rate under 4%!
After today, we have 2 NFP readings in the past 4 months falling well under 100k for the first time since the labor market crawled out of its hole in 2011-2012. Combine that with already-swirling fears about global growth, trade wars, and other sectors of the domestic economy and it makes some sense that investors are starting to get nervous. In fact, they were clearly nervous BEFORE this morning’s jobs report if Fed rate cut expectations were any clue (a full rate cut is priced in to swap markets for July) and the hard data merely validated the fear.
This definitely could have gone the other way had the number been stronger than expected. To be sure, bonds are in overbought territory and could easily be coaxed into a bit of a selling spree if they encounter the wrong combination of data and events. But as we sometimes discuss, that scenario is so obvious that we can assume an abundance of traders were positioned for it. Then days like today happen and that hoard of traders is forced to capitulate (i.e there were lots of short positions forced to cover).