Payrolls came in at 114k vs. expectations of 175k, and more importantly, the unemployment rate rose to 4.3% from 4.1% prior. Finally, average annual earnings declined to .2% vs. expectations of .3%.
The data confirms that the economy is slowing which the market already knew but the Fed hadn't figured out yet. We forecast that we will have 3 rate cuts this year, but that the fundamentally flawed Fed will not cut by 50bps in September as it operates as if its third mandate is to be behind the curve.
We do not, however, believe that the US will enter a recession as the most critical financial condition is the 10-year treasury which has fallen over 80 bp over the two months. We expect the weakening housing market to stabilize as the drop in the 10-year feeds through to mortgage rates. Housing inventory has been rising but is still near an all-time low. Declines in housing and auto investment have precipitated all 12 post-WWII recessions.
We reiterate our 3.5% target on the US treasury bond as global rate cuts cause the global money supply to expand rapidly which flows into the capital markets. We also reiterate our 6,000 target on the S&P with a likely rally coming toward the end of the year as we get clarity on the election and the economy continues to show slow growth but not a recession. We reiterate our call that yield securities will outperform as the rate drops. Preferred stocks are attractive as rates drop and the economy is resilient enough to avoid default risk.
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