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The strong jobs report is just strong enough, says a cautiously optimistic U.S. stock market

Andreas Solaro/AFP/Getty Images

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That sound you heard Friday morning was Wall Street letting out one big sigh, and then a bigger second one.

With the coronavirus delta variant raging globally and posing another threat to an already uncertain economic recovery, Friday’s stellar U.S. July jobs report caused waves of relief to ripple through the markets, especially as investors digested the numbers as good enough to make them optimistic but not good enough to do the same for Jay Powell.

Both the Dow Jones Industrial Average DJIA, +0.46% and S&P 500 SPX, +0.10% closed at record highs to end the week after a better-than-expected July employment report from the U.S. Labor Department that saw the creation of 943,000 new jobs and the unemployment rate falling to 5.4% from 5.9%. The strong print managed to offset growing fears about slowing cyclical economic growth and the possible impact of surging COVID cases powered by the delta variant.

The report also provided a brighter picture than ADP’s private-sector employment report from Wednesday which showed only 330,000 jobs added in July, hugely underwhelming the 653,000 forecast. That report ramped up the concern about the economic impact of COVID’s resurgence, but ADP’s numbers have also been less reliable during the pandemic, leaving many investors to adopt the stance that they would not panic until they saw Friday’s numbers, which many admitted would not yet fully take the spread of the delta variant into account.

But while Friday’s report was good enough to send investors home happy for the weekend, it’s real impact might be seen next week as those same investors realize that the print wasn’t good enough to change the mentality of an accommodative Federal Reserve,

“This number was really good, but the best part was it wasn’t so strong that the Fed would have to change policy,” Ryan Detrick, Chief Market Strategist for LPL Financial wrote Friday.

The Federal Reserve has made it clear that it wants to start the dreaded withdrawal of its monetary stimulus measures, including a tapering of its bond purchases, which has prompted investors to try to thread the needle by looking for economic growth that would still leave just enough weakness to keep interest rates low for a while longer.

Fed Chair Powell and his fellow policymakers have their trigger fingers on the “Taper” button, creating almost as much fear on The Street as a new COVID surge among an increasingly vaccinated population, but Friday’s employment report may mean the trigger will not be pulled just yet, hence the relief that is likely to be reflected in next week’s trading.

“Chairman Powell is still looking for substantial labor market improvement and this print is a clear step in the right direction,” said Issac Boltansky, Director of Policy Research at Compass Point. “But I think he and the majority of his colleagues will want to see more progress before the taper begins.

That ‘nice but not too nice’ sentiment was echoed in U.S. Treasury yields, with the 10-year Treasury note yield jumping about 7 basis points to settle at 1.288% on Friday, leaving yields still at the low end of their range for the year.

The big winners from an optimistic start to next week will not be in the tech sector. The only stock index to pull back on Friday was the tech-heavy Nasdaq Composite COMP, -0.49% which got somewhat de-FAANGed as shares of Apple AAPL, -0.34%, Amazon AMZN, -0.63% and Netflix NFLX, -0.79% all closed down as bond yields rose.

While Friday’s sanguine mood might spread into next week, it does not appear destined to last long. 

Next week also brings the consumer price index for July on Wednesday and investors will be looking ahead to the end of August when Fed leaders and other economists will meet in Jackson Hole, Wyoming for their annual conference and tapering will again be the hot topic.

But it won’t be the only topic as even Powell’s future as America’s monetary policy czar is in question as of late. Powell’s term ends in February, 2022 and the question is whether President Joe Biden will renominate him for a second term.

“More broadly, there are a number of known unknowns on the horizon including the impact of the delta variant, the expiration of enhanced unemployment benefits, mortgage forbearances rolling-off, uncertainty regarding the eviction moratorium, and kids returning to school,” said Boltansky. “And of course the leadership of the Fed.”

See also: U.S. inflation is still running high – and it doesn’t look like it will fade fast soon

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