Jobs Report: A Tale of Two Trades

NEW YORK ( TheStreet) -- Friday's monthly jobs report tells a tale of two trades.

In 2012, market observers used each of the Bureau of Labor Statistics's monthly employment reports to gain a pulse on the presidential election. If non-farm payrolls could grow at a steady pace, critics argued, it would provide President Obama the momentum he needed to win reelection on the back of a seemingly improving economy. Otherwise, it was Mitt Romney's race to seize. Ultimately, Obama cruised to a second term.

In 2013, the focus has shifted. Markets are on round-the-clock Federal Reserve watch. And the tale of two trades are obvious: participants who buy and sell based on the strengths or flaws of economic fundamentals, and those who buy and sell on whether those economic indicators will lead central bankers to scale back stimulus measures.

Look to Friday's market action following the jobs report to explain.

The S&P 500 popped at the opening bell as the 195,000 new payrolls added in June, the upwardly revised 195,000 added in May and the upwardly revised 199,000 added in April boosted the average monthly gain to 182,000 during the prior 12 months. Hourly wages increased 10 cents in June from May.

Good news, right?

Maybe. The S&P quickly relinquished its gains and slightly dipped into negative territory for a tick around 10:30 a.m. ET.

"In this bizarro world we're in, where good is bad and bad is good, we might see the Fed take their foot off the QE accelerator a little bit and maybe start buying less bonds sooner than the market had predicted," said Michael Serio, regional chief investment officer for Wells Fargo Private Bank.

That was the general feeling among analysts TheStreet interviewed Friday morning when the market headed lower after the upbeat opening.

Housing data, consumer confidence, labor statistics and a raft of other positive economic indicators generally have shown a stronger trend of improvement in recent months than at any other time during the recovery. But an improving trend hints that the Fed may finally have the wiggle room to draw down its monthly purchases of mortgage-back securities and longer-term Treasuries -- which is more generally understood as monetary stimulus.

Markets may have worked into negative territory for a short blip on Friday because a strong jobs report hints that the Fed could taper as soon as September, Gene Goldman, director of research at Cetera Financial said.

A spike in the yield on the benchmark 10-year Treasury note seemed to telegraph that possibility.

The 10-year note on Friday was plummeting 1 23/32, boosting the yield to 2.715%, the highest level seen in about two years. TheStreet's Jim Cramer said Friday that the 10-year's run this week to 2.6% from 1.6% yield on May 22 shows that the bond market "correctly ran ahead of tapering." Bond trades on Treasuries anticipate what the federal funds rate will be in the future. Though Fed Chairman Ben Bernanke last month reiterated that the central bank would not raise short-term rates any time soon, market participants do understand that rates could increase within a 10-year timeframe, which would affect the 10-year note.

Before it raises the federal funds rate, though, the Fed must begin to scale back its quantitative easing efforts.

Unprecedented monetary policy has lent support to the rally in major U.S. equity markets since the bottom of the financial crisis in mid-2009. The worry among many traders is that when the Fed pulls back on stimulus, it could hurt the market, especially if tapering by the central bank occurs too soon and adversely affects the economy.

Of course, the degree to which the macroeconomic environment can handle a Fed pullback and stay stable remains to be seen.

Which introduces the other trade in this "bizzaro" market world: Stocks gapped up at about 12 p.m. ET to session highs and held on to gains by the closing bell.

This, said Quincy Krosby, a market strategist at Prudential Financial, could have been a result of the market having fully digested the jobs report and having determined that the positives outweighed the worries of a Fed taper.

"It sounds cliche, but this market wants to move higher," said Krosby.

The Institute for Management Supply's manufacturing index on Monday lifted higher than 50 at 50.9, which indicates growth in the industry. A report last week on New homes sales rose at a quicker-than-anticipated annual clip by 476,000 in May. Friday's report on June jobs was solid. The indicators are all steadily improving.

"What we've thought would happen continues to happen that in terms of the economy, growth is slow and steady," said Tim Holland, portfolio manager at Aston/TAMRO Funds. "The sort of slow healing of the economy continues, and that should be really good news for the consumer, and that should also hopefully continue to tie back to support for housing even with slightly higher interest rates."

If the improving economic data is a true recovery, then the Fed's tapering shouldn't tank the economy. Bernanke and the Fed have said as much. They will only taper if they believe the economy can withstand such a shift.

So when the market sells off on good economic data, it suggests that market participants are betting that the Fed will scale back monetary stimulus and that the economy isn't improving as much as the data reports.

But if we start to see more trading sessions like Friday's -- a gap up on strong economic information, despite concerns that it will fuel the Fed to scale back on the juice -- we could see the start of a shift back to pre-crisis market fundamentals.

For July 5, it appears the market accepted the June payrolls at face value.

-- Written by Joe Deaux in New York.

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