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A surprisingly strong U.S. jobs report has dispelled fears that the world’s largest economy is teetering on the brink of recession.

The numbers published Friday do little, though, to shed light on what the next few months will bring. In fact, they underline the contradictory state of an economy where unemployment is hovering around half-century lows and stocks are roaring, but the bond market and many other indicators are screaming caution.

Investors, in particular, are grappling with an environment in which bad news is good news, and vice versa.

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The benchmark S&P 500 stock index slipped Friday in the hours after the publication of the latest payroll report. The official numbers showed the United States created 224,000 net new jobs in June, blowing past economists’ expectations for an increase of only 160,000.

The market’s downbeat response to an upbeat report reflects investors’ white-is-black logic. By this reasoning, a robust jobs market makes it highly unlikely that the U.S. Federal Reserve will chop interest rates this month by the half percentage point many investors had expected. Since rate cuts are generally good for stocks, a smaller cut or no cut would be bad news for Wall Street.

The only problem with this reasoning is that it amounts to saying stocks need a weaker economy to prosper. “Is it better to have a soft economy and rate cuts than a strong economy and no rate cuts?” asks Joel Naroff of Naroff Economic Advisors in Philadelphia. “This makes no sense to me.”

The June jobs report may turn out to be a head fake. While U.S. stocks hit record highs this week, bond markets have been registering deep concern about what lies ahead. Bond yields, which move in the opposite direction to bond prices, have tumbled since the start of the year as many investors flock to the perceived safety of fixed-income investments. On Friday, the yield on the benchmark 10-year Treasury hovered just over 2 per cent, down sharply from 2.7 per cent in January.

There are good reasons for the bond market’s wariness. Since January, U.S. factory activity has fallen close to its lowest point in a decade, according to the purchasing managers index for the manufacturing sector compiled by IHS Markit. The Cass Freight Index, a gauge of trucking shipments in the U.S., has also disappointed in recent months, suggesting a significant downturn from the boom levels reached last year.

U.S. construction spending is sliding. So are home sales. “Based on previous cycles, the recent downturn in U.S. home sales is consistent with a broader economic downturn in the near term,” according to a report last week from the Federal Reserve Bank of St. Louis.

For now, though, robust consumer spending is driving a strong jobs market. The June jobs report will calm nerves put on edge by a much weaker May report, which showed only 72,000 jobs created.

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Futures markets show most investors still expect the Fed to cut rates, but at a slower pace than many had hoped before the jobs report. A half-percentage-point cut this month is now off the table, although many investors still anticipate a cut of 25 basis points – a quarter percentage point – at the Fed’s next meeting on July 30 and 31.

For its part, Capital Economics sees the Fed holding off on any cuts until September. “The data this week were consistent with a continued slowdown in economic growth, but don’t yet look weak enough to convince the Fed to cut interest rates immediately,” wrote Andrew Hunter, senior U.S. economist. He expects Fed Chairman Jerome Powell to use his testimony before Congress next week to push back against expectations of a rate cut later this month.

The pace of rate cuts from there will hinge on broader questions. The most immediate is whether the Trump administration’s trade battles with China and other countries will flare into something worse.

Just as important is whether a strong jobs market will begin to push up inflation. Recent readings have fallen short of the Fed’s 2-per-cent target and a continued shortfall will add to the case for rate cuts.

Then there is the political backdrop. U.S. President Donald Trump hailed the jobs report on Friday but continued his push for much lower rates. “If we had a Fed that would lower interest rates, we’d be like a rocket ship,” he said. “But we’re paying a lot of interest and it’s unnecessary but we don’t have a Fed that knows what they’re doing.”

Rate cuts would give the stock market exactly what it wants. It’s not clear, though, if they would be the panacea many investors expect.

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“In contrast to the view apparently priced into the stock market, we expect growth to slow sharply over the second half of the year even as the Fed begins easing policy,” Mr. Hunter at Capital Economics said.

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