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As a lousy golfer, I’m a big fan of mulligans. For those readers who don’t torture themselves on weekends or spoil long walks on grassy knolls, a mulligan is when a golfer replays a shot without penalty. In effect, a do-over. But they’re only allowed in casual play, not when the score matters. Every day counts in stock markets, however, but equity markets seem to be giving themselves a mulligan for yesterday’s declines anyway. The fact that it’s the first of the month and a Friday are almost certainly having an impact.
The nominal reason for today’s rally is the weaker-than-expected Nonfarm Payrolls report. October payrolls rose by only 12,000 – well below the 100k consensus – and the two-month revision was for -112k, 31k of which was for September’s report. That certainly seems to solidify the notion that the labor economy is weakening, thus opening the door for more aggressive rate cuts, even though the Bureau of Labor Statistics acknowledged that the number was likely affected by hurricanes and strikes. We saw bond yields fall sharply in the immediate aftermath, with the 2-year note yield down as much as 10 basis points and the 10-year falling by 5bp. Yet as we approach midday, the 2-year yield is up 1bp and the 10-year is up 6bp to 4.33%.
There are some who believe that 10-year yields above 4.3% would be a big negative for stocks. In theory, I don’t disagree. Higher yields provide competition for stocks and impede long-term valuations. But in at least in the short-term, those folks must have missed the memo about every dip being a buying opportunity. While there is a heavy degree of sarcasm in the prior sentence, it reflects the current equity trading mindset. If there is any reason whatsoever to bounce, equities will attempt to do so and traders will attempt to chase the rally for a while.
One reason for the bounce is the calendar. Many traders assume that new money flows into the market on the first day of a new month, and when combined with the largest decline in the S&P 500 (SPX) since early September, that seemed like a good enough reason to get overnight futures higher. And it’s much easier to base a day’s trading off the bond market’s initial reaction to an economic report rather than shift strategy when the bond traders do.
Remember also that today is Friday, was a day when we have over 600 so-called 0DTE options. On most days we only have a handful of index and ETF options that expire; on Fridays, hundreds of the most popular single-stock options also expire. Expiring options have become a popular means for traders to chase and accelerate rallies, especially since 2021, when we first explained the phenomenon. The rally seems to be taking a lunch break right now; let’s see whether there is another push in the afternoon or some pre-weekend book squaring.
It would be understandable if we see some book squaring into the close. A deeper read of today’s employment report is not uniformly market friendly. The Unemployment Rate held steady at 4.1%, implying that there is neither a surge in newly jobless workers, nor a rush back into the labor force from those on the sidelines. It also calls into question the recent triggering of the “Sahm Rule.” Furthermore, Average Hourly Earnings rose 0.4% on a monthly basis, above the 0.3% consensus. That was offset by a downward revision of last month’s report, from 0.4% to 0.3%, but either way, consistent readings in the 0.3-0.4% range are not consistent with a 2% inflation target. That’s why Fed Funds expectations only moved up slightly.
Related: A Spooky End to the Month; Looking to AAPL and AMZN