Daily Brief - Job market is cool(ing) again

TLDR: In divining the trajectory of Fed rate cuts, it’s going to come down to the labor market. The Fed has a dual mandate and while keeping an eye on inflation has been about as thrilling as watching paint dry, the job market is finally showing some action. And the early read is pointing to a more aggressive rate cut path.

The monthly payroll number is still flexing, but it’s no longer bench-pressing those 250,000-pound rolls it tossed around last year. Unemployment has woken up from the half-century slumber at 3.4% and casually waltzed up to 4.1% by June. Layoffs, more an urban legend a few months ago, are becoming a feature of our workforce landscape.

No surprise then that the market - red dots in the chart above - is already turning more aggressive in its aggregate cut expectations relative to Fed’s own projections. Investors now expect the Fed to end the year at 4.25 and next year at 3%.

The picture is far from dire but the cracks are becoming a lot more apparent. The economy is no longer willing to absorb just any type of worker, and the longer-term unemployment total (workers that have struggled to find a job for over 6 months) is creeping up.

Another eye-catching development is the notable evaporation of 49,000 temporary jobs. For context, losing temporary workers is the corporate equivalent of throwing non-essential baggage off a sinking ship; they’re always the first overboard when budget cuts come knocking. Historically speaking, a serious nosedive in temp employment is the Pied Piper of impending labor-market woes. The steady wane of temp jobs since early 2022 maintained its less-than-glamorous trend, with this June marking the most significant single-month exodus we've seen in a full two years.

Things are about to get interesting and, judging by the price action, equity and fixed income investors are fast catching up with the news.

Market Movers: Sectors response to unemployment spike

Here are the historically best and worst performing US sectors when the unemployment rate previously crosses above 4%:

Top 3 Performing Sectors:

1. S&P Health Care: 3.79%
2. S&P Telecom: 2.71%
3. S&P Consumer Discretionary: 2.17%

Bottom 3 Performing Sectors:

1. S&P Energy: -1.55%
2. S&P Industrials: -0.58%
3. S&P Financials: 0.76%

Earnings Spotlight: Overreaction to NVIDIA earnings?

Nvidia once again exceeded Wall Street's expectations with its latest earnings report, but in a company accustomed to extraordinary growth, even impressive numbers can fall short of investor expectations.

The AI chipmaker, a key driver of this year’s market rally, reported over $30 billion in sales for its fiscal second quarter, a 122% increase from the previous year and above analysts' expectations of $28.7 billion. Profits also surged, reaching $16.6 billion, well above the $15 billion forecast.

Nvidia provided slightly better-than-expected sales guidance for the upcoming quarter, yet its shares dipped by as much as 5% in after-hours trading. Investors seemed disappointed by the narrow margin of the earnings beat and were also concerned about potential delays in the release of the company’s latest AI chips, Blackwell.

However, Nvidia reassured that revenue from Blackwell is still expected within this fiscal year, indicating that the company’s growth momentum remains strong despite the market’s initial reaction.