Hot jobs number makes the Fed’s job more difficult: Strategist

The US added more jobs in May than economists were expecting. Economists had been expecting about 180,000 jobs to be added in the month, but the BLS report showed 272,000 were added.

Stephen Dover, Head of the Franklin Templeton Institute, says it’s going to make the Federal Reserve’s job a lot harder. “The Fed’s dealing with a car that’s got one foot on the gas and one foot on the brakes,” he says. “The Fed’s trying to slow things down. The fiscal stimulus is trying to speed things up, and so this makes things Fed’s job very difficult.”

Watch the video above to hear Dover explain why rates are not going to drop that much over the next 3 to 5 years.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Stephanie Mikulich.

Video Transcript

We also had that hotter than expected jobs print that’s really the driver in today’s early market action.

When you take a look at that hotter than expected print coming in at 272,000, a little over 49% of traders now betting that rate cuts are still coming in September down from over 55% in the prior reading to break it all down what this data means for equity.

We want to bring in Steven Dover.

He’s the head of Franklin Templeton Institute, Chief Market Strategist.

I it’s great to talk to you.

So I guess first just how would you sum up the print that we got this morning?

And what essentially it means for the markets?

Well, I think you got to say, hey, it’s hot, hot, hot, right?

It’s not only way above consensus, it’s above the highest number that economists thought were gonna happen.

The fed is in this predicament.

This is an important number for the fed.

Why?

Because they have this balance between unemployment and uh inflation.

This is a number that kind of indicates both here.

We have this last week where there’s sort of an indication inflation is down.

Um, interest rates might drop.

And then we have this number this morning, which is a reverse, one number doesn’t show everything.

But, um, it’s pretty important in indicator that the economy is still very strong, makes it difficult for the fed.

Steven.

We raised this question to Robert Sachin of city earlier and I’ll raise it to you too.

Does the fed run the risk of remaining higher for too long?

Well, of course, that’s a possible risk.

I, I think, um, I’m more a strategist.

I’m not an economist.

I’m trying to think, how does this impact investment?

How do I look at this going forward?

And ultimately, the way we think of interest rates is how we use them for discounting investments.

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And I think the implication of this could very well be that the long term interest rates that the, the rate at which the fed is going to keep interest rates over the next, I don’t know, 335 years is probably higher than we thought it was before.

Um, and so that’s gonna infect affect all sorts of different investments.

Um, I’m not worried right now, um, that the fed is keeping interest rates too high because this morning’s numbers indicate that the fed is, the current interest rates are not really pushing the me down the, the feds dealing with a car that it’s got 1 ft on the gas and 1 ft on the brakes.

The Feds trying to slow things down, the fiscal stimulus is trying to speed things up.

And so this makes the fed’s job very difficult.

Yeah, certainly.

And, and I guess the reason why I asked that question to you even knowing that you’re not an economist, but it all so impacts portfolio strategy.

If you have a fed, that continues to say the same thing for long enough, that means that the market may look at that and say, OK, there’s after a while, we can start to, to fade the importance of that and it puts more focus on other parts of the market.

And, and how would you evaluate that?

Where would you perhaps institute any type of rotation in that manner?

Well, I think that the first um rotation you have to make is that a little bit less focus on these weekly and all these numbers that are coming out, they’re just swinging us back and forth and trying to think where are we going?

And I think where we’re going is probably rates over the next 35 years are not going to drop all that much.

So we’re talking about whether we’re going to rate cuts this year, but the real issue is where are we going to end up when rates finally do drop?

There are some big changes just this week, Europe dropped interest rates, the differential between the US and foreign rates is growing, that’s going to have a big impact.

On the dollar that’s going to be, have a big impact on how we look at international investments.

I think one of the biggest opportunities potentially over the next few years is when the dollar finally drops and we see a AAA rematch between valuations in the United States and overseas.

But today moved in that opposite direction, strong for the dollar.

So Steven, when when it comes to those investment opportunities, then down the line, given those expectations and kind of this reassessment that we’re seeing play out in real time on the street.

How would you advise investors to position themselves at this point in the game?

So first of all, you got to look at um most investors maybe not the ones on this show, but most people out there, a lot of companies have a lot of cash.

They’re trying to make that decision when they move that cash into fixed income.

We’ve been advising people to move out of cash into fixed income.

Today is a little mixed, right?

Kind of well, rates might stay a little higher for longer.

It’s maybe ok to be in cash.

But we still think that the economy is going slightly slow down.

Rates are gonna go down and it makes sense to move out of cash into fixed income within fixed income spreads are very tight.

This is not gonna help that um at all.

So um you need to probably make your fixed income decisions more around duration and a little bit less um on spread within equities.

Um This is large cap positive, small cap negative.

So, um you know, there is a real bifurcation between those two those two areas.

So um hard on, hard on small cap companies.

And then as I mentioned, um globally, um Japan’s cheap, other countries are cheap, but they’re gonna be cheaper after the end of the day because uh that differential in interest rates is strong for the dollar Steven Dover, who’s the head of Franklin Templeton Institute’s Chief Market Strategist?

Thanks so much.

We appreciate it.

Thank you very much.

Bye bye.