Today we will hit two topics, NPF and MOAB.

Let’s Start with NFP

About as good as it gets for the economy, not so good for Fed cuts.

Not only were the headline jobs better than the top estimates on Bloomberg (303k jobs), but we also revised prior job reports up by 22k.

Wages are doing reasonably well, with monthly wages coming in 0.3%.

What is most impressive to me is the unemployment rate coming down to 3.8%. That occurred while the participation rate increased nicely. At 62.7%, it is just a smidge below the post-Covid high of 62.8%. The Household Survey (which is used for unemployment) added 498k jobs!

Definitely not “Goldilocks” for the Fed, but good for the economy.

• Yields should rise a bit and curves should be less inverted.
• Stocks should probably react slightly negatively to the report as yields rise. But offsetting that yield rise is the sheer strength of the economy and the fact that the consumer should be in good shape.

What Does MOAB Have to do with Anything?

Nothing and everything. MOAB or “Mother Of All Bombs” isn’t front and center, but Escalation and Expansion is. Thursday’s big drop in stocks was precipitated by fears that Iran was preparing to attack Israel. Part of why stocks were higher overnight (and are still strong post-NFP) is because nothing happened overnight in terms of escalation and expansion (you can see that in oil too, which is hovering around unchanged).

We dealt with our thoughts on Hedging Geopolitical Risk at the start of the year and remain convinced of two things:

• Long energy (and energy stocks) is the best hedge, since we like that sector already for a variety of reasons, and the next potential shoe to drop would be cracking down on Iran’s 3.5 million barrels of oil being sold daily.
• Flight to safety is unlikely to work well. Yes, on Thursday afternoon, bonds showed a “flight to safety” trade, but I suspect that will be short lived. This is because the rising cost of oil and the realization that (globally) deficits will rise to increase military spending will weigh on bond yields (especially out the curve).

Make no mistake, the global Game of Chicken continues, and in my analysis, the “enemy” sees weakness and thinks we will veer.

So, once the market is done digesting the payroll data (which was truly exceptional), look for risky assets to trade poorly (lower stocks and wider credit spreads).

I think enough support has been broken on the longer end of the yield curve (and most people seem bullish bonds) that we could see this crack, especially if oil does gap higher.

The talk from the start of the year was about Geopolitical Risk. It is definitely time to act and not just talk as the risk of “clear and present danger” is very high at the moment.

So, for me, MOAB as a euphemism for geopolitical risk outweighs the NFP report today.

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