Solid jobs boom sparks morning rally, but Fed caution and AI anxiety flip the script

First — we get what can only be described as a solid jobs report. Nonfarm Payrolls came in at +130k versus expectations of just 70k. And if you really want to understand it — look under the hood. Private payrolls exploded higher, adding 172k jobs. The only thing dragging down the headline was a loss of 42k government jobs (which is huge bonus!).

I was on Mornings with Maria yesterday and was part of her panel to discuss the impact of the report. Click below to watch.

Unemployment ticked down to 4.3% from 4.4% — which, by the way, is even more ‘historically’ full employment – suggesting the labor market is not rolling over and playing dead. Wages? Right in line. Up 0.4% month-over-month and 3.7% year-over-year – better than the rate of inflation - another positive.

So, what happened?

Stocks did exactly what you’d expect — they surged. Because if the labor market is stabilizing, that’s constructive. It tells you the economy isn’t rolling over. But bonds? Bonds sold off. Because strong labor data suggests the Fed is in no rush to cut rates. And if the Fed isn’t cutting, the easy-money crowd gets nervous.

And so, it was — until it wasn’t.

As the day wore on, the narrative shifted. It always does. The same data that was “resilient” at 9:00 a.m. suddenly became “too strong” by 1:30 p.m. The focus went from growth is good… to no need for further rate cuts (at the moment).

Classic -Morning celebration. Afternoon - second-guessing. Capisce?

The Dow lost 66 pts, the S&P ended flat, the Nasdaq lost 36, the Russell gave back 10 pts, the Transports added 8 pts, the Equal-Weight S&P added 18 pts while the Mag 7 lost 176 pts.

And that negative? Well… it wasn’t just one thing. First - it was the Fed parade. Cleveland’s Beth Hammack. Then Dallas Fed President Lorie Logan. Then Kansas City’s Jeffrey Schmid. One after another basically saying the same thing:

Let the prior cuts work their way through the system before we just slash and burn rates again. Monetary policy has lags. And oh, by the way, cutting too aggressively risks reigniting inflation. And tomorrow we will get the latest CPI report - so that is top of mind.

Translation? The “cut now” crowd is just going to have to wait and that causes them to throw a temper tantrum and hit the ‘sell’ button.

And that’s when investors started to rethink the whole thing…. Because if the labor market is stable and Fed officials are comfortable holding steady — the urgency for rate cuts fades.

Which then raises the bigger question — how exactly is Kevy Warsh going to corral this FOMC into speaking with one voice if the mission is to lower rates? Recall - Fed chairs don’t just make the decision – it is a committee vote – He has to build consensus. And right now? The committee doesn’t sound ‘consensual’!

But wait – there’s more -

Enter stage left - National Economic Council Director Kevin Hassett — coming in hot — saying there’s plenty of room to cut because AI-driven productivity will boost supply, increase output, and keep inflation contained.

In other words — growth without inflation. BINGO! (which should be good).

And just like that… now we’ve got dueling narratives. Fed officials saying: careful. The White House saying – there’s plenty of room. And as usual the market gets stuck in the middle.

And then — because apparently we like piling it on — the AI panic flared up again. Remember what I said – once the focus turns negative then everything suddenly becomes negative…. (and vis versa – but yesterday it was negative).

Tuesday it was the wealth management firms — Schwab, Stifel, Raymond James – all getting whacked - investors suddenly questioning how “automated” advice might disrupt the model. Yesterday? It was Real estate services. Think CBRE down 12%, Compass down 12%, Cushman & Wakefield down 13%, CoStar off 6%. It’s the same story – Investors, traders and algo’s are suddenly trying to handicap which white-collar industries are most vulnerable to the next wave of AI disruption.

But here’s the irony… On the one hand AI-driven productivity is the argument for cutting rates (which is good for stocks) while at the same time AI-driven disruption (apparently not good for stocks) is the excuse to sell stocks.

