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Eyeing payrolls progress

The Federal Reserve wants to see “substantial progress” in the economy before it makes any move towards removing accommodation. They haven't specifically defined what that is, but they'll know it when they see it.

But if Fed Chairman Jerome Powell has used his press conferences for anything, it's to hammer home the point that he's still very concerned about the labor market, one-half of the Fed's dual mandate. “I'd say we have some ground to cover on the labor market side,” Powell said after July's decision dropped. “I think we're some ways away from having had substantial further progress toward the maximum employment goal.”

The July employment report arrives today at 8:30 a.m. ET, with economists, on average, looking for nonfarm payrolls to rise by 870K, compared with 850K in June. The jobless rate is seen dropping to 5.7% from 5.9%.

A very strong payrolls gain could lead to the Fed hinting at tapering as early as the Jackson Hole symposium this month, Jennifer Lee, senior economist at BMO says, although she is looking for a below-consensus gain of 775K. “As long as we continue to see over 500K or 600K every month, steady gains, cutting away at those losses... that to me would be 'steady progress,'” Lee said on Bloomberg.

Anybody's guess: Looking more closely at payrolls expectations, it's clear that once again Wall Street is all over the map. Forecasts range from up 350K to up 1.6M, according to Reuters.

Data points this week have been mixed. Jobless claims, while not part of the survey period, are trending in a direction that points to an improving labor market, falling to 385K, but ADP's measure of private sector payrolls came in at a relatively anemic 330K, less than half of what was expected.

In the more bearish camp, BofA Securities is looking for a 750K rise in payrolls, which it says reflects the “relatively softer high frequency data.” “Since the July employment week, the Homebase data continue to suggest labor market conditions are softening,” BofA economist Stephen Juneau writes in a note. ”Indeed, the employees working index averaged -16.3% during the week ending August 1, nearly 1.8% below the prior week’s reading.”

“It’s likely this gets revised up but it appears that small business employment growth is slowing despite more and more states opting out of unemployment benefits and overall robust demand,” Juneau says.

“The end of the month, UKG (Ultimate Kronos Group) data suggest that shift work employment actually declined in July,” he adds. “Indeed, the series shows a 0.6% drop from June. We think this drop could be partially seasonal as it may reflect summer production slowdowns.” “Additionally, UKG found that the decision of states to opt out of unemployment insurance benefits did not yield faster employment growth in an analysis of their data. This is consistent with what we’ve seen in the claims data.”

Jefferies Chief Economist Aneta Markowska is much more bullish, calling for a rise in payrolls “well above” 1M and closer to 1.5M, citing expiring UI benefits and seasonal factors. “Aggregating claims based on program expiration dates shows that the most meaningful declines occurred in the second and third weeks after the last enhanced UI payments,” she writes in a note. “This implies a sizable NFP increase in July and even larger gains in Sep/Oct.”

Will substantial progress stymie stocks? All things being equal, recovery in the labor market toward pre-pandemic levels should be bullish for equities, further boosting the potential for earnings growth. But with the historic amount of Fed easing involved, the stock market could be back to a good-news-is-bad-news scenario.

“A stronger than expected number is likely to encourage additional members of the Committee to make a hawkish pivot, raising the chances of a taper sooner than the market expects,” Caxton senior analyst Michael Brown writes. “As such, good news on the economy is likely to be bad news for risk assets in the aftermath of the report.”

Fed speakers this week have floated the idea that the FOMC could be ready to start tapering in September. “There's no reason you'd want to go slow on the tapering to prolong this. You want to get it done and get it over with,” Fed Governor Christopher Waller says. Tapering would likely push Treasury yields higher, removing a key reason for the path of least resistance for stocks still being up and to the right, even at record levels.

This week, Citi downgraded U.S. equities to Neutral, calling for the 10-year Treasury yield (NYSEARCA:TBT) (NASDAQ:TLTto rise to 2%, with a 70 basis-point rise in real yields, which are now at record lows. Global equity strategist Robert Buckland writes that Citi's rate strategists “attribute much of the move to technical factors. Most notably, U.S. treasury issuance has dropped over the summer, but will rise again later in the year. They think that this, along with ongoing economic recovery and likely QE tapering, will push 10-year bond yields back towards 2.0%.”

Goldman Sachs just boosted its 2021 target for the S&P 500 (SP500) (NYSEARCA:SPY) to 4,700 from 4,300 in part due to the lower-than-expected rates. But strategist David Kostin says that rates above 1.6% would cut fair value back down to 4,350, below current levels. (2 comments)

Robinhood reverse

Robinhood Markets (NASDAQ:HOOD) stock slid 28% yesterday, backtracking from its 50% climb on Wednesday.

