04.06.25 - Weaker job report and service sector data - ignored

Today’s ADP employment report revealed a sign of weakness in the US labor market. The private sector added only 37’000 jobs in May. This is well below expectations of 115’000, following the slowing trend since the start of the year and marking the slowest pace since March 2023.

At the same time the sentiment in the US services sector unexpectedly deteriorated in May with the Service PMI at 49.9 and below the 50 threshold, now indicating a potential contraction (consensus estimate 52).

Markets: DAX with new all-time high, US indices up led by Tech stocks +0.3%, US dollar weaker with declining interest rates, gold +0.6%, Swiss Franc and Japanese Yen stronger against major currencies (safe haven demand?)

My view: Despite weak labor data, signals through leading indicators of potential economic weakness, now even in both, the manufacturing and the service sector, markets remain remarkably resilient. To my surprise, investor sentiment shows no real vulnerability, highlighted by the German DAX hitting fresh all-time highs today.

This market strength, in the face of multiple headwinds like geopolitical risks, unresolved trade disputes, and historically high debt levels, suggests that momentum-based strategies continue to dominate. Algorithms appear programmed to keep buying, irrespective of the economic backdrop.

We are witnessing a growing disconnect between markets and fundamentals, an environment driven more by speculation than by earnings or economic reality. investors leverage levels have surged again, now matching the extremes last seen before the 2001 dot-com bust and the 2008 starting subprime crisis. That, to me, is a major red flag.

Yet, as history has shown, periods of irrational exuberance can persist far longer than expected. A high number of today’s rather new market participants have never experienced a prolonged downturn. Their confidence in rapid recoveries, reinforced by past aggressive central bank interventions, could make the eventual correction all the more painful. When the tide turns, the “young gambling crowd” may face a reality check. I suspect it will take an unprecedented catalyst to bring this cycle to a more severe and lasting end.

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