First and foremost, this is just one month's (May's) data.
In the greater scheme of things, while financial markets will focus on how this may impact direction in the short-term (today's trading), we tend to look for what the long-term implications are: what the underlying trend suggests for the North American economy and ultimately the global economy and how this may impact the assets that we hold in our client's portfolios.
Better than expected results on both sides of the border:
In Canada, while the jobless rate held at 6.8% for the 4th consecutive month, employment grew by 59,000, mostly in the private sector (economists expected approx. +10,000):
While this is a positive economic development and considerably lifts the average (30% of the last years gains came in May), we will wait to see if there are any revisions and whether next months data will continue the trend.
Meanwhile in the US:
Not only were the headline data (an increase of 280,000 non-farm payrolls) better than expected (223,000), the more important wage growth data (average hourly earnings = +.3%) were higher than expected (+.2%).
This is important because one of the last remaining data points to kick in to the recovery thus far has been wage inflation and it has given the Federal reserve breathing room for the timing of the inevitable increase in interest rates.
Certainly this could further add to bond market volatility as bond investors perceive higher future levels of inflation if this becomes a trend (higher wage growth) and will want yields to give them a greater premium over expected inflation.
Greater bond market volatility may lead to greater equity market volatility (as bond markets lead financial markets, one of our 2015 themes):
Yesterday the S&P 500 broke down through the lower end of the recent trading range (2100) and thus far this morning is trading at near the 2190 level.
If selling (profit-taking) appears as a result, this could mean that we will not see buying support until 2040 (which would be close to a 5% correction from the the highs.
With equity markets at rather expensive levels and earnings expectations for Q2 at negative levels, it would appear that the sellers might gain the upper hand through the next month or 2.
We shall monitor these developments closely as they may have some significance for our portfolio models which are positioned rather defensively (more cash than our target) at the moment.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist