The Bureau of Labor Statistics issues their monthly “Jobs Report” on the first Friday of each month.  It is arguably the most watched report on Wall Street.  Today, before it was released, Dow futures indicated it would open up 250 points.  As soon as the report was issued, it dropped to 180 points.

It was a good jobs report, with 250 thousand new jobs created last month and that the unemployment rate remains a low, low 3.7%.  Average hourly earnings increased at 3.1% annual rate, year-over-year, suggesting the benefits of a strong economy are finally seeping down to workers.  That’s good news!  So, why did the futures drop?  Because that makes it almost certain the Fed will raise interest rates next month, to forestall inflation!

The market already reflects four interest rate increases by the end of next year.  Normally, that would be enough to push stocks down, but this time, earnings are expected to increase enough to compensate for the rate rises.  However, I would be surprised by four more increases.  One, when you consider productivity is increasing close to 2.5%, which constrains inflation.  Two, the dollar is too strong already.  Each increase in interest rates strengthens the dollar.  Three, this also hurts emerging markets.  The U.S. economy cannot remain strong with the rest of the world suffering.  Four, increasing interest rates increases debt service on our $20 trillion national debt.  If there are less than four interest rate increases, it will help stocks rally nicely.

So, increased earnings (good) increases risk of inflation (bad), which increases likelihood the Fed will increase rates (bad), which makes the dollar stronger (bad).  Any questions?