This isn’t about fundamentals – Why? Because companies and people will adapt…. we always do…. Yes, some jobs will be eliminated (trust me I know it happened to me at the NYSE and I’d be happy to discuss) and new jobs will be created. There is historical precedent – we have seen it thru the prior 3 industrial revolutions….and while it is uncomfortable, it is what it is. This is about anxiety and the speed at which the narrative flips tells you how anxious the sentiment really is. It goes from optimism, to doubt to AI panic! And so, what we see is investors rotating out of the labor-intensive sectors – due to potential AI disruption and into less vulnerable names – which at the moment are in a range of sectors…. Energy + 23% ytd, Basic Materials + 17% ytd, Consumer Staples! +14% ytd, Industrials + 12.6% ytd….

In the end, I think this year is going to be a ‘value year’ over ‘growth year’. And that is currently the state of the union…the Value Trade – SPYV is up 4.6% ytd while the Growth Trade – SPYG is down 1.3% ytd.

Bonds got sold on the news…. the TLT and TLH both lower – down 0.5% and 0.4% respectively and that caused rates to rise…. the 10-yr shot up to 4.20% (up 7 bps) before settling in at 4.17%. The 30-yr shot up to 4.83% up 8 bps before settling in at 4.79%. In the end – I think rates stay right where they are and as long as the 10 yr doesn’t pierce 4.5% and the 30 yr. stays below 5% - then stocks can continue to run.

Oil continues to churn in the range that we identified……$62/$66.50…today it is trading at $64.45. There is no reason to break out nor break down.

Gold has quieted down – consolidating as the market recalibrates its expectations. Look - the drivers that fueled the surge have cooled. The dollar has stabilized, rate-cut urgency has faded after solid private payroll growth, and real yields have firmed as Fed officials signal patience. So, here is the lesson or today - When the “slash rates, debase the dollar” narrative loses steam, the momo guys stop the hysteria and take a breath. For now - gold has settled into the $4,995/$5,055 trading range.

Bitcoin is trading at $68,000, Ethereum around $1,900, and Solana is at $81.

The dollar is trading at 96.84 and remains in the 96–98.50 range, exactly as discussed.

European markets are higher – German up 1.4% while the UK is up 0.1%.

And the anxiety continues here and investors thrash around - this morning we see …. U.S. futures are higher – Dow up 132 pts, the S&P up 22 pts, the Nasdaq is up 85 pts, and the Russell is up 17 pts.

Eco data today includes Initial Jobless Claims, Cont. Claims and Existing home Sales – which are expected to be down 4.6% - but let’s see…. remember – that read is from January – typically a very quiet time of year for home sales.

Today is another busy earnings day. Before the open we’ve got reports from American Electric Power, Exelon, PG&E and Fortis – all in the utilities space, CBRE in commercial real estate – interesting after yesterday’s punch in the face, Howmet Aerospace in industrial manufacturing, Iron Mountain in business services, and Restaurant Brands International and Crocs representing consumer restaurants and retail.

The S&P closed at 6,941 down 66 pts and still unable to pierce 7000……Futures this morning suggest we will try again…..but my guess is that we will fail….just too much anxiety (in the growth trade) for the S&P to push up and thru – although is you look at the Equal Weight S&P you see it is making new highs and that speaks to the transition from growth to value, cyclical and defensive plays.

Fusilli with White meatballs

This is just Fusilli and meatballs without tomato sauce.

For this you need the hamburger meat to make the meatballs, parmegiana cheese, eggs, s&p, parsley, onion, garlic and Italian bread soaked in milk. You also need fusilli, lite cream, butter, fontina cheese & olive oil.

Ok – bring a pot of salted water to a rolling boil.

Start by sautéing the chopped onion and garlic in olive oil.

Make your meatballs and be sure to add the softened onions and garlic to the mix.

Roll them into golf ball sized meatballs. Fry them in a bit of olive oil. When done – add in the cream and then the grated fontina cheese to make the meatballs and sauce.

Add the fusilli to the pot and cook until aldente.

When the fusilli is done – add it to the meatballs and sauce – mix to coat and serve immediately in warmed bowls. Have extra parmegiana for your guests.