🥛 Payrolls beat 162k vs 53k. Now what? 📈

GM. This is Milk Road, the newsletter that knows that Scott Bessent just won a fistfight with the Yen, and no matter how you look at it, that’s pretty impressive.

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The headline allocation posture for the Milk Road Macro Index moved up to -0.17. Not quite out of CAUTION yet, but the good news is that both the economy and the market pillars are pulling in the same direction.

Source: Milk Road Macro Index

Let’s break it down.

Friday's payrolls beat expectations like Bessent beat the Japanese Yen. 162,000 against a 53,000 consensus. Yuge.

This drove growth impulses to spike so much higher that it single-handedly nudged the real economy score to -0.05. This means that the economy's underlying strength is beginning to register in market signals too. Bullish!

The macro buffer remains at its maximum at +0.50 with stress at +0.04, and it is still the primary reason the posture is CAUTION rather than RISK OFF. A labor market that keeps surprising to the upside, GDPNow holding third-quarter growth at 4.7%, and services activity near multi-year highs collectively give the economy pillar its full backstop even as questions about interest rate hikes still loom over the markets.

Now, let’s actually talk about the markets.

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BARELY BULLISH

Market momentum climbed to +0.08, but the market pillar remains fragile. Kind of like the Yen proved to be fragile when Bessent started throwing hands.

Sorry, we’re doing Bessent vs. Yen jokes in this one. I promise I will write new material next week.

Anyway, market breadth is at -0.33 and financial conditions at +0.62, with the VIX now at 15.30. I know this is just a bunch of numbers, so let me explain what this means.

It means the jobs-driven improvement in market momentum could easily reverse if Thursday's CPI release cracks the credit-and-volatility calm that financial conditions depend on. If the CPI print shows a surprise in the inflation data, it could crush the recent market momentum we’ve seen.

The unresolved question of whether ISM services prices paid at 72.6 would pass through to consumers in the CPI remains unresolved.

Right now, the inflation direction axis is holding at 0.00 because the core Consumer Price Index has not yet moved, but September hike odds are now near 60% and Hormuz-linked energy costs are still a concern. This means that a hot CPI print would likely carry more weight than it would in a calmer environment.

A core monthly print at or above 0.3% would flip the inflation axis positive, begin eroding the macro buffer, and likely drag market momentum back toward zero. That would point the posture of the index back toward a RISK OFF print.

A soft CPI number leaves the full backstop in place and clears the framework's path back toward full RISK ON.

What do I think?

I’m not concerned about inflation, rate hikes, or the setup for the market for the moment. I think there is going to be a lot of volatility and lower volume ahead of the midterm, but overall, I do think the bull market will recover and remain strong.

If you want to see how the other Milk Road analysts and I are navigating these markets in our portfolios, join Milk Road PRO today for just a buck and steal all of our best investment ideas.

See you there, but in the meantime, stay safe, stay educated, and stay bullish!