Jobs fell, stocks hit records: bad news became the medicine

Good morning. Last night's U.S. July jobs report was a shock. The economy lost 23,000 jobs. Forecasters had expected around 80,000 gained, and not one of roughly 75 economists surveyed predicted a decline. May and June were also revised down by more than 100,000 jobs combined.

Yet the unemployment rate fell to 4.1%, which is not good news. More than 260,000 people stopped working or looking for work in July, so the drop looks more like discouraged workers leaving the labor force. Many analysts say companies are not firing so much as holding off on hiring amid higher prices and uncertainty.

Oddly, stocks cheered. Weak jobs mean less reason for the Fed to hike in September, the thinking goes. The S&P 500 and Nasdaq closed at records, and it was their best week since April. The conviction is thin, though. The Fed still cares most about inflation, which has run above target for nearly five years, so a hike has not been ruled out.

That makes next week's July CPI report the real test. A hot number could quickly shake this relief rally. Separately, President Trump is trying again to remove Fed Governor Cook, but markets barely reacted.