Late Wednesday night, Robinhood filed to register almost 100M of shares that some of its pre-IPO investors may sell from time to time. That sent the shares on a downward trajectory. While the stock fell in the first session after the IPO, it closed at $70.39 on Wednesday, 85% above its $38 IPO price, as retail investors piled in, bringing it to meme-stock status. (26 comments)

Amazon worker return

In what may be the biggest sign of corporate America's concerns about the recent spike in COVID-19 cases, Amazon (NASDAQ:AMZN) has put off plans for employees to return to the office until 2022. According to an initial report in the Seattle Times, Amazon told its technology and office staff to continue to work from home until at least Jan. 3 of next year.

"As we continue to closely watch conditions related to COVID-19, we are adjusting our guidance for corporate employees in the U.S. and other countries where we had previously anticipated our employees would begin coming regularly in the week of Sept. 7," the company said in a statement provided to Seeking Alpha. "We are now extending this date to Jan. 3, 2022." (158 comments)

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iPhone scanning

Apple (NASDAQ:AAPL) is said to be about to debut a new software feature that will be able to scan and detect child abuse images on the iPhones of Americans.

According to a report in the Financial Times, the features will use an algorithm that will scan photos on a person's iPhone, and which have been uploaded to their iCloud account, to look for images that are on the national database of known images of child sex abuse. The images would be flagged and reported to law enforcement authorities if there is a match with those photos in the national database.

The company has used such technology, called "hashing" for photos loaded up to iCloud, but it is believed that this would be the first time Apple would employ hashing directly on users' iPhones. (177 comments)

M&A anxiety

Spreads of major deals such as AMD's (NASDAQ:AMD) purchase of Xilinx (NASDAQ:XLNX) and Analog Devices (NASDAQ:ADI) acquisition of Maxim Integrated (NASDAQ:MXIM) narrowed after hitting some of the widest levels ever since the deals were announced.

“I’ve never seen anything like it," Roy Behren, managing member and portfolio manager at Westchester Capital, said in an interview with Seeking Alpha. "Maybe in March of 2020 with the COVID, other than that, you can tell people are just selling out of positions."

Behren attributes the recent widening in deal spreads to Aon (NYSE:AON) and Willis Towers Watson's (NASDAQ:WLTW) decision to terminate their deal last week, which caught risk arb investors by surprise. (37 comments)

Ethereum pops

Ethereum (ETH-USD) rallied as the cryptocurrency's London hard fork activated yesterday, upgrading the blockchain technology.

The most important part of the change is EIP 1559, a fee reduction feature, Ethereum inventor Vitalik Buterin told Bloomberg News in an interview. The hard fork is "proof that the Ethereum ecosystem is able to make significant changes," he said. (13 comments)

Today's Markets

In Asia, Japan +0.3%. Hong Kong -0.1%. China -0.24%. India -0.3%.
In Europe, at midday, London -0.1%. Paris -0.1%. Frankfurt +0.2%.
Futures at 6:20, Dow -0.3%. S&P -0.1%. Nasdaq -0.1%. Crude +0.6% at $69.50. Gold -0.4% at $1801.55. Bitcoin +6.2% at $40884.
Ten-year Treasury Yield +2.3 bps to 1.24%

Today's Economic Calendar

8:30 Non-farm payrolls
10:00 Wholesale Inventories (Preliminary)
1:00 PM Baker-Hughes Rig Count
3:00 PM Consumer Credit

Companies reporting earnings today »

What else is happening...

Novavax (NASDAQ:NVAXslides after delaying FDA submission for Covid vaccine.

Cloudflare (NYSE:NETstock pulls back after wider loss forecasts.

Vaxart (NASDAQ:VXRTagain touts benefits of its oral tablet vaccines over viral vector-based ones.

Plug Power (NASDAQ:PLUGraises full-year gross bookings guidance to $500M.

Cigna shares (NYSE:CIdrop 11% on disappointing Q2 results, dragging down other insurers too.

Check out the ETF (NYSEARCA:KRBNthat returned over 75% and amassed $500M in AUM in its first trading year.

FireEye (NASDAQ:FEYE) stock slides after soft Q2 results following products divestment.

NIKE (NYSE:NKE) CEO: E-commerce business hasn't slowed since post-COVID reopening.

Known to most as Uranium Pinto Beans, Jason has more than 15 years under his belt of trading stocks, options and currencies. His expertise primarily lies in chart analysis, and he has a strong eye for undervalued stock. Because he’s got the ability to identify great risk/reward trades he usually enjoys taking the path less traveled and reaping the benefits from the adventure.

He is a co-founder of Option Millionaires, and he is best known for his weekly webinars with Scott, as well as his high level training webinars and charts found in the forums.

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